Why Air India is in a mess, how it can be revived

Have you heard of a company?

  • That makes a financial commitment of Rs 55,000 crs, for purchase of 111 aircraft, on an equity base of Rs 145 crs and carry forward losses of Rs 776 crs (IA 957 crs less AI profit reserves Rs 181) as on 31/3/2006. As of May 2009 48 aircraft were delivered at an estimated cost of Rs 24,000 crs.
  • Whose working capital requirement exceeds the annual turnover i.e. up from Rs 2369 crs in 31/3/2006 to Rs 16,300 crs in 31/5/09?

One does not need to be an astute businessman or a banker to know that a company whose net worth has eroded is bound to run out of cash in normal course even if aircraft orders were not placed. All credit to CMD Arvind Jadhav for bringing the issue in public focus even if it arose out of delay in paying salaries.

IA’s problems started with the grounding of all A320 aircraft by V P Singh’s government after the Mumbai Bangalore flight crashed around 1989-1990. Private airlines did give IA serious competition but IA fought back to make a meager profit in the years 1997 to 2000 followed by a loss of Rs 606 crs between 2000 and 2003. It made PAT of Rs 160 crs in the next three years but a loss of Rs 240 crs in 2006-07. Old aircraft, increased competition and operational cost made making profits much more difficult. Merger of Vayudoot with IA only meant that Vayudoot’s losses and employees were now IA’s.  

On the other hand AI made a loss of Rs 577.5 crs during the years 1996-97 to 2000-01 and a profit after tax of Rs 358 crs in the next five years ending 2005-06.

Thus, in 2005-06 the national carriers were financially weak, used old, fuel inefficient aircraft impacting customer service and cost not to forget overstaffing and related problems. No new aircraft had been purchased since 1990. Increase in demand was partially met through leasing aircraft.

The UPA government first changed the name of Indian Airlines to Indian accompanied with a smart logo. Even before the all IA aircraft sported the new logo (if I remember correctly) the Ministry of Civil Aviation (MCA), vide its letter dated 20/4/2006 asked the AI board to work towards Merger with IA.

The brand Indian Airlines was now dead.

Although many customers were unhappy with IA there was a strong emotional connect with the brand. Just as toothpaste is synonymous with Colgate so is IA with domestic flier’s atleast for those born between 1950-70.

During this period the MCA opened up the sector to new private airlines (low cost + full service) and an Open Skies Policy. Private sector airlines were allowed to fly on the lucrative Gulf routes. Media reports state that the policy resulted in increase of seats to Gulf carriers by over 250%, allowed them to operate to 15 destinations. The Ministers of Civil Aviation and External Affairs should let us know if granting of liberal rights to Gulf carriers resulted in any foreign policy gains for India. The policy increased capacity, led to price wars and lowered cost to the consumer. Loss of monopoly on the Gulf routes meant that AI could no longer have profits from this sector subsidize loss making sectors.

On one hand the MCA’s decision benefitted the consumer, on the other it compounded AI/IA’s problems. The new aircraft were yet to arrive competition was stiff with advent of low cost carriers/foreign airlines and had to live with inefficiencies arising of being a government owned company.  

Thus AI could not fully use the bilateral rights unlike foreign airlines which took maximum advantage.

Competition is good but the extent of opening up of Indian skies was badly timed by MCA. It could have done so gradually giving AI/IA time to receive new aircraft and improve performance.

Fuel costs and paying for acquired aircraft put more pressure on the cash flows and bottom line. There was no Equity infusion by the Government either, something it could have easily have done during the boom years of 2004-2008. As if this were not enough AI/IA had to deal with issues arising out an MCA directed merger!

There is no use blaming the 31,000 employees alone. When employees sees their company having to fight competition with hands tied, for reasons referred to above, it is bound to affect morale adversely. Frequent change of CMD, lack of independent directors except Mr N Vaghul, no directors with exposure to global airlines industry are some other reasons for the current impasse. Fuel price hike and current slowdown contributed too.

The Merger of AI with IA was to give scale, integrate operations, avoid duplication in ground handling, ticketing, maintenance, warehousing, provide seamless service to the customer etc. A visit to the Air India web site says it all. The Air India site is now the main site www.homeairindia.in. It has links to IC site i.e. www.indiaairlines.in and Air India Express i.e. www.airindiaexpress.in. Air India site has names of Board of Directors. It also has financials of AI up to 31/3/2006. The IA site has accounts of IA up to 31/3/2007. It shows a list of directors although the company no longer exists. The merger was effective April 1 2007. Consolidated accounts or accounts of merged company NACIL are not available on the site.

