Monday, October 11, 2021

How Air India lost sight of its flight path

Air India, the national carrier of India, is now sold back to Tata group, reportedly for ₹18,000 crore, 20 per cent over its reserve price plus aircraft debt of ₹15,300 crore. The Tatas were the original owners of Air India and so it seems like poetic justice — government of India made many attempts to sell the airline.

The government has got a paltry ₹2,750 crore in cash and keeps a debt of ₹61,000 crore that is transferred out of Air India’s books to another entity.

According to management guru Peter F Drucker, the root cause of an organisation’s crisis is, “Doing right things but fruitlessly.” The list of top management blunders that broke Air India Maharajah’s back are:

Ordering new fleet of 111 Boeing aircraft: Boeing was given this order in 2005-06 to coincide with the India visit of then US President, George W Bush II. In his book Not just an accountant, ex-CAG (Comptroller and Audit General) Vinod Rai describes how Air India’s board of directors had originally placed an LOI on Airbus for 10 MCLR (A330) aircraft. But the Air India board was “nudged” to change the order to Boeing, and increase the order size from 10 to 111 aircraft.

Terming it a supply-side proposal, the Planning Commission raised a red flag. Reading between the lines, it appears that the Boeing order was placed with the tacit approval of the then PM as a quid pro quo for waiver of NRC (Nuclear Regulatory Commission) action against India by the US Congress.

Air India’s miniscule equity capital was quickly wiped out, and with accumulated losses the airline’s net worth turned negative.

Faulty aircraft configuration: The long haul B777 and B747 aircraft had “vanity first class cabin” that was rarely filled. This meant that the break-even load factor capacity for meeting even cash operating costs went beyond 130 per cent. And Air India’s policy of deploying fuel guzzling wide-body B747s on certain domestic routes added to its operating losses by an estimated ₹350-400 crore per year.

Inability to offer direct non-stop flights from major growth centres: Air India, for example, simply forced passengers going from Kerala to the Middle East or from Bengaluru to the US to travel via Mumbai/Delhi, adding 8-16 hours to total travel time. Before Air India Express started offering direct flights from the South to the Middle East, Air India offered only few such flights as its crew and engineering bases were in Mumbai.

Heterogeneity of fleet: Air India’s fleet complexity further exacerbated with the order of 18 Boeing 737s for Air India Express. Indian Airlines as well as Air India had historically used Airbus (A-319/320/321) fleet for short-haul services. Adding Boeing 737s for short-haul flights added to inventory costs and further training of the crew.

Forced (failed) marriage between Air India and Indian Airlines: The merger between Air India and Indian Airlines has remained only on paper. The public sector airlines were merged in 2006-07 to facilitate better synergies of their resources, yet resources, aircraft, men, material and machines remained divided. There were no synergies. The merger without employee lay-offs simply magnified problems like excess manpower. Air India, Indian Airlines and Air India Express maintained separate kitchens even after their marriage.

Poor Maharajah but rich employees: Air India paid a heavy price for “buying peace” with unions during mid-1990s. Paying huge salaries to its pilots and aircraft maintenance engineers (AMEs) hit the airline hard.

The unions of pilots and AMEs demanded US equivalent salaries in rupees. This robbed Air India of its cost competitiveness.

Inability to face change: The change brought in by liberalisation of the airline industry post 2005 meant all flagrant wastages of monopoly times had to go. The reactive management style (instead of proactive) ensured Air India was poorly placed to face the challenges of liberalisation.

Lack of customer focus, bad financial management, and arrogance of unionised employees made things even worse.

Lack of professional management: There was a lack of continuity or accountability of the top leadership. The IAS babus who come to run Air India have little aviation experience and generally fail to understand that aircraft capacity and fares need to be aligned to trade winds.

Greed at the highest level: Air India was a navratna, jewel in the crown, when YC Deveshwar was at the helm. However, from 1994 to 1999, it quickly nosedived from a profitable airline to report staggering losses, resulting in the wiping out its reserves.

What is remarkable is that the losses were made during times when air capacity was regulated and competition, benign. Air India’s CMDs only pursued their own goals during this time — handsome increases in flying “shortfall allowance” for their clan, generous incentives for AMEs, post dated incentive deals with GSAs (general sales agents) in London, etc.

Failure of asset monetisation: Air India, during its golden days, invested in the entire aviation value chain, starting with aircraft maintenance with Boeing in Nagpur, cabin catering through subsidiary (Chef air), setting up Centaur Hotels at Santacrux Airport and Juhu, and investing in GHA (ground handling agency) at many airports. These assets were ill-managed and were later sold for a song.

10/10/21 Pankaj Narayan Pandit/Business Line

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