Controversy in the air

Published : Jun 09, 2001 00:00 IST

The suspension of Air-India's Managing Director at a time when the disinvestment process in the airline is at an advanced stage triggers a controversy.

AIR-INDIA has hit rough weather once again. This time the turbulence was caused by the suspension of its Managing Director, Michael P. Mascarenhas, on charges of corruption.

On May 23, the Ministry of Civil Aviation charged Mascarenhas with corruption, saying that in 1998 he had "unduly favoured" Welcome Travels, Air India's ex-general sales agent (GSA) in London. The Ministry says the airline lost approximately Rs.57 crores because of extra commissions, called product linked incentives (PLI), that Mascarenhas sanctioned over a period of time. Investigations made by the vigilance department of the Civil Aviation Ministry, the chief vigilance officer (CVO) of the airline, and the Comptroller and Auditor General (CAG) confirmed the "undue favour" in a report. This led to the suspension.

Mascarenhas, however, rebutted the charges and said that "it is a deep-seated conspiracy and a deliberate smear campaign. They have cooked up an issue and created a case." He argues that his suspension is a deliberate effort to slow down and sabotage the disinvestment of the national airline. The GSA issue was created by distorting facts, he says.

Political interference is common in the airline's functioning. Apparently, Mascarenhas is in favour of disinvestment, whereas some of his colleagues and Civil Aviation Minister Sharad Yadav are not.

Suspending a top officer when the troubled airline is in the final stages of the disinvestment process is seen as an inadvisable move. The allegations are serious, but perhaps more important is the issue of jeopardising the airline's future.

In a statement made to the press after the suspension order was served on him, Mascarenhas said: "The order is highly irregular and clearly motivated and has been based on charges framed with mala fide intention. I am seeking legal opinion and will move the appropriate court of law. In fact, it was my suggestion to hand over the case to the Central Bureau of Investigation (CBI)."

Other officers who have come under a cloud are Commercial Director H.S. Uberoi and Regional Directors P.K. Sinha and Capt. K. Bihari. All the officers have decided to challenge the allegations in court. Meanwhile, the Air-India investigation into increased percentage in commissions has now been referred to the CBI.

This latest controversy triggered a round of mud-slinging between Mascarenhas and the now-reinstated Commercial Director V.K. Verma. It escalated in early May after Mascarenhas refused to comply with the orders of the Civil Aviation Ministry to reinstate Verma as Commercial Director. Verma had been chargesheeted for failing to attend to work for seven months without giving any valid reason. The spat began last October when Verma made a militant speech on the demerits of privatisation at an employees' meeting. A tape-recorded version of this speech found its way to the Prime Minister's Office and Verma was demoted as Director, Corporate Affairs. Verma went on indefinite medical leave.

Sources in Air-India say that Verma and Sharad Yadav share a common opinion about disinvestment. And once the issue died down, the Minister had Verma absolved of the charges and ordered his reinstatement. Mascarenhas, however, complicated the situation by refusing to implement the Ministry's directive.

Air-India was once a "Maharaja" in its class. Unfortunately, for reasons common to all public sector undertakings (PSUs) in the country, Air-India deteriorated to such an extent that it is now one of the least preferred airline for international travel. The company is so steeped in debt, says an Air-India official, that it does not have money to install an in-flight entertainment system, let alone upgrade its fleet. As very little capital was pumped into the airline, it could never expand and, therefore, lost out in the race.

One of Air-India's biggest problems is that it has very high distribution costs compared to other international airlines. The GSA system, which demands PLIs, is a bane to the company's finances. PLI is given to agencies to motivate them. Because of the highly competitive market, the airline had to pay its GSAs high PLI commissions along with a 3 per cent over-riding commission on revenue accrued from flights. In addition, a 9 per cent commission is paid to agencies on passenger ticket sales. Certain GSAs like Welcome Travels are given an additional commission, as a bonus for generating optimum business. Air-India has 34 GSAs worldwide and two private companies who operate as GSAs in India.

When the airline began to lose revenue rapidly, the issue of its high distribution costs was taken up by the Ministry in 1997; Air-India board looked into it in 1998. The carrier was losing approximately Rs.300 crores annually. A memorandum circulated among board members stated that the percentage of special promotion expenditure paid by Air-India to its GSAs was 18.34 in 1992. It soared to 34.77 in 1997. The note said that "one of the reasons for the increase in incentives and commissions is the appointment of GSAs." In March 1998, the board passed a resolution suggesting that distribution costs and incentive payments be reduced in order to increase yields. Measures were taken to strengthen strategy and improve the company's financial situation, an Air-India official told Frontline. By cancelling GSA licences and appointing consolidators instead, the airline was able to preventing the payment of high commissions.

Welcome Travels remained a GSA until mid-2000. Verma told Frontline that he found it strange that while other GSAs were either being cancelled or not given commission raises, Welcome Travels asked for and got substantial increases in PLI percentage. This obviously prompted him to get the Central Vigilance Office at Air-India to investigate the agency. In October 2000, the acting CVO, M.B. Sagar, submitted a report which stated that senior Air-India officials including Mascarenhas misused their positions to give "undue favours" to Welcome Travels.