How would a consumer react when he visits the site? Why do I need to visit multiple sites? If the brand is one why do I need two tickets, one with AI code and another with IA code are some of the questions a consumer may asks.

The merger appears to be driven by the MCA and not the Airlines themselves. Resistance to change is naturally bound to be more prevalent because it is something that was pushed down employees, not what they wanted or believed in.

The merger per say is a good idea but was badly timed, thought through and executed.

Now let us look at a specific matter involving private airport companies. A February 2007 media report states that subsequent to the signing of the Operation, Maintenance and Development Agreements (OMDA) between GOI and MIAL (Mumbai International Airport Limited) the private player has written to the ministry asking for around 78 acres of land — a residential colony for AAI employees.  

Air India have verbally confirmed that land owned by the Airport Authority of India (AAI) at Kalina and Sahar in Mumbai over which AI had “grand father rights”, have or are in the process of being transferred to MIAL. It is understood that on this land stand AI operations, administrative, accounts bldg, engineering set up, AI/IC colony, cargo hub amongst others.  

It is not known if the transfer of land to MIAL was part of the original OMDA or was any consideration paid for the transfer? However, it implies that NACIL might, sooner or later, have to shift out its offices and relocate AI/IC colonies or pay rent at market rates.

At today’s prices a land bank of this size in Mumbai city is worth a fortune.  

The points being made are two. One, is MCA is the appropriate authority to decide on conflicting interests of private airport vs. government companies. Two, privatization of metro airports is welcome but it will also increase costs for NACIL as the above decision will.

If NACIL is to operate as a commercial enterprise all dealings between the company and GOI should be at arm’s length. Is the GOI compensating NACIL at commercial rates for flying to non viable destinations, services rendered during natural disasters like Kutch earthquake, use of VIP aircraft and Haj subsidy?  

Lastly the GOI needs to appreciate that privatization does not mean killing a state owned company. It could learn from governments of Western and Middle East nations who aggressively push for business to public and private companies.

Find below some suggestions that might assist NACIL come out of the ICU.

  • The Government must come clean on the true financial condition of NACIL. The attitude should be - Yes we have a problem and will overcome!
  • A national airline is the pride of every country. It should be no different for India.
  • The Board should be headed by someone of Mr. Narayan Murthy’s stature.  
  • The Board of Directors be recast such that one third are Independent Directors. They should have functional skills in Management, Marketing, Human Resources, Finance and Legal.
  • The Minister of Civil Aviation and a PMO representative should be Board members too.
  • The Managing Director reports to the Board and should have atleast a three year term.
  • The Ministry of Civil Aviation should, for now, have joint responsibility for NACIL’s performance along with the Board.  
  • NACIL must be adequately capitalized.
  • Organization Restructuring and VRS should first start at senior levels. When other employees see Management leading from the front they could agree to a similar proposal for themselves.
  • A Core team of AI/IA executives with Board members to prepare an implementable roadmap for effective merger within a fixed time frame.
  • An immediate review of the maturity of existing aircraft loans must be undertaken and lenders be requested to extend loan tenures to avoid further mismatch of cash flows.
  • Aircraft on ground 21 (as on 1.5.09) to be got in working condition to enable quick return of leased aircraft.
  • There should be a total freeze on providing further rights to foreign carriers. NACIL needs to be supported to enable speedy recovery.
  • Up gradation of IT environment such that it is comparable with other airlines.
  • A member of the Central Vigilance Commission should be part of the team which negotiates key contracts to avoid delays in investigations after contract is awarded.
  • An independent evaluation of the merits and demerits of outsourced services and contracts (e.g. engineering facilities, manpower for operational areas, ground services) be undertaken by a joint team having management and union representatives. It should be convened by a Board member.
  • Performance of employees who affect savings of more than Rs 30 lakhs per annum should be recognized with Air India medals.
  • Appointment of retired employees should be cleared by the Board.
  • Except the CMD every employee can have only one office only.
  • Necessity of existing foreign postings to reviewed.

The devil is in the detail and implementation of ideas. India wishes NACIL a speedy recovery.

The author is Managing Consultant Surya Consulting.

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