To keep Air-India afloat

The government has cleared the proposal to privatise Air-India but will this decision enable the airline to come out of the red?

IT seems appropriate that Air-India should have chosen the maharaja for its mascot. Profligacy and mismanagement have reduced the airline to bankruptcy and decrepitude and, like the maharajas of yore, it is surviving solely on past glory. Having kept it afloat for decades, the government decided to hand it over to the private sector in the hope that the measure will rescue the national carrier from a crash.

The proposal, the first in a series of big ticket sell-off of public sector equity planned by an impoverished government, was cleared by the Cabinet Committee on Disinvestment towards May end. It envisages selling 60 per cent of government stake in the airline. Of this, 40 per cent is to be sold to the private sector to rope in a strategic partner.

Union Minister for Disinvestment Arun Jaitley stated that the government would allow any Indian promoter to hold 40 per cent of the equity. A foreign investor would be allowed no more than 26 per cent. The government hopes that 74 per cent of the equity will remain in Indian hands, while its own share will be equal to that of the strategic partner. The proposal sets apart 10 per cent of the equity each to be offered as employee stock options (ESOP) and to Indian financial institutions.

Crucially, the government has decided to hand over management control to the strategic partner, which may be entirely Indian or a joint venture with a foreign partner, including a foreign airline. This is a marked departure from the stand taken earlier by successive governments on Indian Airlines, the domestic carrier. They had maintained that they would not allow a foreign airline company to take a stake in the domestic carrier.

Policymakers seem to think that the fundamental ills that plague the airline, namely management failure and the need for large-scale infusion of capital, admit few remedies. In deciding to hand over the management to the strategic partner, they have acknowledged the failure of the current style of management.

Management failure compounded by political interference is the root cause of the abysmal performance of the airline. For many years it was packed with bureaucrats who had neither the professionalism to manage an aviation company with international operations nor the will to resist political pressure. The Indian Administrative Service (IAS) lobby has considered top jobs in both the airlines too attractive to be ceded to professionals. In fact, the political leadership has consistently packed the boards with its nominees, shortcircuiting the Public Enterprises Selection Board. Joint Secretaries from the Civil Aviation Ministry have presided over the decline of both Air-India and Indian Airlines.

While the Indian Airlines is still headed by bureaucrats, Air-India has been headed by a professional for a couple of years. But then, he functioned under the gaze of the Civil Aviation Secretary, who was nominated the Chairman. Successive Civil Aviation Ministers have displayed remarkable reluctance to let go of their remote control over the two airlines, exercised through their nominees on the boards. Uncooperative bureaucrats have found themselves unceremoniously shunted out.

The company has been haemorrhaging heavily in the last few years, and its accumulated losses have risen to over Rs.1,000 crores. How much of the disinvestment proceeds will be ploughed back, if at all, remains to be seen. But it is expected that the strategic partner will have enough financial muscle to pull the airline out of the morass it has sunk into. It is doubtful whether a partner without a substantial stake in the airline will be willing to pump in the required funds.

Why does Air-India need huge capital infusion? With 24 aircraft, it has the smallest fleet in the world; it can fly only half the routes that it is entitled to. As one observer remarked, it has fewer aircraft than directors on its board. And its fleet is an ageing one. In fact, more than a third of its fleet is over 20 years old. Of late, the airline has been leasing aircraft, an operation that consumes 11 per cent of its revenue.

Fleet expansion has been stalled by political interference and managerial foot-dragging. Acquisition of aircraft is a major financial decision for any airline and the political leadership naturally has an interest in the purchase decisions, which is perhaps why successive managements have put off purchase decisions. Even in the past, purchase of aircraft for the domestic carrier had become a subject of controversy owing to political involvement right at the top. The entire process had to be put through the scrutiny of the central investigative agency. The expectation is that a private and autonomous management with equity stake in the venture will perhaps find it easier to make the decision purely on commercial considerations.

Without fleet expansion, Air-India will probably see its routes shrink further. It flies only 17 routes today, down from over 30 a decade ago. While part of the blame could go to its domestic counterpart that ate into its Gulf market, Air-India has had to keep off several other profitable routes primarily because its costs were too high compared to other international airlines. Even in the traffic to and from India, Air-India has only a 22 per cent share, although it is the national carrier. India-Gulf, India-United States and India-Japan are its only profitable routes while on the Canadian and European sectors the airline makes heavy losses despite decent load factors.

A ballooning wage bill is a major factor in pushing up costs. Air-India's 17,500 employees together account for an annual wage bill of over Rs.1,000 crores. The productivity-linked incentive scheme introduced by its management in the 1990s has become a source of constant haemorrhaging of the airline. It inflated the annual wage bill by over Rs.200 crores. The irony is that the incentive was never linked to productivity from the start: it was more in the nature of the appeasement of an increasingly strident section of the top echelons of the airline, which demanded higher wages and incentives. Apart from wages, the generous terms awarded to General Sales Agents and Consolidators have also been responsible for driving down the airline's bottomline. The airline markets itself through a network of 78 GSAs worldwide.

Union Civil Aviation Minister Sharad Yadav has stated that the disinvestment would be done in a manner in which the interests of the workforce would be protected. With 750 employees to an aircraft as against the international norm of 150, downsizing will be necessary unless fleet expansion takes place and the surplus staff can be gainfully deployed on new routes. There is talk of linking ESOPs to Voluntary Retirement Schemes. Already the Air-India unions have announced their intention to oppose disinvestment. According to R.B. Chaure, general secretary of the Air-India Officers' Association, the airline can be turned around with some fund infusion by the government. The new management's big challenge will be its treatment of surplus staff.

Against this backdrop, handing over management control to the strategic partner, especially if it has the experience of running an international airline, seems an option worth trying. However, as one observer put it, the devil may be in the details. Whether the government will let the private management run the airline without any political interference is a million-dollar question. The example of Maruti Udyog Limited, where the government, an equal partner with Suzuki Motor Corporation, dragged its feet for two years even as the Korean motor companies gained precious lead time to launch their products and eat into MUL's market is a case in point. Complete autonomy in management with specific performance targets and parameters written into the terms of the joint venture agreement could deliver the goods. The government is appointing a global advisor to assist the Cabinet Committee to manage the disinvestment process. One has to wait to see the fine print.

The fine print will also impact the price that the disinvestment will fetch. Unless international investors believe that the airline can in fact be turned around, they will not be willing to pay a good price. Its net worth is threatening to go negative, and with its bloated and pampered staff and small and ageing fleet, the prospects do not seem attractive. Strong political will and commitment to turn it around should manifest itself in the fine print.