Bowing to privatisation

The move to privatise Air India comes after years of deliberate neglect by the government and a series of measures taken over two decades to systematically run it into the ground.

Published : Aug 02, 2017 12:30 IST

For Ind survey: Air India Sunset

For Ind survey: Air India Sunset

THE Maharajah, Air India’s mascot since 1946, has been reduced to a crude caricature of his once-regal self. The airline’s status as India’s “national carrier” would appear incongruous in the hands of a private owner, yet this is exactly what the Narendra Modi government announced on June 28. The Union Cabinet Committee on Economic Affairs gave its “in-principle” approval for a “strategic sale” of its ownership in the airline, which implied handing over management control to a private entity while retaining a portion of the stake in the company. The Cabinet constituted the Air India Specific Alternative Mechanism (AISAM) consisting of a Group of Ministers headed by Finance Minister Arun Jaitley to guide the process of disinvestment.

The sale is the first big-ticket privatisation of the current National Democratic Alliance (NDA) government, which brings to mind the disastrous and egregious round of privatisation under the government headed by Atal Bihari Vajpayee. The ghosts of Balco, the aluminium company that was sold off to the Vedanta Group, Centaur Hotels, which was sold off on terms that bore the hallmark of a scandal; and the aborted sale of Air India during the Vajpayee era now threaten to resurface as the Modi government shifts gears towards aggressive privatisation of public assets.

The AISAM was mandated to decide the key issues in the stake sale. Among these are questions of how Air India’s whopping debt, amounting to more than Rs.52,000 crore, ought to be handled; whether some assets (and not-so-insignificant liabilities) ought to be hived off into a shell entity; the modalities of the strategic sale and the disinvestment in three of Air India’s profitable subsidiaries; the question of how much of stake to sell off; and, finally, who and which entities would be eligible to participate in the grand bargain.

The sheer range of these weighty imponderables raises a fundamental question: how can a stake sale be approved even before what is to be sold is decided? An Air India pilot, with almost 20 years’ experience with the company, echoed this: “It is like selling off your house without knowing where it is located or without even knowing what it looks like! How do you take an ‘in-principle’ decision to sell off the company without determining what you want to sell?” For obvious reasons, he prefers to remain unidentified. His fears are not without foundation. A circular issued by the Air India management in June warned retired employees against making “negative remarks” to the media or even on their personal social media accounts. The circular warned retired employees that “negative comments” would result in the “cessation of post-retirement facilities”. “If this is the fate of those who are no longer with the company, imagine what would happen to me if I am named,” the pilot told Frontline .

The Cabinet, on June 28, also approved “strategic disinvestment” in five of Air India’s subsidiaries: Air India Engineering Services Ltd (AIESL), which provides maintenance, repair and operations (MRO) services; Air India Air Transport Services Ltd (AIATSL), its ground-handling venture; Air India Charters Ltd (AICL), which operates Air India Express; Airline Allied Services Ltd (AASL), which operates Alliance Air; and Hotel Corporation of India Ltd (HCI, which owns Centaur Hotels). Apart from these subsidiaries, Air India also has a joint venture with SATS Ltd, the ground-handling and in-flight catering service provider at Changi Airport in Singapore, called Air India SATS (AISATS). It is significant that AIATSL, Air India Express and AISATS have been profitable, unlike the parent company. In fact, Air India posted operating profits in the last two years, for the first time in a decade.

About a month before the announcement of the decision to privatise Air India, the NITI Aayog, the government’s think tank that is a pale shadow of the Planning Commission that it replaced, submitted a report on privatising Air India, after “unbundling” it, a clever euphemism for separating the loss-making portions for retention by the government while selling off the profitable portions of the largest Indian airline. Although the report is not available in the public domain, several aspects of it have been selectively leaked, and these raise serious concerns. The first is the obvious issue of Air India’s outstanding debts, amounting to more than Rs.50,000 crore. Media reports indicate that the NITI Aayog had suggested that the aircraft-related loans and working capital borrowings be passed on to the strategic investor; the think tank has apparently suggested that the government take a hit on the remaining portion of the debt by writing it off. The Union Minister for Civil Aviation, A. Gajapathi Raju, provided a perfect example of the government’s doublespeak by terming the NITI Aayog’s recommendation of an aggressive sell-off as suggestions “for a strong and viable airline”.

