An airline's troubles

Print edition : July 22, 2000

Much slander is directed at Air-India, the national carrier which is described as beyond redemption. But the facts tell a different story.

ON the face of it, the Union government should not be hard-pressed to find reasons to privatise Air-India. For the past few weeks, Indian newspaper and magazine readers have been told just why the state-owned carrier is beyond redemption. It is a drain o n the national exchequer. It posts astounding losses, year after year. Its aircraft never take off on time, and when they do, they are poorly utilised. Air-India is overstaffed and inefficient, its personnel are ill-mannered and apathetic when they are n ot outright incompetent... so goes the litany. The sole solution, received wisdom has it, lies in allowing private capital, perhaps a foreign airline, to transform and re-shape India's ailing national carrier.

There is just one problem with this seeming consensus: it is not founded on much fact. While it is no one's contention that Air-India is a model of how a business ought to be run, there is evidence to suggest that the airline and its management have not done as badly as most people would imagine. And there is more than a little reason to believe that the slander directed at Air-India has the present Union government's blessings, in an effort to ensure that Rashtriya Swayamsevak Sangh (RSS) critics of di sinvestment are not able to block the airline's sale.

The facts with regard to Air-India's monetary losses illustrate just how unfair at least some of the recent criticism has been. Since the airline was nationalised in 1953, it posted profits in 37 of its 47 years. Five of those years in which losses were posted were years marked by fleet expansion and technological transformation, and this is not an unusual situation in the industry. The switch from turboprop aircraft to jetliners, for example, forced Air-India to post losses, as did the induction of Boe ing 747s and, in 1986-1987, Airbus aircraft. Then, from 1996-1997, Air-India went into a tailspin unprecedented in its history. That year, it posted a loss of Rs.400 crores. Both poor management and a lack of vision, critics have pointed out, ensured tha t the airline continued to bleed in subsequent years.

During 1999-2000, Air-India suffered a net operating loss of Rs. 75 crores. What the apologists of disinvestment have not seen it fit to mention is the fact that the airline had worked to get its act together, and would last year have posted a healthy le vel of profit if it was not for regulations that placed Air-India at a disadvantage vis-a-vis international carriers. For example, aviation fuel charges in India are some 40 per cent higher than elsewhere in the world, a major liability for an air line that has no option but to run half its flights from India. In addition, Air-India pays state sales taxes on aviation fuel at rates up to 35 per cent. International carriers refused to pay the tax from 1994, citing conventions of the International Ai r Transport Association (IATA). They have not been forced to comply, but Air-India has been made to do so.

Government regulations have affected Air-India in less evident ways too. From a low of $00.63 a gallon in April 1999, international fuel prices climbed 72 per cent to $1.05 a gallon by March 2000. Anticipating this increase, international airlines hedged their purchases, making forward purchases at $0.75 a gallon. This practice is generally frowned upon in public sector enterprises for a variety of reasons, some of them sound ones. But the failure to hedge, along with high levels of taxes and surcharges , none of which are of Air-India's making, cost the airline about some Rs.180 crores. Interestingly, airlines which are touted as models of efficiency, notably Lufthansa (of Germany) and Singapore Airlines, receive bulk purchase discounts. Air-India used to receive similar discounts until the mid-1980s, when the practice was discontinued under pressure from the Finance Ministry.

None of this is to suggest that Air India is in no need of reform. What the figures do show is that over the last two years, its management has been sensitive to the airline's problems and has acted to address them. Cost-cutting measures were put in plac e, ranging from freezing recruitments to cutting down on overseas postings. Top management was told to stop taking their counterparts in other airlines out to hotels for business lunches, and to use an in-house facility in the Air-India building instead. This year a major part of the losses was accounted for by government surcharges on fuel and a price escalation the airline had no powers to protect itself against. In addition, it had to make a Rs.103 crores arbitration payout for the controversial Cari bjet deal, an agreement the present management had no role in. Significantly, the airline has never defaulted on loan repayments, currently some $120 million a year.

PROFITS are not the only area where Air-India feels that it has had an unfair press. More than a few newspaper editorials, for example, have claimed that the airline is a drain on the exchequer. In fact, Air-India does not cost the government a single ru pee by way of subsidies or budgetary support. The government's total investment in the airline is Rs.153.84 crores, equivalent roughly to Air-India's earnings in 11 days. The investment, part loan and part equity in 1953, were amalgamated in 1994. Air-In dia has paid out some Rs.220 crores in dividends and interest to the government. In addition, it made government-directed investments in a spectrum of enterprises, notably Rs.60 crores in Indian Airlines, Rs.40 crores in the Hotel Corporation of India, a nd Rs.32.98 crores in Vayudoot. None of those investments has earned it proper returns.

Most national carriers have not managed anywhere near as well, including some that have been held out as models for Air-India. Air France, one of the world's largest airlines, recently received a $4 billion bailout from the French government. Italy's Ali talia received $2 billion, while Belgium's Sabena, Greece's Olympic and Spain's Iberia were granted packages of over $1.75 billion each. Portugal's TAP needed a bailout of over $1 billion, while three major airlines, Ireland's Aer Lingus, Indonesia's Gar uda and Kuwait Airways were granted capital infusions of over $3 million. Governments around the world have, the record shows, acted to protect their national carriers in times of distress. By contrast, Air-India, despite its evident problems, has not re quired a bailout.

