Our tax money bailed out Air India's strikes?

May 10, 2012

In this issue:
» Fuel prices to go up again
» Bumpy road ahead for infra funds
» Jim Walker thinks troubles for Europe are far from over
» And things are not too good with US either
» ...and more!

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A few weeks ago, the country had given a generous gift of Rs 300 bn to the national carrier Air India. The idea was to bailout the ailing company and help it gain a firmer footing. The company was and is in doldrums due to spiraling costs and a huge debt burden. And in a highly competitive environment, it has not been able to raise prices to compensate for the cost increases. But just under a month down the line, the company is back in the news. And again for all the wrong reasons.

The company's pilots have gone on a strike. The reason - they feel that the pilots of the erstwhile Indian Airlines should not be trained on the new 'Dreamliners' because this would hurt the career of the Air India pilots. Believe us; we were equally amused and shocked when we read this reason. Even the High Court of Delhi has deemed this strike illegal. However, the pilots have stated that the strike would continue till the weekend. As per a leading daily, the strike and its consequent cancellation of scheduled flights would result in a loss of Rs 100 m per day for Air India. A loss that it really cannot afford at this stage.

But the pilots don't really seem to think so. They are more worried about who gets trained on a new aircraft model than to worry about how they will get a paycheck if the company continues to bleed. Oh yes they don't need to worry about that. As long as there are taxpayers like us, they will keep getting the government to bail them out.

The merger of two ailing airlines Indian Airlines and Air India was a mistake to start with. And then bailing them out with taxpayer's money was a bigger mistake. We have already seen that bailouts are just a temporary relief. In the long run the company has to restructure its costs, its policies and most importantly the attitude of its employees. Otherwise we would be bailing such companies out till either there is nothing left to bailout. Or the people of the country raise their voices and object to it.

Do you think the government was right in bailing out Air India? If not, then raise your voice and participate in our Ban Bailouts campaign. Remember every vote counts.

You can also share yourcomments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Armed with cash in their purses, India Inc has been going all out to expand their global footprints. Nearly every other company talks about its international acquisitions or its international business plans. Easier foreign funding for these deals as well as attractive funding rates has been a key driver for these deals. A survey was recently carried out by the International School of Business and reported by The Mint to study the Tansnationality of Indian companies. The survey has ranked companies on the basis for their overseas assets, revenues and employee numbers. Interesting, the Tata Group of companies occupies a significant position in this survey. 6 out of the top 15 companies belong to the Tata Group.

Source: Livemint
* TNI (Transnationality Indiex)

Desperate times call for desperate measures. The ballooning fiscal deficit, depreciating rupee and relentless crude oil prices are waking up the government to the need of an across the board fuel price hike. The move was long awaited but the government has been dragging its feet due to ongoing state elections and opposition from other parties. However, it finally seems to be ready to bite the bullet. And if things go well it won't be alone in doing so. The Finance Minister has made it clear that the Central Government by itself can't offer a sustainable solution to the problem by granting subsidies. It's time that the State Governments rationalize (reduce) taxes on fuel. While it all sounds good, we hope the reform doesn't get stuck for the lack of green signal from other parties and offers more than lip service.

The infrastructure sector attracts higher private equity investments due to strong return generating capabilities. However, right now it is in a crisis of sorts as far as fund raising is concerned. It may be noted that about nine infra focused funds were launched during 2009-2012. And they had plans to raise 200 bn during the same period. However, they have managed to raise only Rs 78 bn. In fact, many have ceased their fund raising exercise all together. Policy bottlenecks, higher interest rates and uncertain regulatory environment is keeping the private equity investors at bay. Apart from this execution issues is also a worry for the investors. Thus, raising capital has become a challenging task for the infrastructure oriented funds. Nonetheless, as per government the infrastructure outlay is expected to double in the 12th five year plan. And for it to materialize private sector participation is a must. Thus, unless the government takes concrete steps to reduce red tapeism prevalent in the sector liquidity would be hard to come by. And lower liquidity will raise cost of funds further aggravating the execution issues. This can have an effect on the long term growth rate of the nation.

On the outlook for the US economy there have been differing views with some expecting the US to report modest growth while others believe that this growth is phony. However, as far as Europe is concerned, the opinion is quite unanimous. That the deepening crisis in Europe will certainly plunge the region into recession. Economist Jim Walker also believes so. He opines that the biggest failing of the Eurozone is its banking system. He also believes that political problems will continue to plague the region going forward. In fact, despite US is also being plagued with problems of all sorts, Walker is of the view that the country still has an edge over Europe. He is one of those who expect a steady US economic recovery this year. Thus, if Europe continues to display stagnant growth and the US recovers, the dollar is bound to rally against the euro. We agree that the crisis in Europe is far from over. But whether the US is also in a state to recover is quite doubtful. Given that the US government so far has chosen to solve the problem by only printing more money, any kind of recovery will most likely be for the short term.

