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Maharaja in a Mess

Issue: 06-2009By Air Marshal (Retd) V.K. Bhatia, with inputs from Arundhati Das and Sangeeta Saxena

Over a decade of mismanagement and misadventure has taken a frightful toll on the public sector behemoth

First, the fairy tale. An Emperor is conned by swindlers into believing they have a cloth which keeps the wearer incredibly warm, but is invisible to fools. The Emperor cannot see the (non-existent) cloth, but pretends he can for fear of appearing stupid. His ministers play along. He then goes on a procession through the capital, freezing in his new “clothes”—until a small child calls the bluff: “But he has nothing on!”

It has now come to light, the Maharaja, too, has on very little. In a sad reflection of Hans Christian Andersen’s oftcited tale of trickery and foolhardiness, Air India’s (AI) crumbling edifice, pockmarked by disastrous dalliances with the untenable and the illogical, have at last been exposed. Jolted by the disfigurement and distress of what was once the sole trump card of the nation’s aviation industry, the government has rushed to the rescue. But not so fast. Balm in hand, this time around the administration is determined to wield the baton. So, even though Arvind Jadhav, the recently appointed Chairman and Managing Director (CMD), has sought a bailout package of Rs 15,000 crore, he may end up with only Rs 10,000 crore.

Together with a financial dole out, the government is cracking the whip to goad the airline into a more brisk, business-like pace. Latest in the slew of such measures is the probability of Ratan Tata heading an international advisory board proposed by Civil Aviation Minister Praful Patel. Comprising some of the industry’s prominent figureheads from across the globe, the board will be tasked to engineer AI’s turnaround. “I am working on a complete rejig,” Patel told reporters. “It cannot be open ended. The government is committed... We want a strong national carrier.” The irony is hard to miss. That 77 years after it was founded in 1932, it should now fall on Ratan Tata’s shoulders to revive the brainchild of J.R.D. Tata. Be that as it may, the Centre is also reportedly keen to partially disinvest its stake in the carrier and reshuffle the airline’s top management to make way for a new “chief operating officer, who could be an expat, to assist the CMD”, besides setting a 24-month deadline to clean up the financial mess.

So acute is the cash crunch that for the first time in the history of Indian public sector undertakings, AI’s parent company, the National Aviation Company of India Limited (NACIL), had had to defer payment of salaries. Unabashed, Jadhav told employees who went on a two-hour protest strike that they should be prepared for harsh decisions. “Considering the critical financial state of the airline, we should all be prepared to face the impact of harsh decisions that will be required to be taken in the coming weeks,” he said.

Apparently, Prime Minister Manmohan Singh is not entirely averse to a bailout package—but he has unremittingly spelt out the conditions: slim down and buck up. Evidently, that’s easier said than done. Here’s why. Addressing the Lok Sabha, the Civil Aviation Minister recently affirmed: “The airline has been facing a financial crunch for the past few years. The borrowings of Air India have risen steeply from Rs 6,550 crore in November 2007 to Rs 15,241 crore in June this year.” The grapevine has it that AI could at present be losing as much as Rs 15 crore ($3 million) a day—without the slightest indication of the slide downhill losing momentum. Unbelievable, but if true, the airline is staring down an abyss.

A major threat that could send it toppling over is the airline’s mammoth staff strength—an astounding 31,000. And that’s only the salaried employees. Add the manpower of outfits to which the airline outsources a significant chunk of its operations, and the figure can touch a mindboggling 50,000 and counting. Not surprisingly, the national carrier also flaunts an employee-aircraft ratio that’s well over 200, against the international norm of less than 80. Further, the workforce coagulates to form powerful labour unions, such as the Air Corporation Employees’ Union, Aviation Industry Employees’ Guild and Indian Aviation Technicians Association. The lethal concoction of multitudinous heads and formidable muscle power serves to encourage a poor work culture, callous indifference and utter inefficiency.

Astonishingly, the same workforce enjoys pay, perks and emoluments that can put a capitalist organisation to shame. Translated into simpler terms, AI’s reported monthly wage bill of Rs 350 crore, or Rs 4,200 crore annually, puts the average salary of its employees at over Rs 10 lakh per annum; that too, when 71 per cent of the workforce make no direct contribution to aircraft operation or maintenance. Worse, succumbing to a myopic decision, the cash-starved airline ordered 111 new aircraft at a whopping cost of nearly Rs 50,000 crore. Admittedly, at the time of placing the order NACIL might not have anticipated the global economic crunch, but what is baffling is that even now the airline apparently has no immediate plans to reschedule acquisitions. In contrast, private airlines have wasted no time in shelving expansion plans in favour of planned capacity reduction, and have even postponed taking delivery of new aircraft.

Of the 111 new aircraft on order, a large number (nearly half) have already arrived, with deliveries scheduled to be completed by 2014. The only exception, and mercifully so, is the delayed Dreamliner 787 by Boeing. “It was not at all sensible to place an order for so many aircraft. There is no budgetary provision for this and the money will have to be raised through international loans,” observed Sanat Kaul, a former member of the AI board. “A new fleet cannot automatically resuscitate the national carrier and there are no hopes of return on this investment.” Continued delivery of new aircraft not only aggravates the problems of over capacity, but also magnifies debt servicing. Already AI has spent more than Rs 20,000 crore on new acquisitions and another Rs 25,000 crore to Rs 30,000 crore will be spent in the coming three to four years. The resulting annual capital repayment and interest alone may exceed the airline’s annual turnover—financially, a most untenable situation.

One prescription that went horribly wrong was the ill-conceived and shoddily executed merger of the erstwhile domestic/regional carrier, Indian Airlines, and the international carrier, Air India under the NACIL umbrella. The move was to have generated a net benefit of Rs 600 crore, apart from creating a world class airline, serving both domestic and international routes with one code. The optimism has proved to be misplaced and rather premature. Grappling with innumerable hurdles, while the two airlines had earlier individually posted modest profits, post-merger, the losses have sky-rocketed. In an interview to a leading national daily, KPMG’s aviation analyst Mark Martin had pointed out, “Integrating the top management first, and lower management and operations later in a sequenced manner was bound to fail. The top-down approach was a disaster. Actually, the integration should have begun at the grassroots level.”

Unarguably, over a decade of mismanagement, misappropriation and misadventure has taken a frightful toll on the public sector behemoth. Liberal bilateral agreements with foreign carriers, disastrous aircraft leasing policy, undue largesse for people in power and position, termination of flights on profitable routes to inexplicably help private competitors even while continuing flights on non-profitable routes, are but a few factors that scripted its downfall. So much so, industry experts insist a permanent solution lies in complete privatisation alone. “AI has sunk deeper and deeper into crisis,” says Kapil Kaul, chief of Centre for Asia Pacific Aviation (CAPA) India. “If it (privatisation) is delayed, there may be no value left even if you want to privatise.”