Air India needs help to take off again, but is the government's restructuring plan the answer?
in BangaloreINDIA's national carrier Air India is near bankrupt and surviving on government handouts. The government props up the airline with dollops of cash every time its employees threaten industrial action. The malaise is deep-rooted and has propelled the airline into a nosedive from which, according to former Minister for Civil Aviation Rajiv Pratap Rudy, given the present structure it cannot survive.
Official figures say Air India has outstanding loans and dues of Rs.67,520 crore. Of this, Rs.21,200 crore is working capital loans and Rs.22,000 crore long-term loans on fleet acquisitions. Accumulated losses amount to Rs.20,320 crore and the airline owes around Rs.4,000 crore to vendors and suppliers, including oil-marketing companies. It also has an annual wage bill of Rs.3,000 crore. In January, all its 11 bank accounts were frozen by the Central Board of Excise and Customs for non-payment of duties estimated at Rs.300 crore.
A Group of Ministers (GoM) led by Finance Minister Pranab Mukherjee was mandated in June 2011 to examine and vet the airline's debt-recast and turnaround or restructuring plan and decide on additional equity infusion into the carrier. It is reported to have suggested that the government hive off a part of its stake in the airline to a strategic partner. But the GoM, which includes Commerce Minister Anand Sharma and Civil Aviation Minister Ajit Singh and is being advised by a committee of secretaries (CoS), is well aware that a stake sale can happen only after the loss-making carrier is able to arrest its decline and achieve a modicum of growth.
On February 7, the GoM recommended that the beleaguered airline be allowed to raise Rs.7,400 crore by issuing government guaranteed bonds or by any other means. (Air India requires Rs.6,750 crore immediately to clear its dues. Of this, Rs.1,200 crore was paid last year. Only after these dues are cleared will it be in a position to look at equity infusion.)
Said Capt. A. Ranganathan, a Chennai-based aviation expert and pilot with over 20,000 hours of flying experience: The question is who does Air India belong to? On paper the President of India. But in reality it has become the fiefdom of the Ministry of Civil Aviation, which sadly has no long-term vision for the airline. We have had three Ministers in the past three years. The government should either write off its debt or close the airline. And what we need is not ruthless privatisation but delinking of the airline from the Ministry and a professional from the industry to head it. Popular routes have been given away on a platter or timings tinkered with unnecessarily. We are also looking to buy more aircraft without proper studies on passenger growth rates. You talk of major airline disasters in this country, and the national airline was involved. In addition, there have been several close incidents involving the erstwhile Indian Airlines, Air India and Alliance Air that could have turned into disasters.
Plethora of problemsThe airline faces a plethora of issues. For instance, the load factor (in the economy class) may be going up, but revenues are not because tickets are underpriced and passengers in premium classes are few and far between. The airline's tooth to tail ratio (flight crew to ground staff ratio) is abysmally low. Aircraft to staff ratio is close to 1:450 in Air India as against 1:180 in the industry. Besides, lucrative routes have been given away to rival domestic and international carriers. The type of aircraft flying on successful routes has been changed suddenly, much to the chagrin of passengers, even as commercially unviable routes are introduced.
While operating costs, particularly of aviation turbine fuel (ATF), have escalated, bad planning and excess acquisition, duplication, and inefficiency and poor route rationalisation have ensured that the airline is stuck with surplus capacity in a falling' market. On top of this, aircraft utilisation is nine hours a day in Air India against the industry benchmark of 16 hours.
In terms of domestic passenger share, Air India stands third, behind Jet Airways and Indigo. Internationally, the ongoing Eurozone crisis has only accentuated the airline's problems.
Morale among its 28,500 employees is at an all-time low. Productivity-linked incentives (PLI) and flying allowances, which constitute 80 per cent of a pilot's remuneration, have been pending for over four months. Said Rudy: In the 1950s and 60s, Air India survived not by flying but by selling bilateral air service agreements to other countries. But this advantage' was lost post the WTO accord when airlines had to compete internationally. Today, Air India is cutting fares to show the government that it is carrying more passengers. But this move is not only killing the airline since it is a legacy full-service carrier trying to match low-cost airlines' fares, but is also upsetting the equilibrium in the industry. Air India works under the assumption that it can continue to bleed but will survive because the government will always bail it out.
As part of Air India's debt-recast plans, the GoM is likely to infuse (with riders) Rs.23,000 crore into the national carrier over the next 10 years, of which nearly Rs.6,700 crore is to be invested in the current fiscal ending March 31 to meet immediate financial obligations. Without this package, there cannot be equity infusion into the airline. The GoM is also likely to okay the acquisition of 27 Boeing 787 Dreamliner aircraft.
