Tuesday, 4 August 2020

Air India’s disinvestment How and why

Updated: April 19, 2018 2:20 pm

It is reported that the government would divest 76 per cent of its stake in Air India. Importantly, this would be a cue to potential buyers that GoI’s remaining 24 per cent stake is lower than the 26 per cent mark, which would have been continuous hurdle in the way of special resolutions and would have interfered in the job of a new management. This has been a long time coming.

Here it is worth mentioning that the Union Cabinet on June 28, 2017, gave its ‘in-principle’ go-ahead to divest stakes in Air India — a wholly owned government airline. The Cabinet granted Air India’s strategic disinvestment, which means the government is willing to shed a substantial portion of its stake and hand over the management of the ailing airline to the private sector. Hence, before discussing the future prospects of Air India’s disinvestment, let’s first have a peak into its past and how the present situation came into being.

 

Air India’s past

Air India was founded by J.R.D. Tata in July 1932 as Tata Airlines, a division of Tata Sons Ltd. Tata Airlines on   July 29, 1946,  became  public  limited  company under  the head of Air India. In 1948 after Independence of India, 49 per cent of the airline was acquired by Government of India, with an option to purchase an additional 2 per cent. In return, the airline was granted status to operate international services from India as a designated flag carrier under the name Air India International. In 1960, Air India International entered Jet age. On June 8, 1962, airline’s name was officially truncated to Air India and on June 11, it became the world’s first all-jet airline. In 1986, with the delivery of Airbus A310-300 airline became the largest operator of this type in passenger service. In 1993, Air India made history by operating the first non-stop flight between New York and Delhi. In 1994, it was registered as Air India Ltd. From 1990 to 2000, Air India introduced services to London, Chicago and Shanghai.

On February 23, 2001, the NDA government decides for Air India’s disinvestment. Three groups lined up to buy stakes in Air India. In May 2004, a wholly owned low-cost airline called Air India Express was launched and also flights to Los Angeles were launched but were terminated soon. On December 1, 2009, Air India introduced services to Washington but they were also terminated soon. For few years, Air India had been facing huge financial crises. During the period of five years it had faced a loss of 10 billion rupees and amassed 38 billion rupees in debt. It had also employed 18,000 staff, which at over 700workers, per plane, is more than double the industry standard. The Indian pilots had fears that there would be major job losses when airline is sold. The re-privatization plan collapsed and Singapore Airlines decide to pull out of a joint bid with Tata Group to take over Air India. Political opposition to privatization, bureaucracy, and global slowdown, which make companies less willing to part with their cash, are all thought to have conspired against the privatization process. This deal was expected to raise $2.5 billion. Earlier Lufthansa, Delta and Air France were its potential buyers.

 

Fiscal mess

In the fiscal year 2006-07, joint losses for Air India and Indian Airlines stood at 7.7 billion, which further reached to 72 billion after  merger by March 2009.   For  this whooping  loss, there were several reasons such  as  rising oil prices, slowing world economy, etc. The difference of fare between Air India and private players also contributed to loss.  Other  reasons  being  its  falling  demand  and  the  most  important  reason is man-made. There was 800 per cent increase in losses in just two years. After the merger aircraft were leased or purchased, capacity was gifted away to foreign airlines under bilateral agreements, for ground  handling  in  Bengaluru  and  Hyderabad , which was  surrendered  to  a proposed  joint  venture.  Flights were withdrawn from profitable routes and pilots weren’t sent for proper training. Actual losses began in 2006 on the decision to lease aircraft to increase market share. There was no proper route, marketing or pricing strategy. Airline took heavy losses till market built-up. In 2006, 4 Boeing 777  were leased and delivery of these aircraft began from July 2007 onwards. But some  of  its  operations  expired  due  to  the  expiry  of lease.  Air Indian Express and India Airlines flights competed with each other ever after the merger. At  the airports of Bengaluru and Hyderabad, Air India had to share its revenue from ground handling with Singapore Airport  Terminal  Services. The industry  average  for  a first officer to become a commander is 4 years. In Air India, pilots spend close to 10-11 years to be first officer. Airline’s inadequate planning for command training from 2003 onwards meant hiring over 160 expatriate pilots and paying them double the salary paid to Indian counterparts. Also Air India faced tough competition from foreign airlines due to liberal bilateral agreements. Due to which Air India’s share of the overseas market has been steadily declining. In  July 2009,  SBI  Capital  Markets  Ltd. was  appointed to prepare a roadmap for recovery. At the launch ceremony of Air India aviation 2010, the then Aviation Minister, Praful Patel said that the national carrier could soon get an organisational restructuring plan. Air India would  undergo  a  major  transformation  of  management.  He  added  that  it would involve important and eminent people on board of Air India

