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MIAMI UNIVERSITY The Graduate School

Certificate for Approving the Dissertation

We hereby approve the Dissertation of Arijit Mazumdar

Candidate for the Degree: Doctor of Philosophy

Director (Dr. John M. Rothgeb, Jr.)

Reader (Dr. Venelin I. Ganev)

Reader (Dr. Abdoulaye Saine)

Graduate School Representative (Dr. Daniel K. Gladish)

ABSTRACT

DEREGULATION OF THE AIRLINE INDUSTRY IN INDIA: AN ANALYSIS OF THE GOVERNMENTS POLICY, RATIONALE AND STRATEGY

By Arijit Mazumdar

Three decades after it nationalized its airline industry, India began to ease restrictions in 1986. This study examines the factors that motivated the government to deregulate the industry. It documents the changes in the regulatory system and analyzes the rationale and strategy behind the policies adopted by the government. Based on results from interviews conducted with government officials in Indias civil aviation ministry, it is concluded that although the factors that motivated the government to deregulate the airline industry include the desire to promote economic development, improve air services and the international trend towards liberalized airline competition, the governments determination of the process and pace of deregulation was informed by established international practices and procedures, national security and safety concerns, and the pluralist nature of Indian politics.

DEREGULATION OF THE AIRLINE INDUSTRY IN INDIA: AN ANALYSIS OF THE GOVERNMENTS POLICY, RATIONALE AND STRATEGY A DISSERTATION

Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Political Science

by

Arijit Mazumdar Miami University Oxford, Ohio 2008

Dissertation Director: Dr. John M. Rothgeb, Jr.

TABLE OF CONTENTSList of Tables..iv List of Figures..v List of Appendices..vi List of Abbreviations.vii Glossary of Termsviii Dedication..xi Acknowledgementsxii

Chapter One Introduction.1 Research Objectives.1 Deregulation of Air Transport Services in India..2 Research Question...4 Literature Review.5 Hypothesis..13 Research Methodology..15 Organization of Study19

Chapter Two Evolution of the Airline Industry in India.21 Introduction21 Historical Landmarks in Indian Airline Industry...22 Regulation of the Airline Industry in India25 Factors responsible for Deregulation of the Airline Industry in India...38 Deregulation of the Airline Industry in India49 Problems associated with Deregulation of the Airline Industry in India...71 Summary and Conclusion..73

Chapter Three Deregulation of the Airline Industry in India: Conditioning factors..75 Introduction75 Established Practices and Procedures in the International Airline Industry..75

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National Security and Safety.98 Political Culture of India..103 Summary and Conclusion109

Chapter Four Government Rationale and Strategy for Deregulation of the Airline Industry in India.111 Introduction..111 Organization of the Airline Industry in India..111 Interview Results.116 Summary and Conclusion130

Chapter Five Conclusion..132 Deregulation of the Airline Industry in India..132 Indias Experiences: Some Observations and Recommendations...140

Appendix A..147 Appendix B..151

References....152

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LIST OF TABLESTable 1: Five-Year Average Profits of Air-India and Indian-Airlines..31 Table 2: Declining returns for Indian Airlines 1988-89 to 1993-94..32 Table 3: Share of Indias Carriers in Indias International Traffic34 Table 4: Growth of Capacity at Air India, 1980-1991...36 Table 5: Air Indias Rankings among IATA Airlines...37 Table 6: Growth in Indias air traffic (in millions), 2007-2017.46 Table 7: Market share of Airlines offering Domestic Scheduled Air Services in India, 2006..57 Table 8: Number of Passengers traveling (in millions) during 2006, First Quarter-Fourth Quarter.58 Table 9: Profits for Indian Airlines, 1995-96 to 1999-2000..61 Table 10: Financial Performance of Air India, 1995-96 to 2001-02.63 Table 11: Air services to and from key markets (2005-2006)...80 Table 12: Air Services Agreement between India and France, 23rd February 2005..82 Table 13: Air Services Agreement between US and India, 14th April 2005..83

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LIST OF FIGURESFigure 1: Growth in Indias air traffic (in millions), 1996-2007...45 Figure 2: Bilateral Air Services Agreement and India..79

