Mount­ing losses and ac­cu­mu­lated debts of Rs 52,000 crore force the govern­ment to con­sider the pri­vati­sa­tion of the national car­rier

Air In­dia’s head­quar­ters in a nar­row by­lane of Delhi’s Ashoka Road is get­ting a fresh coat of paint, in­clud­ing a large im­age of its famed mas­cot, the Ma­hara­jah. Inside, the of­fice of Ash­wani Lo­hani, chair­man and man­ag­ing di­rec­tor, is be­ing spruced up too. Bristling with plans, Lo­hani has just an­nounced that Air In­dia is in­tro­duc­ing a flight to Copenhagen and an­other to Tel Aviv when Prime Min­is­ter Naren­dra Modi is sched­uled to make a his­toric first visit to Is­rael in July.

Lo­hani, a turn­around ex­pert who had put Mad­hya Pradesh on the tourism map of In­dia, was brought in to get Air In­dia into shape, in Septem­ber 2015. To his credit, the In­dian Rail­way Ser­vice of­fi­cer got down to the fun­da­men­tals of putting the air­line back on track: mo­ti­vat­ing staff, im­prov­ing on-time per­for­mance and en­sur­ing that the pas­sen­ger load fac­tor on ev­ery flight was much higher than in pre­vi­ous years. That brought back some glow to Air In­dia’s sun em­blem. Helped along by drop­ping tur­bine fuel costs, AI re­ported an op­er­a­tional profit of Rs 100-odd crore in the past two fi­nan­cials, for the first time in a decade.

That, though, was the only glim­mer of light in the fog and gloom that have en­veloped In­dia’s flag­ship car­rier in the past 10 years. Un­der the glass top of his desk, Lo­hani has placed a writ­ten sheet to con­stantly re­mind him of the grim re­al­ity. It dis­plays the fig­ures of an­nual losses that Air In­dia has in­curred since 2007—the year the cen­tral govern­ment merged the two In­dian avi­a­tion pub­lic sec­tor giants, Air In­dia and In­dian Air­lines, into a sin­gle en­tity. Since then, it has been haem­or­rhag­ing non­stop at a crip­pling av­er­age rate of Rs 5,000 crore an­nu­ally. At last count, the losses to­talled Rs 52,000 crore. Mean­while, Air In­dia’s share in the boom­ing do­mes­tic avi­a­tion mar­ket has shrunk to just 14 per cent—a dis­tant third be­hind the high-fly­ing Indigo and the sta­ble Jet Air­ways. On the in­ter­na­tional sec­tor, it still has a sig­nif­i­cant share of 25 per cent but con­tin­ues to lose heav­ily on th­ese flights (see graphic: Air In­dia in a Tail­spin).

Now, much to Lo­hani’s dis­com­fort, there has been a grow­ing cho­rus of voices in the past few weeks, both in Delhi’s power cir­cles and in the me­dia, for the Naren­dra Modi govern­ment to take a de­ci­sive step and, if nec­es­sary, to pri­va­tise the ail­ing PSU. Air In­dia’s chief thinks that such talk is hav­ing a de­mor­al­is­ing ef­fect on his staff and he is des­per­ately seek­ing clar­ity. Be­hind Lo­hani’s desk, on a book easel, is a thickly-bound copy of the Bha­gavad Gita with verses in San­skrit, Hindi and English. Ev­ery morn­ing when he en­ters the of­fice, he ran­domly turns a page and reads a pas­sage. On one re­cent morn­ing, the book opened to a pas­sage which read, “Kr­ishna! Dis­peller of all doubts! Re­move this doubt of mine be­cause only You can re­move it com­pletely.”

The same af­ter­noon, Lo­hani got the first clear sig­nal of the govern­ment’s in­ten­tions to­wards Air In­dia. In an in­ter­view with Do­or­dar­shan, Arun Jait­ley, the af­fa­ble fi­nance min­is­ter, said, “To keep Air In­dia run­ning, we have in­vested Rs 50,000 crore. That money is govern­ment’s money, that’s your money. It could have been used for school ed­u­ca­tion. And if 86 per cent of fly­ing can be han­dled by the pri­vate sec­tor, it can also han­dle 100 per cent.” Jait­ley in­di­cated that the Union min­istry for civil avi­a­tion was ex­plor­ing all op­tions, in­clud­ing strate­gic dis­in­vest­ment.

