Too Small to Stay


 

The idea that small means bad is deeply embedded in our minds. Especially, in the men’s and especially in Russia. What is astonishing is that when you start thinking about this worship of size, you realise there’s nothing to be astonished about. In fact, it is almost natural: Russia is the largest country by territory and politics here has always been a men’s politics. This is what Max Weber called the link between geography and mind-set.

In the Kremlin these days, enlargement is the solution to every conceivable problem, whether it is congestion in Moscow, reform of education or propping up the aviation industry.

On Sunday, Dmitry Medvedev ordered ‘all airlines which cannot ensure passengers’ safety’ to be shut down. Two days earlier, inspecting the debris of Yak-42 whose crash had wiped out a top hockey team, he said that the number of air companies must be radically reduced and this should be done as quickly as possible.

What he really meant, though he didn’t say so out loud, was that small companies are doomed. Let’s make no mistake: the decision to push them out of business had been taken long ago and has little to do with the Yaroslavl tragedy.

A few weeks before the crash, the deputy prime minister Sergei Ivanov summoned up the mood by saying that he wants to see small airlines grounded and that he had already ordered aviation watchdog Rosaviatsiya to ban flights for companies with a small fleet. From next year airlines will need to have more than 10 planes (with no less than 50 passengers seats) and in 2013, more than 20.

The government plans to subsidize regional flights but funding will only be available to the largest companies. From January 1, all planes must be equipped with proximity warning systems. Essentially, five or seven companies will be left, others will fold up.

Squashing the little man is based on the idea that small companies can’t afford safety. They can’t buy new aircrafts or even maintain those they already have. So it’s just a matter of time before there are more crashes. Whatever the merits of this argument – and experts have spent the last few weeks poking it full of holes – it carries the day politically. ‘We can’t just stand and watch planes of these so-called airlines crash,’ Sergei Ivanov said.

How the number of aircrafts owned by an airline can improve safety is not clear.
Ludmila Baleevskikh
Muranov, Chernyakov & Partners

There are cases in which the law sets minimum requirements to the size of a company. The classic example is, of course, insurance or banking. We don’t want banks with the capital of a grocery store.

The law, though, is not so much about the size per se as about proportion. It pays more attention to the ratio of the company’s capital to its risky assets, than to the capital itself - according to the Basel Accord, an international banking standard, the ratio must be over 8%. The point is not to hand the market over to the biggest but to make sure that every company, small or big, has a cushion proportionate to the risks it takes.

This idea of proportion seems to be missing in the government’s plan. The requirement of having 10 or 20 aircrafts adds nothing to the safety of a big company but pushes small players out of business.

If small companies are inherently bad, closing them down seems not only sensible but just plain right. It simplifies things: you no longer have to worry much about how to improve the work of government agencies which supervise the industry. Because this is the core of the problem - an aircraft which is not safe must not fly, whether the owner has another plane or two planes or no other planes at all. The idea of risk sharing, as in banking or insurance, doesn’t work here: every aircraft must be in order.

The disdain to small airlines is clearly part of a wider struggle for domestic flights. It clears the market for two or three companies and raises the entrance barriers to future competitors.

It is also politically safe. The babyflot was born in the early 1990s when Aeroflot, the only airline in Russia, at that time, broke up into about 300 companies. The process looked like a chaotic and hasty sell-off of state property and after 20 years few feel any sympathy for the beneficiaries of that privatisation binge.

Yet the victory of the supporters of the ban may turn out to be pyrrhic. Without competition prices will go up and the number of travellers, down. Some areas entirely dependant on air transport risk becoming cut off from the mainland. In the end, the ban means state subsidies to the industry without any prospects for the taxpayer of getting off the hook.

picture: © wimpos - Fotolia.com

 

 

Enlargement is not always the solution
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