Jaitley justified the stake sale in Air India, arguing that the public money being pumped into the airline would be better used by investing it in education and health. The recent decision of the NITI Aayog to privatise services in urban district hospitals points to the vacuous nature of this logic. “It is not as if Air India is snatching money away from the poor, the infirm and those in need of education, nor is the airline responsible for their plight,” a retired Air India pilot told Frontline .

Selective amnesia

The Cabinet announcement on June 28 was greeted with glee by the champions of privatisation in the media and in industry. It has been welcomed as a sign of the government’s commitment to reform. The privatisation of the bleeding airline that has been suffocating under a mountain of debt that was not of its making is seen by these advocates as paving the way for deliverance for the humble taxpayer. But what is truly staggering is these advocates’ selective amnesia about how Air India came to such a pass and how the humble taxpayer was not invoked in all these years when the country’s premier airline, and unique institution, was systematically driven into the ground.

But that is a story that started unfolding over two decades ago, roughly coinciding with the Indian adventure with liberalisation. It has all the trappings of corporate intrigue, policy capture and the brazen but multifaceted attack on the two public sector airline companies—Indian Airlines, the domestic carrier, and Air India, the international carrier—that were later merged to form a single company known as Air India.

Broadly, the assault was on three realms, each of which was fatal for the two public sector carriers. The first of these was the manner in which the government, after repeatedly stalling the Indian carriers’ efforts to expand their fleet for almost a decade since the mid 1990s, suddenly pushed them into deals for 111 aircraft in late 2005 and early 2006. This was the time when air travel was expanding, no doubt fuelled by the rising income levels among the upper tiers of the Indian middle class after liberalisation. The decision of the two companies to purchase aircraft like sacks of potatoes or onions has haunted the companies ever since and remains the only reason for the fatal surge in Air India’s debt.

The second aspect of Air India’s sorry state pertains to the manner in which the two airline companies were merged, one year after the fatal bulk purchase of aircraft, with utter lack of preparation. This was a shotgun marriage from which the combined entity has still not recovered. The third dimension of Air India’s travails stems from the “open skies” policy of the government, which hit Air India’s international operations particularly hard even as foreign carriers exploited the free run they were allowed in India.

A notable feature of the policy regime in the last two decades is the remarkable continuity under two different political dispenasations— the ruling NDA led by the Bharatiya Janata Party and the Congress-led United Progressive Alliance (UPA). Although the UPA must take a larger share of the blame for wrecking Air India, not merely because of its longer reign at the helm of affairs but also because significantly more severe damage was done to the airline’s health during its tenure, the two BJP-led coalitions also contributed to Air India’s miserable downfall. After all, it was the Vajpayee government (1998-2004) that first initiated the privatisation of Air India in 1999. Although it did not materialise, it caused significant damage because the airline’s urgent need to augment its ageing fleet was not possible under the cloud of an impending disinvestment. After all, it would not have made sense for the government to invest in aircraft when it was on the verge of handing over the company to a private player. There is much irony in Jaitley steering Air India into the hands of a private player 18 years after his first failed attempt.

The deal that sank Air India

There is no doubt that the biggest blow to Air India—and the erstwhile Indian Airlines that merged with it in 2007—was caused by the reckless and egregious decision to order 111 aircraft at an overall cost of Rs.46,549 crore in 2005-06. Air India placed an order for 50 Boeing aircraft (with GE engines), including a whopping 27 medium-capacity long-range Dreamliners. Air India Charters, its subsidiary, signed a deal with Boeing for 18 aircraft fitted with CFM engines (CFM is a joint venture between GE and the French company Safran). The combined value of the two orders was Rs.38,149 crore (at the then prevailing exchange rate of Rs.44 to the U.S. dollar). The deal was signed on December 30, 2005. In February 2006, Indian Airlines followed it up with an order for 43 Airbus aircraft in a deal that was valued at Rs.8,400 crore.

