Seize The Day

In keeping with its philosophy of “minimum government, maximum governance”, the new political dispensation has a rare chance to sweep clean the Augean Stables and free Air India from its fetters, setting it back on the high growth path—under private professional management.

As any aviation analyst will assert, India is one of the most promising markets in the world. And three leading international carriers—Etihad Airways, AirAsia Berhad and Singapore Airlines (SIA)—enthusiastically agree. Following the government’s decision in September 2012 to allow overseas airlines to invest up to 49 per cent in the domestic aviation sector, they have decided to set up joint ventures here. Consequently, although the country’s carriers are still struggling to achieve profitability, new ones like AirAsia India and Tata-SIA Airlines are appearing on the scene. Both these are likely to scale up aggressively in the domestic market and quickly go international if the five-year/20-aircraft rule is revoked. Even as they introduce global best practices, their entry is expected to trigger more competition, create multiple options for passengers and ultimately bring lower fares. However, if a full-fledged fare war erupts, it is also possible that some struggling carriers may go under.

Air India and Jet Airways are the only nominally full-service airlines left in a highly competitive market that is emphatically going low cost. About two-thirds of the seating capacity on domestic flights belongs to low-cost carriers (LCCs). And travellers flying economy on the full-service carriers pay practically the same fares as on LCCs. When state-owned Air India offers rockbottom fares, it does so despite operating in a much higher cost band than the LCCs. The national flag carrier, whose history goes back to 1932 when it was founded by the legendary J.R.D. Tata, seems reluctant to launch its own low-cost subsidiary perhaps for fear of cannibalising itself. It may also suspect that the drastic overhaul in its work culture required—especially the employee productivity levels demanded of an LCC—is beyond its capability. Since it remains afloat thanks to government largesse it has no incentive to compete sensibly with the rest of the industry. Indeed, the other airlines have long complained that Air India’s lack of accountability distorts the market.

An Unhappy Scene

As of February 28, 2014, the Air India Group had a total operational fleet of 125 aircraft with average age of 8.1 years. Although estimates vary, it has accumulated losses of over Rs. 37,000 crore plus debts of over Rs. 47,000 crore. Indeed, for the past seven years, Air India has been in the red mainly due to an unfortunate decision, dating back almost ten years, to place a huge order for Boeing and Airbus planes. The carrier is unable to profitably deploy some of these aircraft and is reportedly in the process of getting rid of eight practically new Boeing 777-200LR aircraft at throwaway prices.

Air India’s ill-considered 2007 merger with its domestic counterpart Indian Airlines also brought a slew of problems in its wake. Some of them are yet to be resolved. Its bloated workforce, amongst the highest per aircraft in the world, entails a massive salary bill. Air India’s highly-unionised employees, like most government functionaries, are confident that they will not be fired, period. Hence the slightest hint of belt-tightening or a call to make sacrifices for the good of the airline elicits threats of strike action. Political interference in the carrier’s decision making and functioning is rife. Apart from bureaucratic meddling in day-today affairs, many routes that are unprofitable cannot be abandoned simply because some politician may object.

The airline is currently engaged in a turnaround plan under which the government is infusing over Rs. 30,000 crore over nine years, commencing 2012-13. But this plan, ostensibly designed to achieve profitability in 10 to 15 years, was made when the economy was humming. Last year, a fall in the value of the rupee prevented Air India from meeting its turnaround targets and a cash-strapped government could not impart the agreed amount. This year, the carrier is seeking infusion of Rs. 8,000 crore, but there is no assurance that this sum will materialise. With the taxpayers’ money being used more to meet day-to-day expenses than to restore the carrier’s long-term financial health, the agreed time frame may have to be extended, perhaps indefinitely.

There are also industry-wide problems that Air India faces like the high cost of fuel and capital, and cut-throat competition from a horde of agile LCCs whose numbers may grow. Foreign airlines too are being granted ever greater access to the Indian market—at the cost, primarily, of Air India.

A Few Bright Spots

Not all is gloom and doom, however. Air India’s operating losses in the financial year 2013-14 sharply reduced by an estimated 44 per cent, while operating revenues surged about 20 per cent, as compared to the previous financial year. Its domestic load factor also increased from 73.7 per cent to 75.8 per cent.

