RUNNING OUT OF FUEL, FAST
THE GOVERNMENT EMBARKS ON ANOTHER EXERCISE TO REVIVE NATIONAL CARRIER AIR INDIA, BUT THE OUTCOME SEEMS OBVIOUS
The government embarks on another exercise to revive the national carrier, but the outlook remains dire
T“To keep Air India running, we have invested Rs 50,000 crore so far. That money is the government’s money, it’s your money. It could have been used for school education,” Union finance minister Arun Jaitley had said in a television interview in 2015. “And if the private sector can handle 86 per cent of flying, it can also handle 100 per cent.” That statement was a precursor to an announcement that followed in June 2017: the airline would be privatised. However, three years after Jaitley made that statement, nothing has moved for the beleaguered airline.
With no takers for its divestment plan, has the government buried the idea for good? With the latest plan to turn Air India into a ‘professional’ organisation, the government seems to suggest just that. It has not been able to find a buyer for the airline, and now there are reports suggesting that the NITI Aayog has advised that its financials be improved first so that it can attract bidders and fetch a better price.
This could mean the last-ditch effort to save the airline has come to naught, casting a long shadow over its revival and the fate of over 21,000 of its staff. Moreover, as the government attempts to keep the airline alive by extending lifeline after lifeline in the form of loans, it is finally the taxpayer who is bearing the brunt of these attempts to pull off the impossible. Marred by decades of mismanagement, a slew of bad commercial decisions and bending of rules to serve the needs of the babus that run it, the erstwhile Maharaja has been nosediving steadily, losing market share even as it sinks deeper into a financial quagmire, defaulting on loans and delaying salaries to staff.
Now for some mind-numbing numbers. The airline has been wallowing in losses ever since its merger with Indian Airlines in 2007. It has been accumulating losses of Rs 5,000 crore every year, resulting in cumulative losses of Rs 47,145.62 crore in 2016-17. A high debt burden, competition, high fuel prices and a weak rupee have wreaked havoc on the airline. Also to blame were high airport user charges. Air India has also amassed a huge debt. The airline owes a consortium of foreign banks Rs 20,000-odd crore towards aircraft purchases in recent years. It also has a working capital loan of around Rs 32,000 crore—advanced by 18 public sector banks—and 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. It still has an annual shortfall of Rs 2,500 crore, for which it is forced to borrow from banks again.
“Air India is very clearly a legacy issue. The debt is unsustainable. Forget Air India, nobody can handle that debt,” Suresh Prabhu, Union civil aviation minister, said in an interview in August this year. Even as the government was hunting for a suitor for the airline, its health was fast deteriorating. Reports in July this year said that Air India has defaulted on government-guaranteed loans given to it by three banks. These banks and two aircraft leasing firms have issued default notices to the state-run airline and have threatened to take legal recourse if dues are not cleared. The banks, to whom AI had outstanding interest payment of over Rs 800 crore, were Standard Chartered bank, Dena Bank and Bank of India. Moreover, the US-based Wells Fargo Trust Services and the Dubai Aerospace Enterprise have also sent notices to AI for defaulting on lease rental payments on aircraft, reports added.
LOSING MARKET SHARE
Gross mismanagement has also taken its toll on the airline’s market share. Air India’s market share plunged to an all-time low of 11.8 per cent this September, down from 19.8 per cent in January 2014. This is despite the number of passengers across all airlines growing 19 per cent in September. InterGlobe Aviation, which flies under the brand name IndiGo, had a domestic market share of 43.2 per cent while Jet Airways reported a share of 15.8 per cent. Low-cost carrier SpiceJet, meanwhile, reported a 12 per cent market share. Air India, which derives 70 per cent of its revenues from international operations, has a fleet size of 163 aircraft, compared with the 57 that SpiceJet has and the 69 aircraft IndiGo flies. Meanwhile, Jet Airways, which had been going through a rough patch financially, is in early talks with the Tata Group for a merger with the latter’s Vistara, say reports. The deal, if it materialises, will bring to fruition the Tata Group’s ambition of running a major airline in the country, as it will give Vistara licence to fly abroad before the mandatory five years of flying for a new airline. It would also help cashstrapped Jet Airways to come out of its financial troubles, say experts.
