No flights of fancy for India’s national carrier

Streamlining Air India before breaking it up and selling it to the best buyer would be the best option

The Indian government’s recent proposal to privatise and sell Air India is a welcome sign. It shows New Delhi is prepared to bite the bullet on a long-festering issue and take decisive action that should have been taken a long time ago.

Millennials probably are not aware that Air India used to be a fine airline at one time, a small airline that punched far above its weight all around the world. But that reputation was squandered by successive governments who combined poor management and oversight with interference and patronage to reduce Air India to its present dismal state of poor customer service, falling market share and low employee morale. And while Air India and the erstwhile domestic state-owned carrier, Indian Airlines, always struggled with profitability, they both knew their respective segments well. With an infusion of professional management and efficiency, each could have survived, and probably even thrived, albeit with reduced market shares in the face of competition in a liberalised market. However, this did not happen as the government arranged an ill-planned, hasty and poorly executed merger of the two airlines in 2007 that only made things much worse for the resulting entity. The fact that the merger is now the subject of how-not-to-do-it case studies at business schools completes the gloomy image.

At the outset, it is important to note that the government has only announced its intention to sell the airline. The details of the sale are still unclear. A quick look at the current situation at Air India does not present a pretty picture, and at first glance would probably turn most potential investors away. The airline carries accumulated debt of $8.5 billion, most of it dollar denominated. Revenue per employee, one measure of efficiency, is Rs10 million as compared to Rs16 million for competitors Jet Airways and IndiGo. When it comes to employees per aircraft, a metric that speaks of airline productivity, Air India has one of the highest ratios in the world at 221, compared with 140 at Singapore Airlines and 127 at Lufthansa. Finally, in the fastest growing domestic aviation market in the world, Air India has a market share of 14 per cent, a third of market leader IndiGo – an airline which only came into existence in 2006 and overtook Air India’s market share by 2010. A financially sound and dexterous new owner could possibly improve these ratios and market share figures in the future, given the flexibility and freedom to do so. What is most daunting is what lies behind the figures.

Most of Air India’s pilots, cabin crew, maintenance engineers, groundhandling staff and rank and file are affiliated with trade unions. Many of these unions are militant when it comes to protecting jobs and benefits with the slightest hint of retrenchment. Unless the airline is streamlined and rightsized before the sale happens, no buyer, and certainly no foreign buyer, is likely to be very enthusiastic about taking on an airline with excess manpower and no wherewithal to do anything about it.

There will be few takers for Air India, if it is sold off today on an as-iswhere-is basis. Then there are the cherry-pickers to consider. IndiGo expressed interest in buying only AI’s international operations and its lowcost subsidiary, Air India Express, which happens to be operationally profitable. They didn’t seem to want the rest for some reason. This obviously cannot be entertained either.

Before it can sell AI as a viable business proposition and realise value through the sale, the Indian government needs to work hard to restore the airline’s battered reputation both inside and outside India, at least up to a point. One way to do this is to induct high calibre professional management to run the airline. This is because despite best intentions, civil servants and bureaucrats cannot and should not be managing airlines. The Indian Administrative Service handbook does not contain a chapter on how to do this. Running an airline successfully is a highly specialised business at the top. There are some very well-managed, successful state-owned airlines and one needs to look no further than Emirates and Etihad, both stateowned but professionally managed, for evidence of this. On how to turn around a loss maker like Air India, the government would do well to study the case of Korean Air (KAL), a government-owned airline. In the late 1990s, following a succession of major fatal crashes, KAL was a pariah. Major airlines refused to sell seats on KAL and the airline was banned from the airspace of numerous countries. Staring at bankruptcy and oblivion, it brought in a new management team and effected an amazing turnaround to the point where it has today become a globally viable carrier with high service and reliability ratings. The government of India should also realise that there are plenty of countries that manage very well without having any state-owned flag carrier.

New management will inevitably value and monetise Air India’s many assets, while trying to minimise its many liabilities. And Air India does have some valuable assets, which perhaps have not been fully exploited. Apart from its lucrative routes, mainly to the Arabian Gulf and North America, it has peak hour landing slots at busy international airports like Dubai, New York and London. Few people may be aware that Air India is the only nonBritish and non-American airline that flies between London Heathrow and New York, one of the busiest and most coveted city pair routes in the world. This is under fifth freedom rights, which allow an airline to carry revenue traffic between its own country and a second country and between the second country and a third country. Air India should be vying to carry lucrative business customers between the two cities. But Air India’s reputation as primarily an ethnic airline that caters mainly to Indians, and its poor service and maintenance records have hurt its ability to exploit assets such as this.

A professional management team with minimum government interference will at least streamline (if not downsize) Air India’s work force, making it more accountable to the revenue-paying customer at every level. It will emphasise safety and maintenance and rationalise the airline’s routes. Aircraft need to be refurbished inside and out and government VIP perks need to end. The international operations require an overhaul.

The profit and loss picture at Air India could improve if the government has the will to seriously give the airline a good dusting down before selling it. If the company starts making profits and the government can stop pitching taxpayer’s money into a black hole (already to the tune of $3.5 billion by some estimates), Air India will start feeling good about itself – something that has not happened in a few decades. When that happens, investors will sit up and take notice.

Despite best intentions, civil servants and bureaucrats cannot and should not be managing airlines. The IAS handbook does not contain a chapter on how to do this