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Merger pain

Print edition : Jun 03, 2011 T+T-

The beleaguered national carrier, Air India, reeling under debt and the aftermath of merger, survives a pilots' strike.

in Mumbai

CLEARLY, India's national carrier, Air India, is flying in rough weather. It will still survive the turbulence because the government will bail it out. However, the recent strike by a section of its pilots has exposed a rot so deep that it will need a very capable leader and a receptive government to find its old glory.

Air India has taken several rough knocks in the past few years. It also suffers from various malaises that are rarely addressed. The result is an unwieldy behemoth that is deep in debt and hard to manage.

Mismanagement and bad leadership and far too much government interference are seen as the main reasons for the beleaguered airline's problems. By many accounts the airline's troubles began with the purchase of a huge number of aircraft in August 2004 and worsened with the merger of Indian Airlines (IA) and Air India (AI) in March 2007.

The strike

The merger was effected to optimise each airline's best practices and to reduce operational and administrative costs. In theory, it was a splendid idea, says an airline official who was with IA. But in practice, it has bombed.

There are key issues still to be addressed such as salary revision, which was promised early. We were told that whichever airline's salaries and perks were higher, those would be applied to all employees across categories. It has been four years and we are yet to see a pay rise, says the official.

Discontent started brewing among former IA pilots in February. In spite of several appeals from them, the AI management paid little attention. The airline did appoint an independent committee headed by Justice D.N. Dharmadhikari in March to examine salary and related issues, but nothing happened.

On April 26, as many as 800 dissenting IA pilots led by the Indian Commercial Pilots Association (ICPA), the IA pilots' union, went on strike. This was two days before summer vacation for schools began the airline's busiest and most profitable period in the year. Air India's domestic operations came to a grinding halt and it is said to have lost up to Rs.15 crore a day. The government did not take it lightly. Several pilots were fired. The ICPA was derecognised, and the Delhi High Court threatened the pilots with stern action if they did not resume work. However, the pilots held firm. Ten days later, after tough negotiations, the pilots were assured that their demands would be met. These included flying more sectors (as pilots are paid according to the hours they put in) and matching their pay scale with that of pilots of the old AI.

It always requires something as drastic as a strike of this scale for the airline to listen, says the official. We have asked for nothing unreasonable. This is what was promised to us. Besides, why are they making a mess of routes? Some of the profitable ones are being disbanded these are areas of serious concern and clear examples of mismanagement.

The Merger

Before the merger, there were instances when IA and AI operated flights at the same time, on the same route, both half full. The Central government felt that it would make better business sense to merge the two airlines. It could help achieve economies of scale in maintenance, ground operations, use of landing slots and parking rights.

The airline, post-merger, was to be branded Air India and managed by a new company, the National Aviation Company of India Limited (NACIL). Together, it had a fleet of 130 aircraft, while other airline companies averaged 70-100 planes.

According to an aviation analyst, the most powerful argument in an airline merger such as this is that it can effectively deliver the classic hub-and-spoke system that large airlines have been operating. For instance, the domestic carrier (the spoke) will bring passengers to big international hubs such as New Delhi and Mumbai. International carriers such as Lufthansa and British Airways operate this way.

Given that Indian private players Jet Airways, Kingfisher, SpiceJet and Indigo will be flying several international routes in the future, this move would give AI a lead over the others.

The merger, therefore, was a logical decision. Yet, the analyst said, because IA and AI were organisations with complex layers of departments run in obsolete bureaucratic ways, the merger was not going to be smooth.

Several civil aviation commentators stated way back in 2007 that merger was not a wise idea and had cautioned the government against it. For example, an expert says: The practical reality may be that none of the benefits of merger may become available, and there will simply be a lot of friction and unhappiness.

In 2006-2007, media reports had pointed out the problems that would arise. Observers said the disparate nature of the two airlines' workforce and their pay structures would cause problems. Duplicate structures would add a layer of fat and a lot of staff unhappiness. For instance, both airlines had ground-handling facilities in Mumbai and Delhi. Those areas were overstaffed.

Much also depended on whether the strong unions existing on both sides worked together. If IA pilots were not given a chance to fly international routes, discontentment would set in. And if AI crew were expected to fly domestic routes, they would revolt as they would lose out on their fat international allowances. The April 2011 strike has vindicated these predictions.

