Air India Losses Plane Mess

A PARLIAMENTARY PANEL SAYS THE MERGER OF AIR INDIA WITH INDIAN AIRLINES IS A DISASTER. BUT MINISTER PRAFUL PATEL IS DEFIANT AND WANTS TO SINK MORE MONEY INTO IT, REPORTS SHANTANU GUHA RAY

THREE YEARS ago, on March 19, 2007, Union Minister of State for Civil Aviation Praful Patel announced his mega plan of being a game changer in the Indian skies by merging the state-owned Indian Airlines (then a profitable venture) and the perennially lossmaking Air India.

Mayday Union Finance Minister Pranab Mukherjee is not keen on bailing out the national carrier

The idea, based on a recommendation to the Centre by consulting firm Accenture, was to create a monolith and spread its dragnet under the cloak of the ubiquitous Maharajah, the mascot of a hospitable Indian king, across the nation and the world. But last week - ironically on the same date - a parliamentary panel declared the merger a big failure, saying it had only messed the state carriers. It added that it would be difficult to sustain the controlling company NACIL (National Aviation Company of India Limited).

NACIL's balance sheet makes for disturbing reading. Losses for Air India stood at a whopping Rs 7,200 crore in 2009-10, more than double the Rs 2,226 crore for 2007-08. The Committee on Public Undertakings (COPU) of Parliament, which prepared the study, is understandably worried. COPU has already called the amalgamation "ill-conceived, whimsical and a marriage of two incompatible individuals" and wondered whether Patel and his ministry ever had a blueprint for the future. Worse, it has called for an inquiry into the mess.

'We cannot separate the two airlines again,' says Patel, but admits losses will continue for at least five years

Consider this. A study by the Civil Aviation Ministry showed entitlement for traffic rights last year increasing by over 400,000 seats per week for all airlines operating out of India. But the foreign carriers and domestic airlines are utilising it 25 per cent better than Air India. Traffic rights are bilateral facilities offered by the host country to all domestic and international airlines.

Patel, who told Parliament three weeks ago that losses would definitely continue for at least another five years, is still defiant and says the merger was a well-conceived plan. "We cannot separate the two airlines again," he told TEHELKA in what appeared to be a counter to the COPU note that asked the government to separate the domestic and international airlines under a single holding company. In short, NACIL can continue but not as a merged entity.

Patel has many explanations for the mess. One of the biggest reasons is that he had to fund a 2005 commitment for a 111-aircraft order worth $15 billion placed with Boeing and Airbus. This came on the back of global recession, high prices of aviation turbine fuel (ATF), increased competition because of India's open sky policy and declining passenger revenue (from Rs 10,242 crore in 2006- 07 to Rs 9,954 crore in 2007-08). Low freight revenue (from Rs 747.63 crore to Rs 672.65 crore during this period) and increased staff costs (from Rs 2,730 crore to Rs 3,824 crore) further compounded matters. On top of this, aircraft utilisation is at a low of nine hours per day while the benchmark is 16 hours. Domestic passengers are not favouring the airline either. In February 2010, Air India carried 6.63 lakh domestic passengers, much less than Kingfisher Airlines at 8.77 lakh and Jet Airways at 7.26 lakh. It accounted for 17.2 per cent of market share and a passenger load of 72 per cent, the lowest among all major carriers.

One of NACIL's new directors, Amit Mitra, also the Secretary-General of the Federation of Indian Chambers of Commerce and Industry (FICCI), says drastic workforce restructuring is required. "The cost overhead is high and needs to change. But if there is an issue of workforce restructuring and it becomes a politically sensitive issue, one can look at enlarging the customer base," Mitra told TEHELKA.

IN A TAILSPIN


Pre and Post-Merger Profit and Loss of the Airlines





Illustration: VIKRAM NONGMAITHEM

But sources within the ministry say this is just the tip of the iceberg. In fact, many top officials agree in clear-cut terms with the note COPU sent to Parliament. They say the merger process was to be completed by mid-2009 but till date, NACIL is just half way through. The synergy has worked well in the integration of network, cross-utilisation of aircraft fleet, leveraging scale for joint procurement like insurance and fuel, and the opportunity to join the global leading airline network Star Alliance, which offers customers worldwide reach and a smooth travel experience. But the merger has not worked in areas like manpower, properties and facilities integration, cross-utilisation of resources, IT augmentation and launching new subsidiaries such as maintenance, repair, and operations (MRO) and ground handling. "The have-nots have totally outweighed some of the benefits the merger achieved," says India's top aviation expert, Kapil Kaul.

The Union Cabinet is also worried, wondering if a strategic sell-off of assets is the best way to solve the crisis. The bulk of Air India's woes stem from its 30 lossmaking international routes where it loses Rs 3,000 crore a year, the biggest chunk from the daily non-stop Delhi/Mumbai- New York Boeing flights that accounts for Rs 750 crore a year. A Group of Ministers (GoM) set up to look into the crisis has recommended immediate shutting down of the routes, even if it means the airline losing its much-vaunted national carrier tag. It is reliably learnt that GoM chairman Pranab Mukherjee has told Patel that he needs to decide if Air India wishes to fly abroad or at home. Mukherjee, in his capacity as Union Finance Minister, is also not too keen on strategic divestment which Patel sees as a long-term viable option for the carrier since the gap that has to be made good is far too large. Mukherjee has made it clear that the government cannot continuously pump money into NACIL and has said the Cabinet will decide on formulating a plan to resurrect Air India - including any move to slash the wages of an estimated 31,000 employees. That Mukherjee is not keen on a bailout is evident from the fact that the government has not agreed to Patel's request to convert Air India's high-cost debt into a lowcost one. And then there is the loss of over $700 million because of Boeing's failure to deliver 27 B787 aircraft which forced Air India to cancel the order.

A worried Union Cabinet wonders if a strategic sell-off of Air India assets is the best way to solve the crisis

YET, SOME of the funds - despite Mukherjee's apparent discomfort - are headed Air India's way. It has already got Rs 400 crore as a first tranche towards equity infusion as against its demand for Rs 5,000 crore. Sources told TEHELKA that Air India and Air India Charter also aim to raise a combined Rs 798 crore ($175 million) through their maiden bond issues to buy planes from Boeing. The governmentbacked bonds will be used to buy seven Boeing 777 planes and three Boeing 737-800 planes for Air India's international operations. Tapping the corporate bond market may help Air India to widen its investor portfolio and cut costs in a market bereft of investor confidence. There are other moves to cut costs. Air India will be relocating some of its pilots away from Delhi to southern cities for Southeast Asia and West Asia routes to curb wasteful expenditure like flying allowances for NACIL pilots which are Rs 2,000 per hour higher than international norms.

But that, unfortunately, is still not enough for Patel and his team.

WRITER'S EMAIL:


shantanu@tehelka.com