Rescuing Air India from crisis requires hard decisions and political support

The state owned National Aviation Company of India Limited NACIL, which operates the airline Air India is in crisis. It’s annual losses have reached a staggering Rs. 5,000 crore ($1 billion) and total accumulated debt of Rs. 16,000 crore ($3.2 billion). Air India contributes 10% of global airline losses with just 0.35% of global traffic. It owes over Rs. 1,400 Crore ($700 million) to state owned airport operators and fuel companies.

At a marathon meeting with it’s operational boss, the Minister of Civil Aviation Mr. Praful Patel, the national carrier asked it’s owner, the Government of India for a bailout of a whopping Rs. 15,000 Crore (US$ 3 billion) – Rs 5,000 crore ($1 billion) as equity infusion and the rest as soft loans with long re-payment tenures and subsidised interest rates.

The general feeling within industry watches is that the most optimistic figure Air India can expect is around Rs. 5,000~Rs. 7000 Crore ($1~$1.4 billion) Rs. 1,500 Crore equity infusion and a soft loan for the balance, and that too if the Prime Minister and Finance Minister are convinced, which till now they are not.

Over the decades, bad management and faulty policies have reduced the Air India Maharajah, once upon a time counted amongst the premier airlines in the world, to a pauper on the streets unable to even pay the salaries of its staff. Questions are being raised on how to rescue the airline. To obtain answers one has to delve a little in to history and culture.

While Indians have grown accustomed to it, over the years the Government in India has cultivated a culture of complete sloth in administration. Couple this with a lack of any ownership for efforts and accompanying lack of responsibility for results or failures, deeply ingrained corruption at all levels, a political patronage system that makes the middle ages look enlightened, and a labour environment so far to the left, that makes communist countries like North Korea, Mongolia, China and Russia look like right wing Nazis, and one can understand why state owned companies in India are some of the most unproductive in the world.

Ignoring the need for hard decisions, since it’s inception, successive governments from city corporators onwards have used Air India as a milking cow; be it during procurements to bestowing political patronage by placing cohorts as employees. Even after allowing for the self handling and self handled engineering services Air India is overstaffed by almost 50%; with over 30,000 employees and an annual wage bill of over Rs. 3,000 Crore ($600 million), the airline has one of the highest employees per aircraft ratio in the world (200:1), . Labour unions who are vote banks for the political parties, especially the left, terrorise Air India with repeated strike action whenever the management attempts to introduce any hard decisions.

The management of Air India is always appointed from the Indian Administrative Service (IAS) who may be excellent administrators, but know very little of the global airline industry. Even these administrators have been successively emasculated by the ruling politicians of the day as well as their operating bosses at the Ministry of Civil Aviation, again staffed by career bureaucrats. Any airline management who dares rock the boat or does not kowtow, is promptly transferred out of the airline, leading an unending procession of constant changes and a lack of cohesive, focussed, proactive, and long term business planning.

With the rout of the left parties in the recent elections, aviation analysts had high hopes of Air India being finally privatised and being freed to chart a course to recovery, but Mr. Patel dashed all hopes. Clearly the politicians and their cronies cannot rid themselves of their addiction to the benefits derived from milking the airline. This addiction is similar to marijuana or cocaine addiction, says Mr. Patel. While he’s joking, he’s not wrong: this addiction is powerful, especially given the recent amplitude of recent elections.

Within this sorry scenario, I find a silver lining. I strongly believe the current Chairman and Managing Director Mr. Arvind Jadhav has the abilities to lead the rescue efforts, provided the politicians and bureaucrats let him.

As Chairman of the Infrastructure Committee for the Bangalore Chamber of Industry and Commerce, I have experienced Mr. Jadhav at close quarters in his previous tenure as the Principal Secretary Infrastructure Development in the Government of Karnataka. He is energetic, hard working, shrewd in planning, incisive in analysis, totally committed to achieving results, and completely unafraid to take hard decisions. A man who does not mince words, at the recently concluded IATA annual meeting, he indicated about deferring aircraft deliveries saying

“I don’t have cash, what do you expect me to do?”

