Yet another bailout plan for Air India

A few years ago when India’s national carrier, Air India (AI), had undergone a design and logo change, its preferred colour on its fleet was red. But the management of AI never anticipated that the same red will soon be splashed all over its balance sheet.

Once the leader of the Indian skies and now reduced to the fourth position in terms of market share, Air India is carrying a loss of Rs 15,000 crore accumulated over the last four years. It is having a massive debt burden of Rs 40,000 crore (almost equally divided between working capital and long-term loan) and to service this, it annually  pays around Rs 1,800 crore as interest. In the first six months of the current fiscal year, the firm has lost Rs 3,451 crore and it owes Rs 600 crore to the Airports Authority of India (AAI). The government-owned company is now asking for a one time fund infusion of Rs 17,500 crore.
   
No wonder the Civil Aviation Minister Vayalar Ravi, recently, told the Parliament that Air India’s expenditure is Rs 57 crore a day against its earnings of Rs 36 crore a day, thus making a daily loss of Rs 21 crore. This does not just reflect the financial mess AI is in. It is a reflection of the strain brought upon the taxpayers’ money as it ends up every time seeking bail out from the government.

This, not to speak of the dues to the tune of Rs 2,280 crore that the airline has piled up as payment due to the PSU oil companies against supply of fuel. No wonder oil companies want AI to pay cash for fuel. But, to be fair to AI, the entire civil aviation industry is in a mess as all players were losing money until recently. High fuel price and cut throat competition among carriers are the main reasons for the distress.

Losing market

The latest effort in bringing what some call the ‘notional airline’ (as against national) out of the air pocket is the financial restructuring plan. In December 2010, AI had hired consulting firm Deloitte Consulting India Private Limited to assess the debt recast plan prepared by the State Bank of India - Capital Markets Limited (SBI Caps) before it was submitted to RBI.

Though the Deloitte report has not been made public, according to what the AI management has indicated, the firm has recommended the airline to put a freeze on pay hike or promotion of its employees for the next three years to make a turnaround. One of the suggestions is shifting part of the 30,000 personnel to engineering and ground-handling subsidiaries. This, it says, is necessary as the airline has an annual wage bill of Rs 3,100 crore. The expected revenue generated from this division is estimated to be around Rs 3,000 crore. The report cites that the wage bill is set come down as around 2,600 employees will retire during the period of freeze.

Among the other suggestions, it has said the debt-laden carrier needs to expand aggressively by adding 113 aircraft to its fleet of 135 to 248 by 2015. It has also advised the carrier to focus more on domestic routes and to optimise utilisation hours of each of its flight to 14 hours a day, up at least 30 per cent from its current utilisation levels. 

The Deloitte plan says a turnaround is possible if flight occupancy increases from 68 per cent to at least 75-80 per cent for low-fare division Air India Express and market share rises from 17.6 per cent in 2010 to 21 per cent. Deloitte also suggested AI cut its bill on aviation turbine fuel by Rs 300 crore annually, through aggressive negotiation with suppliers for domestic routes. It said that all these should be met by a comprehensive debt recast plan worked out by SBI Caps and substantial cash infusion from the government.

Not easy

Can the ailing airline implement these turnaround measures? It is undoubtedly a hard task for the beleaguered airline to make them work. The suggestion on salary freeze is too touchy a subject on which employees have gone on strike and AI can ill-afford one more. The hive off plan was part of the merger plan pushed by then minister Praful Patel but has not really taken off. After the government approved the proposal to set up the National Aviation Company India Limited to run the merged Air India-Indian Airlines, the integrated company, as adviced by consultants Accenture, had decided to start special business units (SBUs).

These SBUs were to focus on integrated passenger service covering both domestic and international operations, cargo business, ground handling, MRO (maintenance, repair and overhaul), low-cost carriers and other allied activities.

Except for launching of the low cost Air India Express, not much is heard about other SBUs. The staff will oppose any move on promotion freeze as the monthly salary disbursal itself has become erratic over the last couple of years.

Already AI has undergone massive wage-related problems after the merger, mainly due to the mismatch in ranks and disparity in wages of two entities. The AI board has just set up a committee under retired Supreme Court judge Justice D N Dharmadhikari to look into these issues. The airlines, however, often faces strike calls by pilots and ground staff.

The proposal on increasing the fleet size is curious as it comes at a time when there was no visible benefit from earlier fleet expansions. For, the airline has not grown with the growth in market, rather it has slumped. Air India’s pride - its international connections - has suffered of late as it has given up on premier routes, Europe being a sad example.

Less said the better about its domestic performance where it has ceded ground almost every month. AI is now fourth after Jet Airways and new players like Kingfisher and IndiGo. As per the latest Directorate General of Civil Aviation figures, AI’s market share has nose dived to fourth place at 17 per cent while its on-time performance or punctuality was 65.3 per cent, well behind the top three carriers. Suffering both internationally and domestically, AI’s growth naturally slumped. As a result, optimum utilisation of its fleet dipped.

There is also a slag in getting new planes. Part of AI’s order for Boeings has not been delivered - the 27 Dreamliners have been delayed for over three years. The latest news is that the first aircraft would be delivered end of this year. AI will begin the process of financing the fleet which will cost about Rs3,842 crore.

A tough call

Though the AI board has in principle cleared the restructuring plan and formed an 11-member committee, headed by its CMD Arvind Jadhav, given the unfriendly posturing of employee unions the implementation will face rough weather. “An official turnaround plan is in place. We can now go to banks for finances,” Jadhav said.

But skeptics are not very hopeful as the current one is the third turnaround plan the airline is experimenting in the last few years. The first by an experts panel wanted AI to increase its fleet size to 275. A 2009 turnaround plan announced by Jadhav did not mention any fleet increase but wanted a low cost domestic airline. Jadhav said recently that AI has been 25 per cent successful in implementing the three-year turnaround plan unveiled by him.

The government has already infused Rs 2,000 crore in two years to bail out the airline, taking its capital base to Rs 2,145 crore and has earmarked another Rs 1,200 crore in the next financial year. But these are like drops in the ocean as AI needs much more money. And above all, it needs a green signal from the government to reduce number of employees to bring the employee-airplane ratio close to competition.