Merger bluesThe airline's millstone has been the government's decision, in March 2007, to merge Indian Airlines (rebranded Indian' in December 2005), until then a largely profitable venture, with the perennially loss-making Air India. As part of the merger process whose idea was based on the recommendations submitted by the consulting firm Accenture a new company called the National Aviation Company of India Limited (now called Air India Limited, AIL) was established. Both Air India (along with its fully owned subsidiary Air India Express) and Indian (along with Alliance Air, a fully owned subsidiary, which was later renamed Air India Regional) were to be merged into this. The merger was viewed as a sure-shot way to counter the challenges of international competition by creating larger capacity and expanding the reach.
The merged airline, it was argued, would have a fleet of over 130 aircraft, substantial market share and, importantly, offer international passengers connectivity to even a two-horse town. But three years later, a parliamentary panel declared that the decision had only messed up the state carriers. The losses in Air India catapulted from Rs.2,226 crore (in 2007-08) to Rs.7,200 crore (2009-10). The parliamentary committee on public undertakings called the amalgamation ill-conceived, whimsical and a marriage of two incompatible individuals and asked whether the then Civil Aviation Minister, Praful Patel, and his Ministry ever had a blueprint for the future of the airline.
The Comptroller and Auditor General's (CAG) performance audit report on AIL's aircraft acquisition says it was flawed, and based on market share growth estimates that were not validated. The report is the cornerstone on which the public accounts committee has been questioning officials from the airline and the Ministry of Civil Aviation (MoCA).
The report, which was tabled in Parliament in September 2011, pegs the loss to the exchequer on account of faulty acquisitions for both Air India and Indian Airlines at Rs.10,000 crore. The audit commenced in September 2009 and ended in early 2011.
Says the report: Had the possibility of merger (with attendant route rationalisation, network integration, common maintenance/ overhauling facilities and other synergies) been considered even at a late stage in the process of fleet acquisition, the underlying economics could have been significantly altered; perhaps, even a common acquisition process for Air India/IC [Indian Airlines] could well have been considered. In our view, the potential benefits for the merger would have been far higher had this been undertaken before finalisation of the massive and separate fleet acquisition exercises undertaken by Air India and IC.
The CAG report has also been critical of the liberal way in which bilateral air service agreements have been handed to foreign carriers by the Air India management and the Civil Aviation Ministry then headed by Praful Patel. Post the signing away of these bilateral agreements, while airlines based in the Gulf can pick up passengers from India and transit them through their West Asian bases to Europe and the Americas, Air India has been denied this opportunity.
Bilateral air service agreements provide various types of freedom or flying rights under freedom of the air, to designated airlines of two countries. Under this, the Sixth Freedom gives the right to fly from a foreign country to another foreign country while stopping in one's own country. Under this right, airlines such as Emirates, Qatar, Oman Etihad, Jazeera and Kuwait carry over half the passengers to and from destinations beyond the Gulf, such as the U.S. and Europe. Also, while many of the Gulf carriers have just one main port of call, a number of cities in India have been opened up to them. This practice, according to the CAG, is detrimental to both Air India and other Indian carriers.
Separate identitiesDespite the merger decision, Indian Airlines and Air India continue to maintain their separate identities. Each has its own manpower, including air crew, baggage handlers, drivers and so on, separate properties and offices and other facilities. There is no cross-utilisation of resources, be it in the sphere of information technology or in facilities for maintenance, repair, and overhaul facilities. While Air India has a five-day week, Indian Airlines works for six days. In airports where both airlines operate (such as Singapore, Dubai and Sharjah), each has its own staff and offices.
Proponents of the merger, however, reel off the benefits: cross-utilisation of aircraft; leveraged procurement of services and supplies, be it in insurance or fuel; and the opportunity to join Star Alliance, a global airline network that offers customers worldwide reach seamlessly.
Salaries of employees of the two organisations have not yet been harmonised, resulting in those working in the same post drawing different salaries; their career paths are also dissimilar. This has caused disenchantment among employees and led to strikes. The primary areas of discontentment are rationalisation of pay scales, career progression, fixing of seniority and allowances and incentives.
In an attempt to resolve these issues, the government appointed a four-member committee headed by Justice D.M. Dharmadhikari, a former judge of the Supreme Court. The committee submitted its report on January 31. Any implementation of the report can happen only after the management negotiates with the airline's unions 14 at last count. Members of some of the unions told Frontline that the committee was an act of political mischief whose only agenda was to reduce pilots' and engineers' salaries.
The erstwhile Air India (AI), represented by the ubiquitous Maharaja, has been the more glamorous airline, flying as it does on long-haul routes and to distant lands. Indian Airlines (IA), on the other hand, was the workhorse, flying domestic and regional country routes. While AI has never been able to take on competition, IA has been relatively better in crisis management, having come through the government's open skies policy.