There are other signs of hope. For instance, the 26-member Star Alliance network has finally accepted Air India into its fold. This should bring the beleaguered carrier considerable extra business, raise its revenues and reduce its fuel bill. Air India is introducing 27 highly fuel-efficient Boeing 787 Dreamliners into service, which also promises substantial savings. It is cutting costs by steadily increasing the share of Internet seat bookings— currently about 17 per cent. It is selling real estate—an important part of its financial restructuring intended to secure about Rs. 5,000 crore over a 10-year period. It is also generating more third-party revenue and has reduced its salary bill after hiving off the ground handling and maintenance, repair and overhaul (MRO) units into separate entities.

Time for Change?

However, Air India’s overall financial health is still precarious because it spends more than it earns. And this situation is unlikely to improve in a hurry. The carrier cannot become viable without structural changes. These include freedom from political interference, strong leadership, professional management, nimble decision making, and curbs on the unions. But getting any public sector undertaking to undertake meaningful reform has proven practically impossible, and Air India is no exception. It is hooked on assured business, assured jobs and government patronage, not to mention frequent bailouts.

Last year the then Minister of Civil Aviation Ajit Singh expressed the view that the government should not be in the service sector, especially the airline industry, where competition is fierce, margins are slim and decisions must be taken promptly. Though his words were met with howls of protest, the logic is irrefutable. Why ever should a government run an airline? Most of the world’s erstwhile state-owned airlines have either been privatised or consigned to history. There is urgent need for some dispassionate thinking on Air India’s future. It should be followed by decisive action.

A Private Matter

In March, the National Transport Development Policy Committee (NTDPC), headed by former RBI Deputy Governor Rakesh Mohan, and set up in 2010, recommended that the government reduce its stake in Air India to 26 per cent over a five-year period. It felt that Air India needs to be recapitalised, organisationally restructured and its working capital debt burden written off. Further, some divisions need to be made independent and corporatism introduced. Five years, however, seems a rather long time frame. Perhaps the privatisation process could be speeded up to forestall a politics-driven rollback.

Yet privatising Air India may not prove to be a smooth affair. The commercial environment is so harsh that Kingfisher Airlines, one of the country’s largest private carriers, was shut down. A privatised Air India might not fare any better, saddled as it would be with debt and functional problems for years to come. Also, Air India in its current condition may hold little appeal for a private party. It is clearly over-staffed, and trimming its workforce is imperative. But the resultant job losses could become an emotive rallying point for the opponents of privatisation. It would help, therefore, for the government to introduce a generous voluntary retirement scheme (VRS) before selling the airline or even to pay employees to sit at home for a few years. The new airlines entering the market could also offer a golden opportunity for trained employees of Air India who are rendered surplus to find new jobs.

The government may need to assume the carrier’s annual losses of about Rs. 5,500 crore for at least two or three years. It is a small price to pay for the possibility of turning a pressing problem into a success story. More attractive are Air India’s real estate and other assets. The government should obtain assurances from investors that the airline will continue to fly, not simply be converted to cash. This is where the Tata Group’s emotional connect may prove invaluable. Tata Group Chairman Emeritus Ratan Tata has already expressed interest in bidding for Air India as and when disinvestment happens. It would be poetic justice for the Tata Group that was summarily and unfairly deprived of Air India in 1953 to get it back. And just as Tony Fernandes acquired a small sick airline from the Malaysian Government and transformed it into the giant that AirAsia is today, the Tatas are best placed to repeat the story with Air India.

However, the news emanating from Delhi is not encouraging. Apparently, the government favours the financial revival of Air India rather than its privatisation. That’s a pity. In the past too hopes of revival have been raised only to be dashed as the airline sinks deeper in the quagmire. Considering the sorry state of the aviation sector, how credible are Air India’s chances of a turnaround? The Centre for Asia Pacific Aviation (CAPA) bluntly states, “There is realistically no prospect whatever of Air India returning to profitability in its current form, so it comes down to a question of how long the state can continue to support the airline, diverting public funds only to allow Air India to compete with more efficient private players.” Indeed, the country has more pressing things to spend on like health care and education.

There is a clear mood for change in the country today. It cannot last forever. In keeping with its philosophy of “minimum government, maximum governance”, the new political dispensation has a rare chance to sweep clean the Augean Stables and free Air India from its fetters, setting it back on the high growth path—under private professional management.

There will always be vested interests reluctant to let Air India go. After all, it is a prime source of power and patronage. But practically every example of successful privatisation across the globe has generated short-term pain and met with political resistance.

If the government shows resolve the opposition is likely to melt away. Even the threat of strike action can be weathered because there are enough private airlines with larger market share than Air India to keep things going till all stakeholders come on board. It is time for the leadership to seize the day and privatise Air India.