Comparisons with profitable domestic airlines, particularly Jet Airways, also rest on thin ice. Airlines like Jet, some observers have suggested, illustrate the virtues of private enterprise. What they have not made public is that private airlines have b een able to capture half the domestic market because some 35 per cent of Indian Airlines' capacity is committed to its international routes. Domestic carriers, through the medium of the Directorate General of Civil Aviation (DGCA), are also protected aga inst rising fuel costs. On average, air fares within India have risen by 10 per cent each year. By contrast, Air-India has had to operate in an international competitive environment. Fares on the Dubai-Mumbai sector, for example, fell from dirhams 1,670 in 1993-1994 to dirhams 1,001 in 1999-2000, an average annual decline of 6.68 per cent. Fares from New York to Mumbai fell from $1,250 to $850 during the same period, an annual fall of 5.53 per cent.

The fact that Air-India could post profits through half this period says something about the supposed super-efficiency of private domestic operators. A ticket on the Mumbai-Singapore sector, for example, costs just Rs.2.05 a kilometre on Air-India. On an y domestic airline, a ticket from Mumbai to Chennai costs Rs.4.62 a km. Where Air-India can charge only Rs.1.45 per km on a Mumbai-Bangkok ticket, domestic airlines raise Rs.4.35 from each passenger travelling from Mumbai to Delhi for each kilometre of t ravel. Since domestic fares are regulated by the DGCA, there is not much meaningful competition between domestic private carriers and Indian Airlines. Air-India, on the other hand, has to face brutal competition on most sectors in which it operates, from airlines with larger fleets and lower costs.

CYNICS might read conspiracies into Air-India's problems, many of which are not of its own making. The airline, for example, has faced bitter criticism for underutilising its fleet. Air-India aircraft, reports have claimed, spend fewer hours flying passe ngers than most major international airlines. In 1997, for example, the average Air-India jet spent just 8.24 hours airborne each day, which is an unflattering figure. But detailed analysis conducted by the airline throws into relief a more complicated p icture. For one, fleet utilisation has improved significantly since 1997, rising to 9.56 hours a day in 2000. And allegations of fleet under-utilisation do not take into account the fact that the airline operates from 10 destinations within India, often filling up capacity before finally departing on long-haul flights. This pattern of operation forces aircraft to spend more time on the ground than they would in single-hub countries such as Dubai.

More important, Air-India's poor aircraft utilisation average is the result largely of the performance of its fleet of ageing Boeing 747-200s. In 1999, each Boeing 747-200 flew just 5.26 hours a day, against an industry average of 10.14 hours. By contras t, its 1999 utilisation of Airbus 300s, at 7.99 hours a day against an industry average of 3.8 hours, and Airbus 310s, at 9.77 hours against an industry average of 7.58 hours, was entirely acceptable.

The reason the airline is still forced to use its Boeing 747-200 aircraft is that the Union government has delayed, for a decade, the decision to purchase new medium-capacity long-range aircraft. Although the purchases would be paid for by Air-India itse lf, bureaucratic delays, punctuated regularly by allegations of corruption, have meant that the new aircraft the airline needs show no sign of arriving.

Perceptions that Air-India flights are without fail either late or delayed are also problematic. The airline's schedule integrity, with some 90 per cent of the flights departing on time, is nowhere near that of the world's top airlines. But it is not aby smal either, especially given the constraints within which the airline operates. Unlike Air France, with its 300 aircraft, or British Airways, with its 250-strong fleet, Air-India simply does not have enough aircraft to provide a buffer against engineeri ng problems or delays in one sector affecting departures from another. The airline has also had to withdraw aircraft to meet national commitments, for example, the evacuation of Indian citizens from West Asia during the Gulf war, or from Indonesia after riots broke out there in 1998. Aircraft for the President and Prime Minister to travel overseas are another problem, and decade-old proposals that Air-India simply service a dedicated government-owned jet have only gathered dust.

Where the airline has been able to address its problems without government clearance, it has not done a bad job. While Air-India has been criticised for being overstaffed, critics have often failed to mention relevant facts. Indian labour laws mandate th at regular jobs cannot be contracted out, so even the staff responsible for cleaning the Air-India headquarters each morning are regular employees. Foreign airlines have no such constraints. Then, Air-India managers point out, Indian airports rely on mor e labour-intensive technologies than most western hubs. Indeed, its ground staff in India are used by Singapore Airlines and British Airways, earning some Rs. 250 crores each year for Air-India. And the airline's own efforts to trim staff, cutting some 1 ,200 jobs over two years, freezing recruitment, reducing expensive overseas postings from 900 to 600 and cutting staff sent abroad by 35 per cent have passed unnoticed.

There is little doubt that Air-India needs meaningful reform if it is to survive and grow. What is less clear is how disinvestment in itself will address any of the airline's major problems. Disinvestment would bring in cash for a dramatic expansion of t he airline's fleet. Air-India's top management believes that such a move is imperative, but clearly this would do little to address the welter of other problems that the airline faces. Much of the criticism that is directed against Air-India is part of a larger campaign against the public sector by the free market pontiffs. But for government regulations that ensured that foreign airlines operating from India have an advantage over the national carrier, Air-India, notwithstanding its other problems, wou ld have posted an operating profit of over Rs. 100 crores this year. And that does little to affirm the proposition that the public sector is a drain on the economy.

It is possible that the campaign against Air-India will succeed in ensuring that RSS opponents of disinvestment will be silenced when the airline goes on the block. But while the pricing of the airline will be based on objective criteria, its negative im age is certain to be factored in. Whoever owns the airline when it finally goes on the block could be laughing: but most Indians will have no reason to.

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