Ac­knowl­edg­ing that fact, Ashok Ga­jap­athi Raju, the Union min­is­ter for civil avi­a­tion, said, “It is no se­cret that the Ma­hara­jah is im­pov­er­ished and is in a debt trap. We are all ap­ply­ing our minds as to how Air In­dia can be

pulled out of it.” The debt trap Raju is talk­ing of, sim­ply put, is the Rs 20,000-odd crore Air In­dia owes a con­sor­tium of for­eign banks to­wards its air­craft pur­chases in re­cent years. It also has a work­ing cap­i­tal loan of around Rs 32,000 crore ad­vanced by 18 pub­lic sec­tor banks. It needs Rs 6,500 crore to ser­vice its debt an­nu­ally. To meet that, it re­ceives Rs 2,500 crore from eq­uity by the govern­ment and claims de­pre­ci­a­tion of Rs 1,500 crore. De­spite all this, it still has an an­nual short­fall of Rs 2,500 crore, for which it is forced to bor­row from banks. This is the fi­nan­cial vor­tex that has seen Air In­dia pile up Rs 52,000 crore in debt in the past decade alone.

JAYANT SINHA, the savvy min­is­ter of state for civil avi­a­tion, says it is the air­line’s mount­ing debt that has the govern­ment wor­ried, forc­ing it to look at var­i­ous op­tions. He told in­dia today, “We are now at the endgame—we are get­ting to the end of the process of ex­plor­ing the al­ter­na­tives and not the be­gin­ning.” Af­ter the Modi govern­ment came to power, he says, the first ef­fort was to cor­rect the tail­spin by putting in place a com­pe­tent man­age­ment, to im­prove its per­for­mance and put an end to the op­er­a­tional losses. Af­ter hav­ing sta­bilised the work­ing of the national car­rier, the next step was to work out how to tackle the daunt­ing debt is­sue. The big ques­tions con­fronting the govern­ment were: why was this im­por­tant, what are the op­tions be­fore it and what im­pact the de­ci­sions would have.

Th­ese are hard ques­tions to an­swer given that the pro­pos­als for the govern­ment to get out of run­ning air­lines go as far back as 1988 when there were two national car­ri­ers, Air In­dia and In­dian Air­lines, both in­cur­ring heavy losses. To his credit, then prime min­is­ter Ra­jiv Gandhi, an In­dian Air­lines pi­lot him­self, made the first bid to break the state mo­nop­oly over the avi­a­tion sec­tor by per­mit­ting pri­vate air taxis on feeder routes to pro­mote tourism. But when it came to pri­vatis­ing the two

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car­ri­ers, Gandhi’s ad­vis­ers told him to go slow.

Af­ter all, it was his grand­fa­ther, Prime Min­is­ter Jawa­har­lal Nehru, who pushed for a closed, self-reliant econ­omy where the pub­lic sec­tor would strad­dle the com­mand­ing heights of the econ­omy, in­clud­ing avi­a­tion. Prior to In­de­pen­dence, a few pi­o­neer­ing pri­vate avi­a­tors ran air­lines. Among them was JRD Tata, who started Tata Air­lines in 1932 and re­named it Air In­dia in 1946. In 1953, how­ever, Nehru pushed through the Air Cor­po­ra­tion Act that na­tion­alised all eight pri­vate air­lines and formed two cor­po­ra­tions, Air In­dia for in­ter­na­tional ser­vices and In­dian Air­lines for the do­mes­tic sec­tor. Tata was made chair­man of Air In­dia and a board mem­ber of In­dian Air­lines. Un­der Tata, who served for

25 years, Air In­dia be­came an iconic air­line with classy ser­vice backed with savvy ad­ver­tis­ing that made the Ma­hara­jah a distinc­tive sym­bol across the world. It was only in the early eight­ies when British prime min­is­ter Mar­garet Thatcher pri­va­tised British Aero­space that In­dia be­gan se­ri­ously look­ing at break­ing the stran­gle­hold of Air In­dia and In­dian Air­lines with their de­clin­ing abil­ity to cope with the de­mands of a grow­ing avi­a­tion sec­tor.