A detailed press release issued by the Press Information Bureau (PIB) in Mumbai on behalf of Air-India reports that in May 1993, when Mascarenhas was Commercial Director, the PLI for Welcome Travels was increased from 3 to 5 per cent. The commission was raised on a post-facto basis and, therefore, was given for the financial year April 1992 to March 1993. With this, Welcome Travels would have earned approximately Rs.1.3 crores annually. Justifying the decision, Mascarenhas stated that on account of flight cancellations in the aftermath of the demolition of the Babri Masjid in December 1992 and the flight engineers' strike in February-March 1993, the airline had to increase the PLI. But the PIB release says that documents revealed that the assurance of the increase was in fact given to the GSA in August 1992 when Mascarenhas visited London and had a meeting with it. "Happenings of Ayodhya in December 1992 and Flight Engineers strike in February 1993 could not have been known to him in August 1992."

The commission at 5 per cent remained unchanged for the next five years and helped the GSA earn over Rs.8 crores. In May 1998, the PLI to the same GSA was once again increased, this time to 7 per cent. Here also, it was on a post-facto basis for the year April 1997-March 1998. This increase continued for three years, fetching Welcome Travels another Rs.13 crores. When questioned by the CVO, Mascarenhas said that the passenger capacity between India and the United Kingdom had crashed by 42 per cent that year - which meant the airline had to enhance the percentage of incentive. But on cross-checking with other international airlines, the CVO found that the reduction in capacity was only 3 percent.

None of Air-India's other GSAs received the benefit of increased percentage in commissions. The CVO's report says that "financial irregularity has been committed only due to manipulation in 1993 and again in 1998". Moreover, the 1998 increase came after entire the year's financial figures were announced. The report notes that interestingly in the first instance Mascarenhas was Commercial Director while in the second, Managing Director. "Other Managing Directors are not under probe as they have not been party to payment of inadmissible commissions," the report says.

In response to the accusations Mascarenhas issued a document rebutting every charge. To begin with, he says, Sagar cannot author a report against him as he does not have the power to investigate the airline's Managing Director, much less suggest suspension. He says Sagar did not have the qualification to be a CVO. According to the Central Vigilance Commission's rules, the CVO has to be of the rank of Inspector-General of Police or above. Hence Sagar's appointment is questionable as he was only a Deputy Superintendent of Police, he says.

Mascarenhas says that proposals for an increase in PLI has to be approved by seven or eight people before it reaches the Managing Director. "Any decision taken in Air-India is a collective decision. You cannot pin down one or two people."

With regard to the 1992 increase, he says the proposal for an increase came up in August 1992 and was cleared in May 1993. Meanwhile, the Ayodhya problem and riots affected travel. Air-India had to make up its sales by increasing PLIs. The percentage of overriding and passenger sales commission given to GSAs follow an International Air Transport Association (IATA) standard. PLI, on the other hand, depend on factors such as market conditions. Since the London sector was threatened during both instances, Welcome Travels received a higher commission in those years. As per industry practice, PLIs have to be reviewed every year, he says. "Our London GSA earns 8 per cent of our revenues. We cannot dismiss them so easily."

As with all PSUs, Air-India's finances are audited by a list of government-approved auditors every year. "Why did they not raise objections to these decisions at that time? How is it that they suddenly bring it up after all these years?" says Mascarenhas.

Air-India Employees Guild leader George Abraham says that PLI decisions are extremely subjective. "This has had an adverse effect on the company. Nobody will want to take decisions now," Abraham told Frontline. "Mascarenhas is an honest and competent officer and we know this is not the reason for his ouster." In fact, it was under him that the company showed this year the lowest net loss in six years, he says. The Air-India union has been in favour of disinvestment as it believes that this may be the only alternative to saving the cash-strapped airline.

Verma, however, said the Union government's decision to disinvest 60 per cent of its shares in Air-India would not be affected by Mascarenhas' suspension because the two companies interested in the airline have completed the due diligence process. "Air-India has nothing to do with the disinvestment. It is now between the Ministry and the companies," he said. He said he never opposed disinvestment. "It's the timing I don't agree with," Verma said. Since Air-India has shown a low net loss this year, he believed it could show a remarkable financial improvement by next year. This will make the airline's valuation higher at the time of bidding, he argued. "I have no intention of scuttling the airline's future. In any case, how can one or two people decide what happens to such a huge company?"

At the conclusion of the financial year 2000-01, Air-India recorded the lowest net loss in the past six years.

According to the airline's financial statement, total revenues increased from Rs.4,662 in 1999-2000 to Rs.5,180 in 2000-01 - by 11 per cent. Net losses witnessed a decline from Rs.38 crores in 1999-2000 to Rs.28.5 crores in 2000-01. The statement said the decline in loss was particularly significant because "the airline had to bear an additional expenditure of Rs.297 crores on account of the unprecedented increase in fuel prices during the year." Air-India's fuel bill has increased by Rs.435 crores in the past two years. The airline says "that if only the additional liability on account of fuel had not been there, Air-India would have made a profit in excess of Rs.260 crores this year. The remarkable performance this year will help the disinvestment process, the statement said.

Air-India obviously faces larger problems than the squabbling among its officers. Nevertheless, was it the right step to suspend a top officer who was due to retire in another six months? Incidentally, this is the first time in the international carrier's 70-year history that a Managing Director has been suspended.

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