Wonder how much capital is required to profitably run an airline having a pan-India license and government support. The million-dollar question comes as an aside to the fact that the Government of India has pumped billions into the 80-year-old heritage-rich poster boy of the Indian aviation industry - Air India.
Once amongst the world’s best airlines, Air India now attracts media attention only for the wrong reasons. No prize for guessing what - it lags the market on account of all round operational inefficiencies including poor product and customer service, low aircraft utilisation, virtually non-existent marketing, and a dismal track record on human relations. All due to the incompetence of the management and recalcitrance of the unions, who historically have had no concern for either passenger
convenience or company finances.
Air India was founded by JRD Tata in July 1932 as Tata Airlines, a division of Tata Sons Ltd. On 25 August 1953, the Government of India exercised its option to purchase a majority stake in the carrier and Air India International Limited was born as one of the fruits of the Air Corporations Act that nationalised the air transportation industry. At the same time all domestic services were transferred to Indian Airlines. Subsequently, Air India and Indian Airlines merged along with their subsidiaries to form Air India Limited and a new company called the National Aviation Company of India Limited (NACIL) was established. In 2001, Air India was put up for sale by the NDA government. However, the re-privatisation plans were shelved after Singapore Airlines pulled out from the Tata Group project and the global economy slumped. In May 2004, Air India launched a wholly-owned low cost airline called Air India Express - connecting cities in India with the Middle East, Southeast Asia and the Subcontinent. Even this could not come as re-enforcement to the troubled finances of our national carrier.
In January 2006, Air India announced an order for 58 jets including the Boeing 777 and the Boeing 787. The airline expects to get its first Boeing 787 Dreamliner by the end of May 2012. It has also explored the possibility of claiming compensation from Boeing over the delays in the Dreamliner project.
Around 2006–2007, Air India began
showing signs of financial distress. The combined losses for Air India and Indian (Indian Airlines in its new avatar) in 2006-07 were Rs 770 crores. After the merger of the airlines, this went up to Rs 7,200 crores by March 2009. This was followed by restructuring plans which are still in progress. In July 2009, SBI Capital Markets Ltd was appointed to prepare a road map for the recovery of the airline. The carrier sold three Airbus A300s and one Boeing 747-300M in March 2009 for USD 18.75 million to help withstand the financial crunch.
It is an undeniable fact that Air India has been witnessing governmental intervention and interference at all stages. Some incidents that point to this mismanagement are: appointment of the board members and chair, followed by the termination of their tenure midway; formulation of major policies for Air India, and then changing them abruptly; decisions on important issues like aircraft acquisition and entity merger have been taken without understanding the full importance, implication, and viability.
Between September 2007 and May 2011, Air India's domestic market share declined from 19.2% to 14%, primarily due to stiff competition from private Indian carriers. In August 2011, Air India's invitation to join Star Alliance was suspended due to its failure to meet the minimum standards for membership. In October 2011, talks between the airline and Star Alliance resumed. However, it remains uncertain when this aim will be realised. As of March 2011, Air India had accumulated a debt of Rs 42,570 crore and an operating loss of Rs 22,000 crore, and was seeking Rs 42,920 crore from the government. From June 2011 onwards, the carrier started missing salary payments and interest payments; leading Moody’s Investor Service to warn that missed/delayed payments by Air India to its creditors, such as banks, would negatively affect the credit ratings of those banks. A report by the Comptroller and Auditor General (CAG) blamed the decision to buy 111 new planes as one of the major causes of the debt troubles in Air India. In addition, it blamed the ill-timed merger with Indian Airlines as well. It is now believed that Air India might sell some of its new 787 Dreamliners.
Due to high fuel and loan costs, Indian government has already pumped Rs 3,200 crore into Air India since April 2009, and in March 2012, the government bailed out Air India Ltd with Rs 6,750 crore, an amount almost double to the spending on new hospitals over the past three years! Quite recently, in April 2012, the Indian government granted another bailout package to Air India, including Rs 300 billion of subsidies.
In the case of Air India Express, it has been struggling with safety issues; the Indian civil aviation regulator reprimanded the airline for serious safety lapses last year. Reports suggest that a tight hold of Air India over the decision making authority in AI Express and internal politics within the airline may have caused trouble. In 2011, Air India Express COO Pawan Arora was sacked by the board on the Civil Aviation Ministry's behest due to questions over his qualifications for the job, salary and also on issues with his earlier job at the Directorate General of Civil Aviation. At that point in time, Arora was selected with much fanfare from a list of 170 candidates after the move to carve out a different management for Air India Express was felt essential for the airline’s growth.
National flag carrier Air India intends to
borrow money overseas to refinance some of its working capital loans. The cash-strapped firm is the first Indian carrier to do so after finance minister Pranab Mukherjee allowed local airlines (in the FY 2013-13 Budget) to raise working capital through External Commercial Borrowings (ECBs) only in the current
financial year. The move was aimed at tackling a crisis in the country’s aviation industry, with domestic airlines laden with a combined debt of $20 billion, according to official data.
The new Chairman and Managing Director wants to change the order of some of the 111 planes ordered in 2006 to get narrow-body aircraft instead of the presently-on-order wide-body aircraft. The move by the state-owned airline follows the government’s decision to infuse Rs 6,750 crore in equity upfront and an assured equity support of Rs 23,481 crore till 2020-21.
The Cabinet has also agreed to hive off the ground handling and engineering services of Air India into two wholly-owned subsidiaries and will pump Rs 30,000 crore into the ailing airline by 2020. Officials said that of the Rs 30,000 crore approved, the government will infuse Rs 6,750 crore into Air India in this
financial year itself.
The airline has been allowed to issue
government-guaranteed Non-Convertible Debentures (NCDs) worth Rs 7,400 crore to its lenders such as financial institutions, banks, LIC, and the EPFO. These NCDs would be used to repay part of the airline’s close-to Rs 21,200 crore working capital loans. The hiving off into two subsidiaries had long been planned by the airline as it would create two separate profit centres.
AI’s maintenance division with 7,000
workers, including 1,500 engineers, is still considered as one of the best in Asia, and has the expertise to maintain and repair the latest Airbus and Boeing aircraft. Plans are to use it to maintain planes from airlines all over Asia.
Similarly, the ground handling subsidiary — Air India Transport Services Limited — with 12,000 workers, will provide services to airlines who require ground handling in India. The move will make AI a leaner organisation, with just 9,000 employees involved in core airline operations.
To conclude, experts believe that Air
India needs to rationalise costs, as the government cannot - and should not - use public money to run Air India. However, with no structural changes having been contemplated, hope for even a modest improvement in Air India’s performance is likely to remain a pipedream, thus validating criticism of the government bailout. If only accountability existed in our system, there would have been greater responsibility exhibited by all those associated with salvaging Air India, once the nation’s pride, but now
a national embarrassment.