The real turn­ing point came in 1994, when Prime Min­is­ter Narasimha Rao’s govern­ment in­tro­duced the Open Skies pol­icy by pass­ing an or­di­nance re­peal­ing the

Air Cor­po­ra­tion Act. This en­abled the en­try of pri­vate op­er­a­tors, per­mit­ting for­eign eq­uity up to 40 per cent in the do­mes­tic mar­ket. Within a year, a host of new pri­vate air­lines like Jet, Sa­hara, ModiLuft, East West and Da­ma­nia had cap­tured close to 45 per cent of the do­mes­tic mar­ket. IA plunged fur­ther into debt and of­fi­cials grum­bled that pri­vate air­lines were be­ing al­lowed to op­er­ate on the more prof­itable trunk routes like Delhi and Mum­bai, while the national car­rier was left to ser­vice loss-mak­ing ones.

The do­mes­tic sec­tor soon faced what the avi­a­tion sec­tor called the four deadly horse­men: low traf­fic, over­ca­pac­ity, poor yields and high unit costs. In­dian Air­lines’ losses be­gan to mount and some of the less ef­fi­cient pri­vate air­lines ei­ther had to merge or shut shop. Mean­while, Air In­dia, though still prof­itable, had be­gun to stag­nate and its share of out­bound in­ter­na­tional traf­fic, which was around 40 per cent in the eight­ies, dropped to 25 per cent—far be­low the av­er­age for flag­ship in­ter­na­tional car­ri­ers.

When the first NDA govern­ment came to power in 1998 with Atal Bi­hari Va­j­payee as the prime min­is­ter, both his dis­in­vest­ment min­is­ters Arun Shourie and Arun

Jait­ley, apart from civil avi­a­tion min­is­ter Ra­jiv Pratap Rudy, pushed for pri­vati­sa­tion of the two national car­ri­ers. A min­is­ter in that govern­ment says, “We were thwarted by a pow­er­ful lobby that pre­vented the move to pro­tect pri­vate op­er­a­tors who thought they would lose out.” To push ahead with lib­er­al­i­sa­tion, the Naresh Chan­dra committee was formed in 2003 to study op­tions. Months later, the committee submitted its re­port and among other things called for pri­vati­sa­tion of AI and IA and the cre­ation of an au­ton­o­mous civil avi­a­tion reg­u­la­tor.

With UPA-I, led by Prime Min­is­ter Man­mo­han Singh, com­ing to power, the Chan­dra committee re­port was shelved. In­stead, un­der the su­per­vi­sion of the then avi­a­tion min­is­ter Pra­ful Pa­tel, an am­bi­tious pro­gramme was launched to re­vive the two car­ri­ers by ex­pand­ing and mod­ernising their fleets. AI had ini­tially submitted a pro­posal to ac­quire only 28 air­craft in May 2004—10 medium-ca­pac­ity long-range air­craft and 18 small ca­pac­ity short-range air­craft. But Pa­tel pushed for a more ag­gres­sive pol­icy, in­clud­ing beef­ing up Air In­dia Ex­press, a no-frills sub­sidiary of AI to cater to the South­east Asian and Gulf mar­ket. He also pushed for In­dian Air­lines to ex­pand its reach.

BY NOVEM­BER THAT YEAR, the AI board had re­vised its pro­posal and pushed for the ac­qui­si­tion of 50 medium-ca­pac­ity, long-range air­craft in ad­di­tion to 18 small-ca­pac­ity short-range ones. A year later, AI signed a pur­chase agree­ment with Boe­ing for the sup­ply of 50 air­craft at a cost of Rs 33,197 crore. Si­mul­ta­ne­ously, IA too signed pur­chase agree­ments with Air­bus for the pur­chase of 43 air­craft at a cost of Rs 8,400 crore. Both th­ese ac­qui­si­tions were to be funded through debt and re­paid through rev­enue generation. A sub­se­quent re­port by the Comptroller and Au­di­tor Gen­eral (CAG) of In­dia found that the as­sump­tions by the civil avi­a­tion min­istry were to­tally un­real and ob­served that “it was a recipe for dis­as­ter”.