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LIST OF APPENDICESAppendix A: Questions for Deregulation of Airline Industry in India Survey147 Appendix B: Organization of the Ministry of Civil Aviation, Government of India..151

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LIST OF ABBREVIATIONSAAI ASA ASK DGCA EU FDI IATA ICAO MOU NRI RPK UAE UK US WTTC Airports Authority of India Air Services Agreement Available Seat-Kilometer Directorate General of Civil Aviation European Union Foreign Direct Investment International Air Transport Association International Civil Aviation Organization Memorandum of Understanding Non-Resident Indian Revenue Passenger-Kilometer United Arab Emirates United Kingdom United States World Travel and Tourism Council

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GLOSSARY OF TERMSAir Service Agreement An agreement with formal treaty status between governments regulating the conduct of trade in international air services. It consists of a series of articles (or provisions).

Alliance

An agreement between airlines to cooperate in the provision or operation of some of their services on a route, or on a regional or global basis.

Available Seat-Kilometers

The total number of seats offered multiplied by the distance flown, used as a measure of air transport passenger capacity.

Cabotage

Provision of commercial domestic air services within a country.

Codesharing

The assignment of one airlines designator code (for example, AI for Air India) to a flight operated by another airline.

Freedoms of the air

Types of international aviation rights established under ASAs.

Hub

An airport that an airline uses as its base of operations and a transfer point for passengers.

Interlining

commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines.

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Intermediate rights

The right of a carrier from one country to fly to another country via a third country.

Load factor

The number of passengers carried as a percentage of the number of seats available.

Memorandum of Understanding

An agreement between two parties.

Non-scheduled airline

Any air transport enterprise only offering air transport services to the public that are not performed according to a regular timetable.

Open Skies agreement

An agreement to remove restrictions on the ability of airlines to operate services between two countries.

Revenue Passenger-Kilometers

The number of paying passengers on an aircraft multiplied by the number of kilometers flown, used as a measure of air passenger travel services.

Route

An air service between two points of cities.

Scheduled airline

Any airline operating regular air services according to a published timetable.

Scheduled services

Flights listed in a published timetable and performed for remuneration.

Substantial ownership

All or majority ownership of an airline by

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citizens in country of registration.

Tariffs

The prices to be paid for the carriage of passengers, baggage, cargo (excluding mail) on scheduled air services.

Yield

Airline revenue per unit traffic. Passenger yield is airline revenue per passenger kilometer.

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DEDICATION

To my parents and Suma

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ACKNOWLEDGEMENTSFirst of all, I want to thank my advisor, Dr. John M. Rothgeb, Jr. His help, guidance, and patience were indispensable when writing this dissertation. I would also like to extend my sincere appreciation to my dissertation committee members, Dr. Venelin I. Ganev, Dr. Abdoulaye Saine, and Dr. Daniel K. Gladish.

Next, I would like to express my gratitude to the Department of Political Science, Miami University, Ohio, for the opportunity to complete my doctoral studies here. In addition, I want to thank the Graduate School of Miami University, Oxford, Ohio, for awarding me a dissertation scholarship for the Spring Semester 2008, and a dissertation support award, which allowed me to carry out this project.

For their willingness to be interviewed, I gratefully acknowledge government officials in the Ministry of Civil Aviation, Government of India, who will go unmentioned here. They clarified many matters for me concerning civil aviation in India during our discussions.

I would like to thank my parents for their love and support throughout the years and for always having faith in my abilities.

My deepest gratitude is reserved for Suma who has been a source of love, patience, kindness and inspiration to me. Without her constant support and encouragement, this work would not have been possible.

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CHAPTER ONE IntroductionResearch Objectives For three decades until the mid-1980s, India heavily regulated its airline industry. It restricted foreign and private domestic commercial airlines from operating scheduled services within the country, while the state-owned domestic air carrier Indian Airlines enjoyed a monopoly. This was in keeping with the countrys socialist-oriented approach towards economic development, which restricted private sector participation, foreign trade, and foreign direct investment. However, since the early-1990s, as part of a broader economic liberalization agenda, India has been