“AIR INDIA IS VERY CLEARLY A LEGACY ISSUE. THE DEBT IS UNSUSTAINABLE. FORGET AIR INDIA, NOBODY CAN HANDLE THAT DEBT” Suresh Prabhu, Union Minister for Civil Aviation
Going by the amount of money Air India bleeds every year, it is the worst performer among public sector enterprises. Hence the decision in June 2017 to go for a strategic divestment. But the government had a stipulation: the winning bidder could not merge the airline with existing businesses as long as the government held a stake. The winner was also required to list Air India and abide by conditions designed to safeguard employee interests, restricting its ability to cut staff. These were big put-offs for bidders, especially the staff part. Who doesn’t know that the Air India staff are highly unionised and have successfully resisted any attempts by previous managements to rationalise the workforce?
The central government later modified the earlier clauses to attract foreign direct investment (FDI) by divesting 76 per cent in the airline, but even then, there were no takers. This proved to be a major embarrassment for the Narendra Modi government’s disinvestment drive, since they were planning to make the carrier a showpiece in this regard. Jet Airways said it would not be participating in the disinvestment process, soon after IndiGo decided to drop out. The Tata Group, widely regarded as a potential suitor, also found the government’s terms too onerous.
But things could be even worse. According to aviation consulting firm Capa India, Air India might even shut down if the divestment programme fails. Even before the government backtracked on disinvestment after failing to find any buyers, Capa had said it was critical that the central government amend the labour and debt conditions for the process to succeed. This is important since the successful bidder will need to invest in restructuring and absorb losses for several years, in addition to the consideration paid for 76 per cent. Also, bidders may want to be ring-fenced from possible political risks, another reason why many were staying away. Capa has also warned that Air India was headed for losses in the range of Rs 9,750 crore to Rs 13,000 crore in 2018-19 and 201920, which is by no means comforting.
Since June this year, the government, along with the Air India management, has been working on a white paper for its revival. The plan has four elements to it. First is addressing the financial issues—strengthening the balancesheet to enable the airline to service its debt obligations. The government has had to recast the entire balance-sheet and has been working with various agencies, lenders and stakeholders.
The second element is to create a viable and value-creating strategy for the airline. “It should result in profitable operations and value creation,” says Jayant Sinha, MoS for civil aviation. “We have been trying to figure out the right route network and how it should position itself. I would classify the overall strategy as Maharaja Direct—which is high-quality service and a very convenient route network which gets you to major cities in India and across the world.”
The third is to address governance and management issues, with the addition of new members on the board— industry leaders Y.C. Deveshwar and Kumar Mangalam Birla and BJP leader Daggubati Purandeswari—so that the airline operates “on a professional basis with full autonomy”. The fourth element is to address a number of long-pending human resources issues, including service conditions, compensation and contract employees.
The government is planning to share the white paper with Parliament when the winter session begins. However, the minister is quick to point out that the commitment to strategic disinvestment, as and when industry conditions are favourable, stays. “We want to make sure Air India is a globally competitive, world-class airline operating at par with global airlines. There is full freedom to optimise routes and Air India is adding more routes. The government has to take the baggage of the past and offload it,” says Sinha. The plan is also to move Air India’s non-core assets into a special purpose vehicle, he adds.
Will the new plan to make the airline ‘professional’ succeed? “Is this a tacit admission that so far Air India wasn’t managed professionally?” asks Jitender Bhargava, a former AI executive director. “The government seems to be taking a lot of ad hoc decisions. Nobody has been pulled up for not attaining objectives.” The biggest impediment to any change within AI are the airline’s unions. “Can the management take on the trade unions?” asks Bhargava.
Meanwhile, the airline staff seem to be a disgruntled lot. “I don’t think any plan is working for the airline at present. We have been at the receiving end of several wrong policies,” says a senior crew member with the airline, not wanting to be identified. For now, nothing seems to be working for Air India. Even as the government pours in good money after bad, India’s official carrier sinks further into the quagmire. This time, there may be no escape.
THE LACK OF BIDDERS FOR AIR INDIA HAS BECOME A MAJOR EMBARRASSMENT FOR THE MODI GOVERNMENT’S DISINVESTMENT DRIVE, SINCE IT WAS PLANNED AS A SHOWPIECE IN THIS REGARD
Source: DGCA; Jet Airways includes JetLite, and Air India includes Air India Express; Rest, others