Introduction

The global aviation industry is passing through severe turbulence due the COVID-19 pandemic, which has triggered worldwide travel bans and lockdowns, resulting in a severe blow to the sector. From India to the United States to the European Union and down to Australia, grounded aircraft have become a common sight. The International Air Transport Association (IATA) expects airlines to see full year passenger revenue to fall by $252 billion in 2020 compared to 2019. The situation is so alarming that industry leaders and bodies have unequivocally said that in the absence of a government bailout as many as 25 million jobs are at the risk of disappearing as most of the world’s airlines will not be able to survive this crisis.

Impact on Indian airlines

Due to the financial woes plaguing the Indian economy, airlines were already facing significant challengers prior to the COVID-19 crisis. With the full impact of the pandemic now playing out in India, airlines have no choice but to take drastic steps to curtail losses and protect cash. This has led to pay cuts at some airlines and early termination of contracts for some sections of the workforce at others. Reports suggest, that the Government of India is mulling the idea of a USD $1.6 billion economic package for the aviation sector, which may be help tide over the immediate crisis at hand.

In the wake of this dire need of economic assistance, it becomes imperative to understand the legal basis of such bailouts and whether the Government is legally justified in investing taxpayer’s money into the private industry.

The economic package could include provisions to defer tax payments, a moratorium for a specified period on interest and principal amounts, reduction in VAT, suspension of landing and parking charges at airports or it may involve direct cash infusion, something on the lines of the Coronavirus, Aid and Economic Security Act (“CARES”), which has been recently approved by the US Congress.

It is interesting to note, the new economic package announced recently for the general public by the government of India consists of both direct benefit transfer as well as tax deferment.

Legal Dilemma

The legal question here is whether a government is justified in suspending the tax liability of private corporations? Assuming it is justified, what criteria should a government follow while deciding which sector/industry is worthy of such financial support. Moreover, if the State agrees to provide aid to a particular sector, can other sectors also demand similar treatment?

Article 39(a) of the Constitution of India provides that the State shall direct its policy towards securing that citizens have the right to an adequate means of livelihood. Thus, if an entire sector is at the risk for significant distress due to an “external factor” like a pandemic, which would jeopardise the livelihood of a substantial amount of citizens, it could be argued that it would become a constitutional responsibility of the State to save the sector so that the livelihood of its citizens may be protected. If exercised, this mandate must be exercised by the State in a reasonable and non-discriminatory manner. For example, if the State chooses to give aid to the aviation sector but denies any such assistance to the road/rail transport sector, this “discrimination” must be based on some reasonable justification and classification.

Similarly, any bailout would have to apply across airlines. While some airlines need immediate assistance with day to day operational expenses i.e. salaries, lease payments, etc. others have cash in the bank or promoters who would be willing to infuse equity. A bailout for the former will help them survive the current crisis whereas might end up strengthening the later enabling them to be even more aggressive with pricing going forward which in turn might eventually will lead to the former bleeding to death.

Without legal justification, such a measure to provide assistance to only one sector (of many) could violate Article 14 of the Constitution of India. Currently in India, intersectoral competition between the railways and airlines is fierce, though limited to intercity travel provided by day return trains like the Shatabdi Express, etc.

In the Indian competition law context, the bailout by the State may not cause much of a problem since the railways are nearly 100% state-owned. Also, the substantial chunk of road transport is owned by the State through various state road transport corporations. Nevertheless, the question is, whether it is justified on the part of the State to invest taxpayer’s money in saving private corporations? The answer, in my considered opinion, is yes, provided the State ensures adequate provisions stipulating what the bailout cash is to be used for. Any provisions in the bailout package stipulating no job cuts (the recent CARES Act, which has been passed by the US Congress has specific requirements for Corporations on employee retention) may leave airlines with no choice but to forgo the bailout altogether as Indian airlines, unlike peers in the US, do not have the ability to raise substantial amounts of cash to keep fleets intact which in turn, guarantees jobs. It makes no sense whatsoever for an airline to maintain large fleets and workforce’s despite bailouts as there is no certainty when demand for air travel will return.

Moreover, the government of India has been aggressively pushing for a 100% stake sale in Air India. Any cash infusion in a private airline will effectively make the State a shareholder. This is far from ideal as the government does not have the skillsets or the bandwidth to monitor the airlines and in turn protect the tax payers money invested into private airlines.

Conclusion

As stated earlier, it could be very well argued that the State is justified in injecting public funds in private corporations, if the aim is to save the employment of thousands of citizens. However, this responsibility on the part of the State can often lead to being a moral hazard as private corporations may act in an unreasonable manner (taking undue risk) with the impression that the State would not let them fail. Therefore, it also becomes imperative on the part of the State to ensure that the aid package is followed with immediate structural and legislative reforms, which aim at improving the sector and thus making it more immune from such seismic shocks.

The last ten years have seen the demise of two full-service airlines i.e. Kingfisher & Jet Airways along with many regional airlines. Unless reforms are initiated now, a bailout at this stage will only delay the ultimate collapse of some of the weaker players.

It will be interesting to see the exact nature of the imminent bailout package by India for the aviation sector. That said, without the Government’s intervention, it is highly unlikely that the industry will survive in its current shape and form.