Jun 17, 2009
For the first time in its 57 years, Air India has sought an urgent financial bailout, reportedly of Rs 14,000 crore, from the government. Apparently, the airline does not have money to pay the June salaries to its 31,000 employees until July 15, 2009. What has gone wrong and what can be done to redeem the dismal situation? To say that airlines in the public sector cannot work efficiently is not correct. Today some of the best run airlines are government owned.
Singapore Airlines and Emirates are two examples. It has also been a matter of satisfaction that Air India has continued to do fairly well through the last 57 years, despite no budgetary support except for the initial equity capital induction by the government of just about Rs 154 crore. Air India purchased all its aircrafts and constructed its buildings (including the famous Air India Building at Nariman Point, Mumbai), hangers, hotels from its own resources or commercially borrowed funds.
In 2000, Air India was chosen for strategic disinvestment as part of the policy of disinvestment of public sector undertakings. After due process, a proposal from Tata co-jointly with Singapore Airlines, emerged as the best offer. However, even before the financial bids could be opened, Singapore Airlines withdrew from its partnership. Immediately thereafter, 9/11 took place and the divestment was deferred.
After the aborted attempt to sell Air India in 2000-2001, the forces that wanted to perpetuate Air India as a public sector took control. The decision was also taken to carry out the much delayed fleet expansion by purchasing as many as 80 aircrafts for Air India and 40 aircrafts for Indian Airlines against international loans of approximately Rs 50,000 crore. No thought was given to have a mix of outright purchased and dry leased aircrafts that would have proved a prudent fiscal decision today. Furthermore, the decision was taken without any understanding of the fact that just a new fleet of aircrafts would not automatically resurrect the severely ailing airline. The urgent need was to completely overhaul the archaic public sector management system and simultaneously introduce international best practices, to give Air India the ability to once again operate robustly in this highly competitive and sensitive industry. It is a national shame that our public sector airlines have been so badly managed. The recent shocking sacking of CMD, Air India a few months after appointment is reminiscent of the equally arbitrary suspension of MD, Air India in 2001-02 on charges that have yet to be proved.
In view of the ongoing declining market share of the two airlines, rather than disinvest, the government decided to merge the entities, so as to create critical mass to better take on competition. Merged entities were incorporated as the National Aviation Company of India (NACIL) on March 30, 2007.
The poor performance of NACIL in the last two years has resulted in a net loss of over Rs 2,000 crore for fiscal 2008 and reportedly Rs 4,000 crore for fiscal 2009. There has been an ongoing decline in passenger load factor and yield coupled with a sharp increase in financial costs consequent to aircraft acquisition and an increasing wage bill. Nor has NACIL been able to keep up with competition from other Indian carriers as evident from the decline in its share of traffic. Reports coming out of NACIL point to the unfortunate lack of proper preparation for the integration of Air India and Indian Airlines in context to manpower and personnel. A professional mechanism to ensure smooth integration of the HR quotient is singular by its absence and serious internal rifts are reported. In short it has been a badly managed merger that was apparently driven from the very top.
The policy of integration of these two airlines can best be described as adventurous and misguided, since it has neither increased market share nor improved the balance sheet. In fact, erstwhile Air India and Indian Airlines continue to fly under different code numbers as a result of which NACIL has not been accepted by Star Alliance. NACIL’s balance sheet remains in deep red.
Our entire public sector airlines ownership policy has been a dismal failure and needs a total review. In fact, the best course for NACIL will be to immediately begin preparations for a strategic disinvestment, once again. This should take place as soon as the global economy improves and the aviation sector takes an upturn. It must be pointed out that a general divestment of 10% equity under the proposed IPO scheme is unlikely to solve the problem. Only a strategic divestment with full management control passing into the hands of a proven group will be the solution.