An­other dis­as­ter was soon to fol­low. In 2007, soon af­ter the large-scale ac­qui­si­tion of air­craft, the UPA govern­ment pushed through a move to merge the two air­lines for the pur­poses of “syn­ergy”. The CAG, in its re­port, pointed out that it would have been bet­ter to have worked out the merger be­fore mak­ing the ac­qui­si­tions. Nor was the fi­nan­cial case for the merger val­i­dated. Worse, there were huge de­lays in the ac­tual in­te­gra­tion, par­tic­u­larly of hu­man re­sources, with dif­fer­en­tial des­ig­na­tions, se­nior­ity and salary need­ing to be har­monised. The sin­gle pas­sen­ger code reser­va­tion sys­tem, a crit­i­cal el­e­ment of the process, was done only in 2011, four years af­ter the merger. The re­sult: the com­bined air­line en­tity plunged into a debt of Rs 20,000 crore within just five years.

In 2011, the UPA-II govern­ment de­cided on a turn­around plan to stop the bleed­ing. It chose to in­fuse eq­uity of Rs 48,212 crore for a pe­riod of 20 years start­ing 2011-12 and end­ing in 2031-32. Based on the in­fu­sion, AI was

ex­pected to show pos­i­tive earn­ings from the fi­nan­cial year and a cash sur­plus from 2017 on­wards. In­stead, AI’s debt only mounted with its in­abil­ity to ser­vice the an­nual in­ter­est pay­ments, bal­loon­ing to Rs 52,000 crore this year. Mean­while, it had also ex­hausted Rs 25,000 crore or half the amount com­mit­ted un­der the turn­around plan. That’s when the alarm bells started clang­ing for the Modi govern­ment.

Iron­i­cally, even as AI plunged deeper into the abyss, In­dian civil avi­a­tion was boom­ing. As Kapil Kaul, CEO, Cen­tre for Asia Pa­cific Avi­a­tion (CAPA), South Asia, points out, “In­dia’s do­mes­tic civil avi­a­tion mar­ket grew by 21 per cent last year to reach 104 mil­lion pas­sen­gers, over­tak­ing Ja­pan to be­come the third-largest do­mes­tic mar­ket in the world, be­hind China and US.” Indigo, the savvy low-cost car­rier, which is now by far the num­ber one do­mes­tic air­line by some dis­tance with 40 per cent mar­ket share, has more than dou­bled both its pas­sen­ger traf­fic and air­craft in the past five years even as AI stag­nated and fell deeper into debt. Spice­Jet, which was res­cued from the brink by Ajay Singh, its orig­i­nal founder, has now turned the cor­ner. Jet Air­ways, though over­taken by Indigo, con­tin­ues to cruise along af­ter its tie-up with Eti­had. The new air­lines, like Tata’s Vis­tara and Air Asia, are also be­gin­ning to find their feet.

SO WHY DOES AI find it­self in such a sorry state? Ajay Singh of Spice­Jet is bru­tally frank. “AI can­not be made vi­able un­der the present dis­pen­sa­tion,” he says. “It should have been sold a long time ago and pri­va­tised. It is among the big­gest pub­lic sec­tor loss­mak­ers in our history as govern­ment, politi­cians and bu­reau­crats used this air­line as their own pri­vate lit­tle or­gan­i­sa­tion. The whole thing was so cor­rupt, with pre­vi­ous civil avi­a­tion min­is­ters known to be bar­gain­ing away the prime routes to for­eign air­lines.” Whether by co­in­ci­dence or not, the CBI has filed a case against Pra­ful Pa­tel and of­fi­cials for many of the al­leged wrongs dur­ing his ten­ure as civil avi­a­tion min­is­ter, in­clud­ing con­ced­ing lu­cra­tive Gulf routes to Emi­rates.