The manner in which the deals were rushed through, the cost of the acquisition and the long-term unsustainability of the two airlines have been clearly documented in several parliamentary committee reports and by the Comptroller and Auditor General (CAG) in 2011. Although it is difficult to establish categorically, circumstantial evidence in terms of the timing of the deal, especially the manner in which it was rushed through in a matter of months after years of dithering over the acquisition of a much smaller fleet by the two airlines, points to the possibility that the acquisition was tied to the India-U.S. nuclear deal by the Manmohan Singh-led UPA government as a quid pro quo .

The CAG audit found that Air India’s request for three aircraft in 1996 was not approved and that even six years later, in 2002, committees were still considering the options. It was only in 2003 that the technical committee in Air India (significantly, under the control of bureaucrats in the Ministry of Civil Aviation [MoCA]) decided to place orders for 17 medium-range and 18 short-range aircraft with Boeing and Airbus, the two premier international aircraft companies. It is important to note that during this time the NDA government was calling the shots and that the inaction was causing severe losses to the two airlines when the market required capacity expansion; in fact, the airlines’ inability to deploy aircraft resulted in an opening for private airlines waiting in the wings. After the UPA came to power in 2004, when Praful Patel was the Union Minister for Civil Aviation, the government asked Air India to go back to the drawing board on its acquisition plans. In April 2005, Air India submitted a fresh proposal for acquiring 35 aircraft on “firm” basis, with an option to acquire 15 more, if necessary. But by December 30, the Prime Minister’s Office decided that a firm order should be placed for all 50 aircraft, apart from the 18 aircraft for Air India Charters. Air India signed the deal with Boeing the same day.

CAG’S objections

The CAG took serious exception to the manner in which the deal was consummated, by contrasting the long delay by the government, from 1996 to 2004, in considering Air India’s request for acquisition with the speedy manner in which orders were placed with Boeing. It observed that the sharp increase, from 28 aircraft to 68, between January and November 2004 suggested lack of application of mind. On the basis of the circumstantial evidence before it, the CAG concluded that the MoCA applied pressure on Air India to inflate the scale of its acquisition. In particular, the increase in the order for long-range aircraft, from 10 initially to 50 finally, resulted in the acquisition budget increasing from $1.10 billion to $6.15 billion.

The CAG also pointed out that Air India’s justification for the acquisition of eight ultra-long-range aircraft was based on inflated forecast of traffic on non-stop flights to Chicago and New York following the acquisition of the aircraft. It pointed out that the India-U.S. sector was “historically a loss-making sector, and this trend of commercial unviability continued even with the introduction of non-stop India-USA flights”. The CAG also noted the Planning Commission’s comments that the traffic projections made by Air India after the acquisition were “risky” and its observation that the Directorate General of Civil Aviation’s (DGCA) statistics did not warrant the assumption of increase in traffic on long-haul flights. It concurred with the Expenditure Department’s observation that the entire acquisition exercise rested on the assumption that increase in capacity would translate automatically into higher demand for traffic on Air India’s long-haul flights. The CAG also noted that the Public Investment Board, which approved the deal, ignored the reservations expressed from within the government by the two agencies. The CAG also observed that Air India had made no effort to determine, through “commercial intelligence gathering”, or set benchmarks for price negotiations with Boeing.

