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Air India is trying to crack down on corruption

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EVERYONE grumbles about the injustices of air travel, but most people assume that the inequities are at least grounded in a fair system. Pay for business class (or have your company pay), and you get comfort and free drinks. Go frugal with basic economy and get stuck in a lousy seat without a carry-on bag. But it is not always a proper free market at 35,000 feet. Sometimes, corruption skews the equation.

For instance, on Air India, the country’s state-owned flag carrier, who you know can apparently determine where you sit. The airline’s chief executive, Pradeep Singh Kharola, recently felt compelled to admonish his staff to stop upgrading friends and family members for free from economy class to business or first.

“It has come to my knowledge that operating crew carry out upgrades to business and first class unofficially during the flight for their friends and relatives,” Mr Kharola wrote on March 13th to his employees, in a letter that was leaked last week to the Hindustan Times, a newspaper. “This is viewed seriously”, he added. “It is reiterated once again that officials/crew members responsible for all such unauthorised upgrades shall face strict disciplinary action.”

The airline allows people to pay on board to upgrade to higher classes. But it seems that Air India flight crew, in particular pilots, have given these upgrades to people they know rather than offering them to all passengers. “This has been a very old menace with pilots exercising their authority wrongly,” a former Air India executive director told the paper.

It is hardly the only way pilots on Air India have been accused of misusing their authority. Gary Leff, a travel blogger, notes that one pilot delayed a flight for two-and-a-half hours after refusing to fly unless a certain female co-pilot joined him. Another did not show up because he wanted to fly to a different city. A third invented a fuel emergency so he could land faster.

These abuses are not unique to Air India. In fact, on the day of the carrier’s invented fuel emergency, pilots on two other Indian airlines allegedly did the same thing. And corruption of various sorts still plagues airlines across the world. In 2016 LATAM, Latin America’s largest airline, paid $22m in fines stemming from a bribery case in Argentina. In February, Sri Lanka ordered a corruption investigation of its national airline, after the carrier cancelled a management deal with Emirates when it allegedly refused to bump regular passengers in order to give seats to relatives of Sri Lanka’s then president. The list goes on.

Aeroplane manufacturers are even worse than airlines and are a ready source of graft. In 2016, the Brazilian aircraft manufacturer Embraer agreed to a $205m settlement after an American government probe into alleged bribery of officials in India, Saudi Arabia, Mozambique, and the Dominican Republic. In January last year, in a deal with American, British and Brazilian regulators, Rolls-Royce, a British engine-maker, agreed to cough up £671m ($809m) to settle allegations that it had in the past secured sales with bribery. The fine was the largest ever imposed by Britain on a firm for criminal conduct. Most recently Airbus, a big European aircraft manufacturer, has cleared out its executive board over a long-running corruption scandal that could cost it as much as $3bn in fines. The industry has a long history of corruption. In 2006, Boeing was fined $615m for using corruption to win military contracts from the Pentagon. The question is less why there was so much graft in the first place as why it has gone on for so long in aviation, when it has long been dealt with in other industries

Air India, which is currently being privatised by the Indian government, seems to be trying to clean up its act. In addition to cracking down on pilots’ misbehaviour, the airline appears to have tackled politically motivated business decisions. In 2016 at least two flights were delayed to accommodate politicians who were running late. But since then, the airline has banned a member of parliament, who was accused of assaulting a cabin crew member, from flying with Air India. And it has announced that it will start fining people who cause flights to be delayed, no matter their political connections. Airline corruption is far from gone. But at least in some corners in India it is starting to be recognised as a problem that needs solving.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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