—The author, who has served on Air India’s board, is chairman International Foundation for Aviation and Development. He was formerly with the Civil Aviation Ministry and was also India’s Representative to International Civil Aviation Organisation, Montreal
For the first time in its 57 years, Air India has sought an urgent financial bailout, reportedly of Rs 14,000 crore, from the government. Apparently, the airline does not have money to pay the June salaries to its 31,000 employees until July 15, 2009. What has gone wrong and what can be done to redeem the dismal situation? To say that airlines in the public sector cannot work efficiently is not correct. Today some of the best run airlines are government owned.
Singapore Airlines and Emirates are two examples. It has also been a matter of satisfaction that Air India has continued to do fairly well through the last 57 years, despite no budgetary support except for the initial equity capital induction by the government of just about Rs 154 crore. Air India purchased all its aircrafts and constructed its buildings (including the famous Air India Building at Nariman Point, Mumbai), hangers, hotels from its own resources or commercially borrowed funds.
In 2000, Air India was chosen for strategic disinvestment as part of the policy of disinvestment of public sector undertakings. After due process, a proposal from Tata co-jointly with Singapore Airlines, emerged as the best offer. However, even before the financial bids could be opened, Singapore Airlines withdrew from its partnership. Immediately thereafter, 9/11 took place and the divestment was deferred.
After the aborted attempt to sell Air India in 2000-2001, the forces that wanted to perpetuate Air India as a public sector took control. The decision was also taken to carry out the much delayed fleet expansion by purchasing as many as 80 aircrafts for Air India and 40 aircrafts for Indian Airlines against international loans of approximately Rs 50,000 crore. No thought was given to have a mix of outright purchased and dry leased aircrafts that would have proved a prudent fiscal decision today. Furthermore, the decision was taken without any understanding of the fact that just a new fleet of aircrafts would not automatically resurrect the severely ailing airline. The urgent need was to completely overhaul the archaic public sector management system and simultaneously introduce international best practices, to give Air India the ability to once again operate robustly in this highly competitive and sensitive industry. It is a national shame that our public sector airlines have been so badly managed. The recent shocking sacking of CMD, Air India a few months after appointment is reminiscent of the equally arbitrary suspension of MD, Air India in 2001-02 on charges that have yet to be proved.
In view of the ongoing declining market share of the two airlines, rather than disinvest, the government decided to merge the entities, so as to create critical mass to better take on competition. Merged entities were incorporated as the National Aviation Company of India (NACIL) on March 30, 2007.
The poor performance of NACIL in the last two years has resulted in a net loss of over Rs 2,000 crore for fiscal 2008 and reportedly Rs 4,000 crore for fiscal 2009. There has been an ongoing decline in passenger load factor and yield coupled with a sharp increase in financial costs consequent to aircraft acquisition and an increasing wage bill. Nor has NACIL been able to keep up with competition from other Indian carriers as evident from the decline in its share of traffic. Reports coming out of NACIL point to the unfortunate lack of proper preparation for the integration of Air India and Indian Airlines in context to manpower and personnel. A professional mechanism to ensure smooth integration of the HR quotient is singular by its absence and serious internal rifts are reported. In short it has been a badly managed merger that was apparently driven from the very top.
The policy of integration of these two airlines can best be described as adventurous and misguided, since it has neither increased market share nor improved the balance sheet. In fact, erstwhile Air India and Indian Airlines continue to fly under different code numbers as a result of which NACIL has not been accepted by Star Alliance. NACIL’s balance sheet remains in deep red.
Our entire public sector airlines ownership policy has been a dismal failure and needs a total review. In fact, the best course for NACIL will be to immediately begin preparations for a strategic disinvestment, once again. This should take place as soon as the global economy improves and the aviation sector takes an upturn. It must be pointed out that a general divestment of 10% equity under the proposed IPO scheme is unlikely to solve the problem. Only a strategic divestment with full management control passing into the hands of a proven group will be the solution.
—The author, who has served on Air India’s board, is chairman International Foundation for Aviation and Development. He was formerly with the Civil Aviation Ministry and was also India’s Representative to International Civil Aviation Organisation, Montreal
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