His letter to Air India staff is equally hard hitting

Air India employees have thus far not felt the impact of problems confronting the aviation industry because employees have been receiving their wages/salary and PLI month after month even when people in the industry in India and abroad have lost jobs or seen their emoluments take a dip. We should therefore consider ourselves fortunate that we have been insulated from the adverse impact of the economic meltdown so far,

….loans from financial institutions at high rates of interest cannot be availed of endlessly to meet working capital expenditure, the time has come for us to face the moment of truth in Air India as well. Air India has not resorted to retrenchment or layoff of staff till date. Air India has only decided to defer the salary and PLI [productivity linked incentive] for the month of June 2009 by 15 days. Executives at the level of General Manager and above have been requested to voluntarily forego their salary/allowances/PLI for the month of July 2009.

Air India has approached the Government of India, as the owners of our airline, for infusion of funds both by way of equity and soft loans. We are hopeful that the Government of India will extend a helping hand soon. However, as we have seen in the United States, financial help from the Government comes with conditions attached.

Cost cutting is the order of the day and Mr. Jadhav is preparing the pampered Air India staff ahead of the airline’s efforts to reduce it’s wage bill by 16% resulting in savings of Rs. 500 crore ($100 million). Will the unions who form a major vote bank for the politicians let this initiative proceed is another question. Other cost cutting measures being initiated should double the savings.

Another key area that revolves around labour is the stalled two year old merger of domestic carrier Indian Airlines into Air India. Two years after commencement the two airlines still operate separate reservation and flight systems and with the government incubated culture and egos, people integration and other synergies are a long way coming. If anything, the merger has left a situation filled with disputes leading to a demoralised and unethusiastic staff. Pressing ahead with this integration and completing it quickly is critical.

In parallel with accelerating the merger should come route rationalisation and prevention of Air India and Indian Airlines cannibalising each other’s traffic. A crying need of the day is for Air India to remove the prism of focussing everything around Mumbai and New Delhi the economic and political capitals of India. Southern Indian cities of Bangalore and Chennai need to be re-looked at, especially in light of massive investments by Japanese, Korean and European companies in these cities; Toyota in Bangalore, Hyundai and Nokia in Chennai. Flights connecting Bangalore to Japan and on the United States west coast, and flights from Chennai to Korea and Finland (alternately a code share partnership with Finnair) should be considered on top priority.

Almost all mainstream media reports focus on Air India’s continuing procurement of aircraft despite the downturn in global aviation, and compare this with the large scale deferrals and cancellations by private Indian carriers. 111 aircraft worth about $8.3 billion have been ordered from Boeing (primarily from Air India) and Airbus (primarily from the erstwhile Indian Airlines), and 66 aircraft have been delivered. Air India will induct 30 aircraft in the current fiscal year ending March 2010, and another 45 by March 2012. However none in media has considered the off-sets which I have detailed in an earlier article, these orders are generating. May be, the government should consider transferring taxes from some of the profits generated by Indian aviation vendors to Air India.

However change in thinking at Air India, the government and the unions is slow in coming. Six committees with members from each of the 11 unions on board have been formed.

  • Cost Rationalisation Committee
  • Committee on Green Initiatives
  • Committee on Integration
  • Committee on Safety
  • Committee on Customer Feedback and
  • Committee on Route Rationalisation

As members on the Airliners India forum humorously commented, the powers that are, seem to have forgotten the “Common sense committee” and the “WTF were you thinking committee”. Added to this the unions are demanding :

  • Probe into management’s decisions on aircraft selection and leasing and acquisition.
  • Probe into “gifting of bilateral rights” to foreign air-carriers and the so-called open-sky policy. [indirectly aimed at the massive growth of Emirates in India]
  • Probe in to the reckless sale and transfer of Air India and Indian Airlines land assets in Kalina and Sahar (Mumbai) to private developer, Mumbai International Airport Limited, on a platter for construction of 5-star hotels and offices in the name of airport development.
  • Probe into payment of arrears to senior engineering executives just ten days before the announcement of deferment of salaries to staff.
  • Direct intervention by the Prime Minister and a thorough probe by a Joint Parliamentary Committee (JPC) in Air India affairs

While many of these union demands have merit, a JPC probe will be one long drawn out fiasco, not withstanding more meddling by politicians who will ultimately bury the truth under an avalanche of political, legislative, and bureaucratic detritus.

The crisis at Air India is here and now. The government needs to stop dithering, act fast and unshackle the right man they already have in place at Air India. Support him with a bailout package which is linked to a viable, productive, proactive and realistic business plan — a plan which will lead to the privatisation of Air India and removal of government involvement in daily operations within the next two years; or else there will be no value left in the airline and only the memories of the Maharajah will remain.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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