What do you make of a situation when even the highest risk investors are playing it safe? Well assets in economies like Spain and Ireland do not seem to be attracting even distressed asset buyers! According to billionaire investor Wilbur Ross few economies in Europe are too risky to be even considered for investments. Ross is a veteran in buying distressed assets in industries from steel to financial services. Hence his opinion on the fate of European economies is worrying. But what intrigues us is that he believes the US too has some huge hurdles in the nature of spending cuts to overcome. Delays in this could push the economy back to recession in 2013. True, Spain and Ireland are problematic. But the entire world could catch fever, if the US sneezes. This is given the sheer size of the American economy and the influence of the US dollar. Also, Ross blames the US educational system for the high unemployment rates in the country. We concur with Ross on his opinion on Europe and American economy. However, we believe that he will find distressed assets showing up in other parts of the world as well.

The initial public offering (IPO) market was dull last year. And even this year it hasn't gotten off to a great start. Shares of most of the companies listed this year are trading below their issue price. Out of the five companies listed so far in FY13, only one is trading well in the positive. The latest addition to this list is Tribhovandas Bhimji Zaveri (TBZ), which closed 8% lower on listing day. Two other companies, Samvardhana Motherson and Goodwill Hospital had to withdraw their share sales due to poor investor response. With continued weakness in the secondary market, it is not surprising that fresh issues are bombing. We believe that investors would do well to pick up blue chips that are currently trading at reasonable valuations versus burning their fingers in the primary market.

In the meanwhile, after opening the day in the positive zone, the Indian stock markets continue to trade in the green. At the time of writing, BSE Sensex was up by 177 points (1.1%). Stocks in the banking and capital goods sectors are witnessing maximum gains. The other major Asian stock markets have closed the day on a mixed note with Malaysia and Taiwan closing in green while markets in China and Hong Kong have closed the day in the red. European markets have opened the day on a positive note.

 Today's Investing mantra
"If you're an investor, you're looking at what the asset - in our case, businesses - will do. If you're a speculator, you're primarily forecasting on what the price will do independent of the business. - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Our tax money bailed out Air India's strikes?". Click here!

    6 Responses to "Our tax money bailed out Air India's strikes?"

    J Thomas

    May 10, 2012

    I hope the pilots will remain on strike indefinitely. Then, and only then, will the government bite the bullet and shut down this anti-national airline.



    May 10, 2012

    So, whats new? The govt continues to spend money it does not have and they keeps crying about the widening fiscal deficit. What a bunch of ______?

    "There are severe limits to the good that the government can do for the economy, but there are almost no limits to the harm it can do."
    --Milton Friedman


    Surinder Kamboj

    May 10, 2012

    I recommend that all the striking pilots of Air India are flown over Afghanistan and air dropped to know the difference between luxury at taxpayers' cost and true hardships.



    B K Nandi

    May 10, 2012

    It is not bailing out the Air India Strike. It is bailing out the inept UPA government and their corrupt ministers. Not only in the national airlines, they are doing miserably bad in most of PSU, ministries because of these ignorant and corrupt ministers. They make only the future commitment like Prime Minister, Finance Minister. Both have been promising repeatedly during last one and half year that inflation would be tamed but it remained untamed even today. They just fooling the people. How long people will remain quite. People become frustrated. People lost faith in them. These ministers do no have any respect to public. PM and FM must resign to save the country. Our tax money is bailing out these ministers not the strikers.


    Suresh Kumar

    May 10, 2012

    The only way to bail out Air India is to lease 70% of the aircrafts owned by it to other airlines. The balance 30% aircrafts comprising mostly smaller sized ones should be meant for non-profitable routes like North East or small towns. The still better alternative is to sell the airline to private carriers through bidding. But, the government and civil aviation ministry will not agree for it, as they are used to burning a hole in our pockets through lavish lifestyle. So, bailouts will continue.



    May 10, 2012

    Bailouts are not always bad , sometimes they are the necessary evils. The prospect of Air fares shooting to eternity ,if government does not have a state carrier to rein in the private players ,is quite bright.
    The air traffic carriers availability in sufficient numbers is very critical for the fast pace of economic growth .
    But the way the situations are created for requirements of Bailouts is worthy of FULL fledged attack from tax payers.

    Equitymaster requests your view! Post a comment on "Our tax money bailed out Air India's strikes?". Click here!