 

Resurgence plans

It is noteworthy that the then Air India chief Arvind Jadhav on July 14, 2010, announced his intention to make new terminal 3 for international and domestic operations with plans to start new direct flights to Chicago and Toronto and also taking almost all international long haul flights due to lack of space. This would also provide greater convenience for transit passengers who earlier had to transfer between the international and domestic terminals which were located on completely different sides of the airport. They would later on be able to catch their connecting flights within the same terminal. Arvind  Jadhav wanted  to  change  the  order  of  some111 planes ordered in 2006 to get narrow-body aircraft instead of wide-body aircraft. Factors responsible for the failure of Air India remained being the winner of various recognized awards including Reader’s Digest, Best South Asian Airline, World’s First All-Jet Airline, World’s Largest Operator of Airbus and many more, which brought complacency in Air India.

Furthermore, rising fuel prices were causing a severe decline in air traffic. With the changing government norms, , Air India  had  to  compete  with  international -level flights offering better services and cheaper costs including Kingfisher Airlines and Jet Airways. Secondly, the merger with Indian Airlines put a scar and a loss of Rs 7200 crore. This merger caused several challenges for survival in front of Air India. Air India took a loan of US $ 534 million from Indian government to fulfil its losses. In July, SBI Capital Ltd decided to prepare revival strategy for Air India. Arvind Jadhav also prepared a turnaround plan with the help of Accenture and SBI Capital but it also failed. Due to the incomplete merger, the organisation’s structure became massive and unwieldy. There were two sets of managers for practically every position and nothing  was  shared.  Its staff strength  was  roughly three  times  what an airline of its size should have. It has strongly entrenched unions who oppose tooth  and  nail any  effort  to cut costs. It has a terrible reputation for service and an even worse one for on-time arrival and departure. That is not the worst. Being government-owned, Air India has to contend with requests from politicians and bureaucrats – requests that it cannot refuse. More importantly, political considerations play a role greater than economic  logic  when  any  strategic  decision  is taken.

It cannot be  gainsaid  that  when Jadhav assumed charge, he started off with a fair amount of goodwill. He was seen as a competent, sensible and proactive bureaucrat with “fire in his belly” who would understand the underlying problems of the airline and take the correct steps. Unfortunately, Jadhav managed to alienate practically the entire staff of the organisation shortly after taking charge by giving a very candid interview to a magazine. In the interview, Jadhav lashed out at the work culture, at the sloppiness at every level of management, and the general lack of energy and ability among his staff who he felt were too pampered and overpaid. Jadhav also pointed out that he was saddled with  32,000  people  when  he  needed  no  more  than 12,000  or so. There were many in the aviation ministry and outside who thought he was not wrong. “Jadhav spoke the truth and it was too harsh for most ears. But if Air India is to survive, these things must be said,” said one senior Air India official, who advocates for Jadhav initiatives. But the mismatch of chairman’s ideas and lack of employee commitment let the airline to this failure. Survival is still a question in front of the airline and it needs a strategic leader under whose guidance this ship can float successfully.

 

The road ahead

Against this backdrop, it is worth mentioning that former Jet Airways CEO Steve Forte said the government should allow professionals to take over and run the airline. “It will be very painful at first, with manpower, fleet and route reductions, but then, as the airline will slowly emerge from the darkness, it will have a chance to grow again in a profitable way,” he said. Jitender Bhargava, former Air India executive director, said, “The UPA government took the airline into this debt trap; now the NDA government should make sure it is not remembered for selling the flag carrier cheap. A special committee of retired and serving Air Indians should negotiate best terms and keep the process transparent.”

Air India’s privatisation did come up several times in the UPA tenure too at the highest level, said another top bureaucrat who was directly involved in the process, but did not want to be named. However, political will was lacking. The argument given was this: Air India was being given on an average some Rs 2,000 crore equity by the government every year since 2011. Nearly 40 per cent of its outgo of some Rs 25,000 crore is spent on oil bills and airports, which anyway comes back to government-owned oil and airport companies, besides the taxes paid. This includes Rs 6,500 crore in fuel, Rs1,500 crore to airports and Rs 500 crore in service tax.

“So, it was seen as just transferring money from one arm of the government to the other,” said this bureaucrat, recalling a conversation at the Prime Minister’s Office. “Air India also has immense prestige attached to it. The last thing the (UPA) government, already marred by scam allegations, wanted to signal to the world was the end of its own airline. It’s not just another company.” However, Air India can no longer bank on perpetual government support as private airlines steadily eat into its share. Governments the world over have stepped back from owning airlines and hotel chains. This is Air India’s BA(British airways) moment. Or is it?

By Uday India Bureau 

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