Soon after the strike was called off, the Committee on Public Undertakings (COPU) slammed the government for the ill-conceived and whimsical decision to merge the two entities. In its report submitted to Parliament, it said: This is a marriage of two incompatible individuals. It recommended that the government separate the two airlines into domestic and international carriers held under a single holding company.

Aircraft acquisition

In August 2004, when Praful Patel was the Civil Aviation Minister, it was decided that Air India would boost its passenger traffic by adding more routes and services. For this the airline had to increase its fleet strength. In a shopping spree, an order was placed for 50 aircraft at a cost of Rs.50,000 crore. The order included Boeing 777 LR (long-range aircraft), Boeing 777 ER (extra range) and Boeing 787 Dreamliners. All were meant for long-haul non-stop flights such as the 16-hour Mumbai-New York flight.

Eyebrows were raised, but no major protest was made. Praful Patel declared that he had received approvals from the clearance committees. But what the airline did not have was a viable revenue plan and a plan for expansion of routes. These deficiencies are mainly responsible for the situation the AI finds itself in. The debt on account of aircraft purchase stands at Rs.40,000 crore, according to AI.

In 2006, an additional order for 60 narrow-bodied aircraft was placed. There was still no viable plan, and so the new fleet of aircraft was useless. Meanwhile, AI was spiralling into debt. It eventually had to scrap routes such as Mumbai-San Francisco to cut back on expenses. Ironically, these were the very routes it was hoping to build on with the new aircraft. The move to revive the airline had actually caused extensive damage. Patel, who is now the Minister for Heavy Industries, is being blamed for destroying the national airline.

During the strike, the pilots asked for a Central Bureau of Investigation inquiry into the acquisition of aircraft, which they said defied logic.

Financial mess

AI's finances are in such serious trouble that it will need an abundance of funds to pull it out of the crisis. Until the acquisition plan, both airlines were doing reasonably well. In fact, says a senior AI pilot, in spite of the corruption within, the airline managed to post profits until 2006-07. Thereafter AI and IA together registered a staggering loss of Rs.770 crore. After the merger, it became worse and the losses went up to Rs.7,200 crore in March 2009.

AI's financial problems, says one aviation analyst, stem from a massive liquidity crunch owing to the acquisition, high oil prices, the economic slowdown, declining passenger traffic and low fares vis--vis expenses. Furthermore, there are 30,000 employees in the merged company. AI has an average of 240 employees per aircraft when the industry standard averages 125. The salary bill itself is out of sync with industry norms.

Recently, the Central government placed Rs.1,200 crore in its coffers to help tide over the liquidity crunch. But analysts say a long-term solid financial plan needs to be enforced to get the airline out of the financial mess.

Lack of empathy

Unlike other public sector undertakings (PSUs), especially the Navratna companies that have carefully chosen leaders at the helm, Air India has historically been straddled with controversial chairmen. The present Chairman, Arvind Jadhav, is no exception.

One of the ICPA's main grouses during the strike was Jadhav's lack of empathy for employees. It claimed that he had a high-handed style and that he was never open to meeting employees. It pointed out that in the two years that he had been with AI, he had done little to take the company forward. Jadhav's only significant move was to shift a chunk of AI's operations to New Delhi, where he sits. AI has been headquartered in Mumbai since its inception, so the move was seen as random and unnecessary. Minister for Civil Aviation Vayalar Ravi is reportedly unhappy with Jadhav following the strike. Jadhav was unavailable for comment.

Other issues

The Minister has categorically ruled out privatisation. In 2001, the National Democratic Alliance government made an attempt to privatise the airline by putting it up for sale. A consortium led by the Tata group and Singapore Airlines made a bid for it, but the deal fell through.

Corruption is another malaise the company suffers from. Frontline learnt through sources that a biscuit packet that costs Rs.2 in a departmental store is purchased by AI for Rs.29.

Old-fashioned perks such as flying an employee's family for free several times a year or upgrading the air travel of politicians and other VIPs consistently has also hit profits.

Just before the merger, in a bid to strengthen branding, Indian Airlines was rechristened Indian. The change of logo and repainting of aircraft cost the company dearly. When the company was merged, it was rebranded as AI. It was just a waste of money, says the analyst. The ICPA has asked for a de-merger. But is the government ready for it?