Saj Ah­mad, chief an­a­lyst at the UK-based Strate­gicAero Re­search, doesn’t mince words ei­ther. “Short of scrap­ping the air­line and start­ing over, there isn’t a fat lot any­one can do,” he says. “AI is noth­ing more than a crony filling state jobs pro­gramme—it has got­ten so bloated, suc­ces­sive in­ept gov­ern­ments do not know what to do to turn it around other than throw good money af­ter bad. It has never re­ally wo­ken up out of its post-merger coma to face mar­ket re­al­i­ties. While it re­mains in this lethar­gic state, cov­ered in po­lit­i­cal red tape and cor­rup­tion, man­age­ment ap­a­thy will en­sure that AI is going nowhere fast.”

The real is­sue is one of smart lead­er­ship and swift de­ci­sion-mak­ing given that profit mar­gins in the avi­a­tion sec­tor are a low 5 to 7 per cent at best. Key in­put costs such as fuel, staff ex­penses, lease ren­tals of air­craft, main­te­nance and tick­et­ing make up close to 70 per cent of ex­penses. Fuel alone can ac­count for as much as 34 per cent. AI’s chief Lo­hani is fond of call­ing avi­a­tion the mother of all busi­nesses

be­cause it is high on safety, tough on reg­u­la­tion, low on mar­gin and stiff in com­pe­ti­tion. What he doesn’t say or want to say is that a pub­lic sec­tor unit with its cum­ber­some ten­der­ing process and the fear of the four Cs—the Courts, CAG, CBI and CVC—is a mis­fit in a sec­tor that re­quires bold and dy­namic de­ci­sion-mak­ing.

A top pri­vate air­line em­ployee points out, “Why AI is in such a sorry state is be­cause of decades of in­ter­fer­ence in man­age­ment by the govern­ment. You can­not have a cus­tomer-fac­ing en­ter­prise that is run by a gen­er­al­ist. You had so many civil ser­vants who came and rung the bell and went. What you need are thor­ough­bred pro­fes­sion­als who un­der­stand all the lev­els of busi­ness and put it all to­gether. The other is­sue is that in this in­dus­try, more than oth­ers, if the cost struc­ture is set in­cor­rectly, it is very hard to change quickly. You need a sus­tain­able cost struc­ture—if you have it, then over time you will do well. If you don’t, you will end up like AI.”

Modi, un­like his pre­de­ces­sors who ei­ther pam­pered or dithered over what to do with AI, is clear that the govern­ment share in the air­line needs to re­duce. As a se­nior of­fi­cial says, “The in­tent is not to have a com­mand­ing share in Air In­dia. But be­fore we do any se­ri­ous think­ing about pri­vati­sa­tion or dis­in­vest­ment, we have to en­sure AI gets the best net worth in the given cir­cum­stances. The most dif­fi­cult part is what will you do and how.”

There are sev­eral op­tions avail­able to the govern­ment for Air In­dia. It would clearly have to con­sid­er­ably re­duce the debt bur­den, par­tic­u­larly the work­ing cap­i­tal loan of Rs 30,000 crore. One sug­ges­tion was that the banks AI owes money to take a re­ally short hair­cut or buy eq­uity stakes in the air­line. But an of­fi­cial says that banks are re­luc­tant to ex­pose them­selves even more, with one banker telling him they have no in­ter­est in sit­ting on the board of the air­line and run­ning it. The other op­tion was that in­stead of stag­ger­ing the re­main­ing amount of eq­uity in­fu­sion of Rs 25,000 crore as part of the turn­around plan, the govern­ment does it up­front by is­su­ing bonds which AI could use to ser­vice its debts.