As far back as 1996, Indian Airlines initiated its acquisition programme, but this was effectively derailed by the NDA government’s decision to divest the government’s stake in the airline. In 1999, the airline shortlisted 15 aircraft from Boeing and Airbus and received bids from the aircraft manufacturers. But the entire process was stalled because the government had already decided to disinvest. It took a full 10 years for the deal to be concluded with Airbus for 43 aircraft. In this case too, the CAG found that revenue assumptions, based on fare increases, were unrealistic in an extremely competitive environment. The CAG noted that a smaller scale of acquisition, with an option to place orders for more aircraft later, would have been a more prudent option for Indian Airlines. It pointed out that although its fleet increased from 67 to 97 aircraft between March 2005 and March 2009, its market share declined from 37 per cent to less than 17 per cent in this period. The CAG also maintained that Indian Airlines ought to have reduced capacity on international routes and, instead, evolved “a common strategy” with Air India for its international operations. The CAG found a shocking lack of coordination between the two airlines, which merged barely two years after the deals with Boeing and Airbus, while making their respective aircraft acquisitions. Both companies made highly leveraged acquisitions: while Air India borrowed Rs.32,274 crore for the acquisition, Indian Airlines borrowed Rs.8,335 crore. It did not require great foresight for the MoCA to recognise that this scale of borrowing would be simply impossible to repay with the scale of revenues it could be reasonably expected to generate. Or, if one fancies conspiracy theories, was this done deliberately to push them to the brink?

The bungled merger

Incredibly, even as the MoCA was pushing the two airlines to go on an aircraft-acquisition binge, it initiated the process to merge the two companies. Two years earlier, Air India had commissioned a study by A.T. Kearney, a management consulting company, which suggested that the two airlines collaborate on fleet deployment and developing a common network. The MoCA was quick to give its “in-principle” approval for the merger, but significantly, the CAG did not find evidence of any “detailed justification” for arriving at this decision. By March 2007, the Cabinet had approved the merger and on August 22, 2007, the two companies were dissolved and incorporated into the National Aviation Company of India Limited (which was later renamed Air India).

Shockingly, it took more than four years for the merged entity to implement a common ticketing system for the two airlines. As a result of the tardy implementation of systems, Air India’s entry into the Star Alliance, a global alliance of airlines that promotes pooling of resources and economies of scale, was significantly delayed. Air India’s entry into the alliance was delayed primarily because the two entities were still using separate codes.

A former top executive in Air India told Frontline that neither the senior management nor the staff and their unions were consulted on the merger. He pointed out that India’s bilateral Air Service Agreements with other countries had the provision for two national carriers, but after the merger, the vacated slots on international routes were quickly occupied by private airlines such as Jet Airways and Kingfisher. A Chennai-based Air India pilot told Frontline that private Indian airlines were allowed to indulge in predatory practices. The pilot, who was a regular flier to Kuala Lumpur, said: “One airline was allowed to take off a few minutes before the Air India flight on both legs of the journey, something that is unheard of in the business of aviation.” He pointed out that this was the case on many routes. Private airlines were allowed to occupy prime slots for ticketing counters, lounges and other facilities that enhanced passenger comfort inside Indian airports, often at the cost of the national carrier, he said.

International commercial air traffic rights are usually termed “freedoms of the air” in which the 1st Right refers to the right to overfly another country’s territory, the 2nd Right confers the right to refuel or carry out maintenance in a foreign location, the 3rd and 4th Rights allow carriers from one country to fly to and from another country, and the 5th the right to fly between two foreign countries while originating or ending in one’s own country (for example, New Delhi-Frankfurt-New York). But an additional Right, the so-called 6th Freedom, has become important in the last two decades. It allows airlines carrying traffic between two foreign locations to stop within their own country, usually their home hub. Such airlines have worked in close coordination with and with investments by their national governments because what is critical to their operation is not just the airline business but the provision and development of a hub. Etihad/Abu Dhabi, Emirates/Dubai, Qatar Airways/Qatar, Cathay Pacific/Hong Kong and Singapore Airlines/Singapore are some examples of this kind of partnership. Until 2003-04, foreign carriers were only allowed to operate from the major airports in India, but since then they have been allowed to serve locations in the interior.