The main issues of contention for the pilots of IA, which now operates flights under the Air India IC code, are salaries, allowances and the opportunity to fly wide-bodied aircraft. AI pilots, most of whom are members of the Indian Pilots Guild (IPG), fly wide-bodied aircraft such as Boeings 747 and 777. But IC pilots, who are represented by the Indian Commercial Pilots Association (ICPA), fly narrow-bodied Airbus aircraft such as the A319 and A320. They get a fixed 72-hour flying allowance, whereas for AI pilots it is 80 hours and a higher allowance. The ICPA wants parity with AI pilots and also the opportunity to fly wide-bodied aircraft, especially when there is a shortage of senior pilots to fly these aircraft.
On the difference in salaries and allowances, the IPG argues that its pilots stay out of the country for as many as 26 days in a month, at times even 13 days at a stretch, and have to live out of their allowances in expensive cities such as London, New York and Toronto. Said a member of the IPG: We get our benefits in cash, they [IC pilots] get in kind [allowances and benefits]. The IC pilots fly at best two to three hours and get back to their homes almost every day.
Countering this argument, an ICPA office-bearer said: Why differentiate when the two airlines have been merged? If AI pilots fly longer hours and stay out for longer periods, we undertake more landings, takeoffs and sectors, and in many cases in poorly maintained airports. AI pilots are paid more not for flying, but for staying out of their homes.
Speaking to Frontline, many IC pilots agreed that it was not logical to demand pay parity. World over, long-haul pilots are paid more. The nature of our jobs is different. What we need is wage rationalisation, said one of them.
On the vexed issue of allowing IC pilots to fly wide-bodied jets, especially the Boeing 787 Dreamliner, the IPG has gone to court. Its view is that IC pilots become commanders much faster, that is in four to five years, than AI pilots (who take twice that time), and so a common, fair and equitable seniority criteria, giving due consideration to the date of joining, will have to be evolved before IC pilots can fly wide-bodied aircraft. The training of pilots on the Boeing 787 has been affected by the IPG going to court. As a result, when the Dreamliner arrives the airline may not have qualified pilots to fly it.
IC pilots say there is no system in place for them to transit from flying narrow-bodied aircraft to flying wide-bodied aircraft. The choice of pilots can be ascertained, said one of them. If Air India is a unified company, pilots must be free, as vacancies arise and if qualified, to convert from one aircraft to another.
Pilots are piqued by the fact that every time a new set of losses is announced and there is talk of cutbacks, they suffer the most. Said a pilot: Our salaries may look glamorous, but a pilot's job is heavily linked to licences, be it medical or proficiency, both of which are assessed every six months. You fail and you are out of a job. The same goes for engineers and technicians. If the management targets inefficiency, and optimally uses aircraft and plans routes, the airline can save costs.
Giving an example, the pilot questions the need to operate an A320 aircraft (capacity: 120 passengers) on the Chennai-Visakhapatnam route with hardly 25 passengers, which is the case more often than not. Other airlines would have cancelled the flight when there were not enough bookings and accommodated the few passengers elsewhere. Or a smaller aircraft could have been requisitioned. But at Air India no one is prepared to take a call, said the pilot.
Pilots point out the wasteful expenditure in paying flying allowances to Delhi-based flight crew who are ferried to centres in the south to operate flights in the southern or South-east Asian routes. They say it is more logical to base aircrew in southern centres rather than have all of them in Delhi. Another instance of bad planning, they say, is having a five-member cabin crew for the A319 and A320. While five members are required to operate an A321 flight, only four are needed for the A319/320. Many aviation experts are of the view that the airline is underselling itself. They would like to see an increase in the number of premium, revenue-extracting seats. They cite the example of Air India's Boeing 777-200, which has only eight first class and 35 business class seats.
Besides, said Rajiv Pratap Rudy: The Boeing 777s that we bought were configured with one-third fewer seats than any of the other airlines. This meant a 20 per cent reduction in capacity. So when revenues went down Air India dropped fares. And losses went up.
Significantly, say informed sources, Air India's loss is Rs.3,000 crore every year on its international operations, with its daily non-stop Delhi/Mumbai-New York Boeing flights accounting for Rs.750 crore. The GoM on Air India has suggested the shutting down of some of these routes.
What now? The government has ruled out a demerger. Aviation experts have suggested the setting up of two strategic business units (SBUs) under the AIL one for international services and the other for the regional and domestic sectors, with each having its own chief executive officer. Tickets will be issued on a common International Air Transport Association (IATA) code, but they will be distinguished by a numerical that indicates whether the flight is international or domestic. Each SBU can follow its own rules and keep its own accounts and compete with one another.
According to Air India employees, the methodology employed in the recent past in handling issues has been to terrorise and gag. They want a vision statement and a clear plan to resurrect the airline.
As part of Air India's debt-recast plan, which has been vetted by Deloitte Consulting India, it has been proposed that banks be allowed to carry the debt on their books as performing assets instead of setting aside money as in the case of bad assets. It also seeks to convert Air India's Rs.11,000-crore short-term working capital loans into long-term debt, extending the carrier's repayment period, and also convert Rs.7,400 crore of its debt into preference shares carrying an 8 per cent dividend (something banks are not confident that Air India can fulfil).