HOW­EVER, WHEN the civil avi­a­tion min­istry sought the ad­vice of NITI Aayog, the govern­ment’s premier think-tank was clear: AI should be pri­va­tised. Rea­son: the to­tal debt is too high, it is not pos­si­ble to ser­vice it and only a strate­gic dis­in­vest­ment will work. As a se­nior NITI Aayog of­fi­cial told in­dia today, “The govern­ment doesn’t want eq­uity— the more we keep, the more the value of AI will be eroded. We need to make the dis­in­vest­ment neat, clean and sim­ple with­out too many con­di­tion­al­i­ties.” MoCA now has the green light to ex­plore strate­gic dis­in­vest­ment—which es­sen­tially means that it is will­ing to give the buyer a ma­jor­ity hold­ing—a share of 51 per cent or more.

For the govern­ment, the sale of AI will be a totem pole kind of de­ci­sion. Given the air­line’s high pro­file, the pri­vati­sa­tion of Air In­dia will reaf­firm Modi’s po­si­tion in the world as an eco­nomic re­former will­ing to take bold de­ci­sions de­spite the po­lit­i­cal risks. Jayant Sinha un­der­stands the mag­ni­tude of the de­ci­sion to be taken, stat­ing, “Air In­dia’s des­tiny will shape the des­tiny of In­dia’s avi­a­tion sec­tor and, given its con­sumer im­por­tance, size and geopo­lit­i­cal rel­e­vance, to be on a par with avi­a­tion sec­tors in com­pa­ra­ble coun­tries such as China and the US. The avi­a­tion sec­tor is vi­tally im­por­tant to all ma­jor economies be­cause not only does it drive rev­enues, jobs and taxes but it is also strate­gic as it shapes the nature of the aero­space in­dus­try, in­clud­ing com­mer­cial and de­fence in­ter­ests.”

Ji­ten­der Bhar­gava, a for­mer AI di­rec­tor who has chron­i­cled the de­scent of Air In­dia in a hard-hit­ting book, while favour­ing pri­vati­sa­tion, re­jects the no­tion that AI has to go out with a beg­ging bowl. Bhar­gava points out that AI has as­sets, in­clud­ing prop­er­ties like the iconic Na­ri­man Point build­ing, that it could hive off into an SPV and sell to re­duce AI’s debt. It also has five sub­sidiary com­pa­nies worth sev­eral thou­sands of crores that it can pack­age sep­a­rately to re­tire much of its debt (see graphic: As­sets & Li­a­bil­i­ties). Apart from that, it has han­gars, land­ing rights and code shares that are valu­able. Ajay Singh con­curs and says, “If you can sell it lock, stock and bar­rel, noth­ing like it. But I have a feel­ing it will be very dif­fi­cult. Be­cause any­one who does that will also be sad­dled with all the wretched prob­lems that come with it—the union and un­pro­duc­tive staff. So it is bet­ter to go piece­meal with it.”

In­stead of leav­ing it to the AI board, Kapil Kaul feels that just as with Satyam, the govern­ment should form an em­pow­ered committee of em­i­nent per­sons—in­clud­ing avi­a­tion ex­perts—that has the de­ci­sion-mak­ing au­thor­ity on how best to pri­va­tise Air In­dia. Ev­ery­one, though, agrees the time is ripe for a big move. As Am­ber Dubey, se­nior part­ner and head, aero­space, KPMG, says, “With the do­mes­tic avi­a­tion sec­tor boom­ing, fuel prices still low, do­mes­tic pri­vate air­lines thriv­ing, air­ports ex­pand­ing and re­gional con­nec­tiv­ity im­prov­ing, there is a con­stel­la­tion of fac­tors in place for a ma­jor de­ci­sion on Air In­dia.”

Jait­ley be­lieves there is now a sec­ond op­por­tu­nity that shouldn’t be missed. Given that AI has an ex­cel­lent global network, among the bet­ter op­tions is for an In­dian pro­moter with a strong do­mes­tic network to take 51 per cent of the shares and tie up with a for­eign air­line to con­vert In­dia into a hub of in­ter­na­tional traf­fic much like Sin­ga­pore Air­lines or Emi­rates has done. The time is op­por­tune for Modi to bite the Air In­dia bul­let at last.

With the sec­tor boom­ing and fuel prices low, THE TIME IS RIGHT to sell the air­line


AIR IN­DIA ONE Prime Min­is­ter Naren­dra Modi on his ar­rival in Spain

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