Liberalised bilateral agreements allowed foreign carriers to significantly enhance capacities. For instance, on the lucrative and high-traffic routes to West Asia, seat capacities for airlines from Dubai increased almost fivefold between 2003-04 and 2008-09. While foreign carriers were operating at almost 99 per cent capacity in 2008-09, Indian carriers were operating at less than 50 per cent. It was obvious that the foreign carriers were able to ramp up capacity utilisation not merely by carrying point-to-point traffic, but by using their 6th Freedom advantage to carry traffic to their hubs and destinations beyond. While Air India was hampered by an inadequate fleet, Indian Airlines was hit hard by the fact that foreign carriers such as Emirates were allowed to operate even from smaller towns such as Kozhikode. In fact, an analysis of air traffic to and from India for 2009-10 by the CAG (2011) revealed 6th Freedom traffic of Qatar Airways, Gulf Air (Bahrain) and Etihad was more than 75 per cent of their overall traffic to/from India. In the same year, Lufthansa’s 6th Freedom traffic was 87 per cent, British Airways 61 per cent and Air France 73 per cent (the overall proportion for European carriers was 74 per cent). More than half the traffic to and from South-East Asia carried by foreign airlines was 6th Freedom traffic, especially in the case of Cathay Pacific.

More critically, the Indian public sector carriers, which were hampered by fleet constraints and hit by the opening up of international routes to private Indian carriers, were unable to even carry the traffic they were entitled to through the bilateral agreements. In 2008-09, for instance, while Jet Airways almost doubled its international passenger traffic, the combined traffic of the public sector carriers fell by almost 20 per cent. Air India pointed out at that time that its problems were compounded by overcapacity, price undercutting by private Indian carriers and by the fact that the private carriers were flying to/from the same destinations that it was serving. It was clear that the abuse of the so-called 6th Freedom rights enabled foreign carriers to use bilateral agreements, in which such rights are not explicitly guaranteed, to serve their commercial rights with no matching benefits for the country.

The CAG observed that the terms of the bilateral agreements thus resulted in the “lack of a level playing field for Air India” before it was ready to face competition. The implicit recognition that the government’s own aviation policies and its direct role in the disastrous acquisition of aircraft and the equally disastrous merger of Air India and Indian Airlines was what made the Manmohan Singh government initiate a turnaround and financial restructuring plan in 2012. The government has so far provided Rs.23,993 crore for the plan out of the overall commitment of Rs.30,000 crore. The move to privatise Air India comes despite a steady improvement in performance in the last few years on several key operational metrics and the sharp reduction in losses (see the accompanying tables and graphs). So, why privatise now, especially after the government—which was after all responsible for wrecking it—has sunk significant capital into the company aimed at reviving it?

Untruthful portrayal

The untruthful portrayal of Air India as the sole truant airline in India reveals that a deep-seated prejudice is at play. What else was Kingfisher, which borrowed recklessly from Indian banks and whose owner Vijay Mallya is eluding the Indian authorities? Nor do prejudiced minds care to recall the number of airline companies—23 of them at the last count—that have disappeared after a short-lived cameo (remember East-West, Modi-Luft and so many others?). Even Jet Airways was on the brink until Etihad bailed it out; SpiceJet too was very close to shutting down not very long ago, leaving thousands of passengers in the lurch.

Truth be told, the airline industry is basically oligopolistic in nature, but with a serious twist that requires government policies, regulations and its own direct involvement. In an industry that is of strategic importance, one in which capital costs are high and in which economies of scale are critical, the industry was for a long time a natural monopoly that required government presence. In the last two decades or so, the government’s role as a monopoly provider has yielded ground to private players even as the government continues to play a critical role. Take the case of all the “national” carriers operating out of their national hubs and it is evident that airlines have been promoted aggressively by national governments; government policies have played a key role in developing airports and other infrastructure; and governments have been aggressively promoting their own airlines in bilateral negotiations.

Seen from this perspective, Air India’s story is that of an outlier in the world of civil aviation. It has been nobody’s child, neglected and kicked around by its own parent. It is a scandal of gigantic proportions. But is not privatisation always that anyway?

( With inputs from Anupama Katakam .)

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