Run(a)way pride

Air India: Years of bad management & faulty policies have clipped it's wings

Run(a)way pride

Flights & plights : An Air India  plane on the runway ready for take off. It has been making huge losses  for several years.

It was bound to happen. Air India, facing a crisis for a long time, has now reached a stage where it is unable even to pay salaries to its employees.  First came the announcement that June salaries to employees will be delayed by 15 days. Now comes a request from the Air India Chairman to its officers to forego July salaries altogether — a la British Airways.

What ails the state-run carrier? Who are responsible for this mess? Is there any solution for the serious financial crisis?

To begin with, let us admit that the entire civil aviation industry in India as well as in the rest of the world are suffering uder global recession.

All airlines in India are losing money heavily and the industry’s estimated loss in 2008-09 was over Rs 2500 crore. But that apart, there are many perenial problems with Air India.
Milking the PSU over the decades, turning a blind eye to the surgery that was required for the airline, frequent change of management, unviable business plan, lack of foresight while taking decisions, are some of the major reasons.

You go deeper into the issues, you find more reasons for the kind of deplorable state that the 77 year old airline is in.  The ‘Maharaja’ is showing tendencies of ending up pauper unless proper remedial measures are found.

Speaking of the airline’s woes, Centre for Asia Pacific Aviation India Chief Kapil Kaul told Deccan Herald “AI has sunk deeper and deeper into crisis. It reflects an unviable business model, inadequate management, lack of management capital, lack of a remedial process which should have started many years ago. There was continuing neglect of AI at every level. And, with 30,000 employees you cannot create a viable business model.”

Lack of funds

Successive years of bad management has resulted in AI mounting its losses. From Rs 2,226 crore in 2007-08, the losses could mount to over Rs 4,000 crore in 2008-09 and far higher in the current fiscal. Which means over Rs 15 crore loss per day ! Something no airline can ill afford.

Successive losses has meant the liquidity volume reducing fast.
According to one estimate (the airline was reluctant come out with figures), the company has exhausted Rs 15,200 crore of its Rs 16,000 crore working capital limit which means cash available at hand is only Rs 800 crore.

But its total payment commitments is Rs 1,400 crore for buying fuel, to Airport Authority of India, vendors and others. No wonder, there is no money to pay salaries. Thus, it has led to the new Chairman and Managing Director Arvind Jadhav — a Karnataka cadre IAS officer — to announce deferment of salary and salary cut.

AI has perhaps the highest staff strength in the world inrelation to the fleet size, for any airline: 31,000. It has also one of the highest employee-aircraft ratio at over 200 when the ideal number is less than 80. Salary outgo alone is Rs 350 crore per month. 

Two years ago, the government decided to merge Air India and Indian Airlines and formed the Nacil (National Aviation Company India Limited) which now runs the airline. The merger has been painstakingly slow, staff issues have remained unresolved leading to disputes over seniority etc, making people demoralised and unenthusiastic.  One of the biggest failures was that the two airlines are yet to operate on a single reservation platform and achieve other synergies.

Too many planes

Analysts point at fleet expansion fiasco saying that it has left the airline bleeding as the traffic kept falling. AI ordered a total of 111 Airbus and Boeing planes and nearly half of them are already delivered. But, eventhough the occupancy is low, AI had not returned or sent on lease any of its aircraft. Its private sector peers like Jet Airways or Kingfisher Airlines have already leased out unused aircraft and also delayed delivery of new planes.
Kingfisher, for example, has also taken a decision to sell 11 of its Airbus A320 planes and return an equal number to lessors. As for falling traffic, AI (domestic) market share is down to about 17 per cent while that of rookie budget carriers SpiceJet and IndiGo is around 13 per cent each. AI international’s position is no better as it ceded ground — or sky — to other airlines.

As a result of continued delivery of new aircraft, the debt servicing is increasing. Already, AI  has spent about Rs 20,000 crore for buying new aircraft and another Rs 25,000 crore will be spent in the coming two to three years, for taking delivery of the remaining aircraft ordered. The result: Nacil has accumulated debt of Rs 16,000 crore, an amount which is equal to its turnover.

So what’s the way out? CMD Jadhav has signalled that savings is a must and is hopeful that a slew of austerity measures he has initiated aiming at saving Rs 1,000 crore per year.

Government to rescue

The measures being taken to cut costs include a system to ensure optimum fuel consumption through usage of technology which could lead to a saving of Rs 300-400 crore annually. Rationalisation of routes, proper scheduling of repair and engineering services and cutting down on employee travel expenses could save another Rs 400-500 crore, he says.

The government may also announce a bailout package. According to civil aviation minister Praful Patel, equity infusion into AI from the Government is on the cards and this year’s budget may provide Rs 4,000-5,000 crore towards this infusion as well as soft loan. This is the first time since its inception that the Government would pump equity into the carrier.

The Chairman & Managing Director says that AI has informed the government about its need of a lifeline. AI, sources say, the bailout package could be between Rs 12,000-15,000 crore including Rs 5,000 crore as additional equity, Rs 7,000 crore as a soft loan payable after five years at a 5 per cent interest rate, and a grant of Rs 2,000 crore.

However, the finance ministry is said to have indicated a package of Rs 5000-5500 crore  including an equity infusion of up to Rs 1,500 crore, plus a soft loan of Rs 3,000-3,500 crore.

Says Kapil Kaul: “AI needs a business plan that is viable, a team which is committed. Bailout package should be linked to a viable, realistic plan. It will be in the interest of the airline to plan for turn around and privatise airline. It needs to be privatised. If it is delayed, there may be no value left even if you want to privatize.  My suggestion is give two years for turnaround, then privatise.”

Surely the government needs to do something quick and drastic. Or else this prestigious national career will soon get grounded under a huge financial burden.

DH News Service

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