Air India - Beginning, Journey & Current Crisis

This article takes you through the beginning and the journey of the Air India. It is currently facing a lot of crisis and the reasons behind its current situation has been shared. Couple of years back Government failed to attract any bidders for Air India. In January 2020, Government of India invited Expression of Interest from the potential investors interested in acquiring Air India. The deadline for submission of queries was extended thrice from 11th February to March 6th and then again it was extended to 17th March. Cabinet allowed Non-Resident Indians to acquire 100% stake in the carrier, earlier it was capped at 49%. As per March 7th news reports, Civil Aviation Minister had indicated on further extension of disinvestment process which was being tried for the 2nd time. Following COVID-19 crisis the matter may drag on till normalcy is restored.

Aspirants would find this article very helpful while preparing for the IAS Exam.

Air India – The Beginning & Its Journey

1. It was founded as Tata Airlines (division of Tata Sons Ltd) in 1932 by J R D Tata
2. In July 1946 it became a Public Ltd Company with the name of Air India
3. 49% of the stake in Air India was acquired by the Government of India in 1948 (with an option to purchase an additional 2%)
4. The government nationalized the carrier in 1953 and passed the Air Corporations Act 1953, which provided the monopoly rights to Air India and its associates. This act was repealed after a standing committee headed by Pramod Mahajan recommended for it in 1993, and since 1994 the private sector players are allowed to participate in the aviation business
5. In 2007 the decision to merge Air India with Indian Airlines to form NACIL (National Aviation Company of India Ltd) was taken. The objective was to ensure lower administrative costs and other services. This merger was opposed by some of the stakeholders as the structure, culture and ethos of both the airliners were different. It is widely considered that the merger was a failure, and the reasons are mentioned below.
   • Instability at the top – around the time of the merger there were 4 CMDs in a span of 6 years. If there is no stability at the top one cannot find the stability in the operations which will affect the bottom-line.
   • The employee headcount was over 30000 which puts it at more than 200 per plane. It is very high as per international standards and will lead to increased cost of operations
   • The difference in the work culture also was a reason for the failure
     • Air India had five working days a week, whereas Indian Airlines had six working days a week
     • The pilots in Air India were promoted unconditionally once in 6 years whereas pilots in Indian Airlines were promoted once in 10 years provided there was a vacancy
     • The ground handling teams operated separately
     • Often there was more than one manager/supervisor for the same operation who followed their own SOPs and had no coordination and sharing of information
     • The differences were so evident that the government had to set up Dharmadhikari Committee (in 2012 on HR Issues of merged AI) which recommended uniform working conditions and pay scales (among other things)
   • One of the ways of reducing the cost of operations is that the airliners use only one type of aircraft (best example in the recent times is Interglobe Operations/IndiGo which uses only Airbuses to fly to places) but in case of Air India it used Airbus made planes for international operations and Boeing jets for domestic operations. This lead to higher cost of operations
   • The AI purchased 111 planes for which it took long-term loans. A CAG report in 2011 criticized this as it made no sense and was a recipe for disaster. The cost of this purchase added to the losses of the carrier
   • The combined losses of Air India (which was making profits before the merger) and India Airlines in FY 07 was 770 Cr which ballooned to Rs.7200 Crore after the merger by FY 09
   • The government in 2012 announced to provide a capital infusion of Rs.30,000 Cr till 2021 and since then AI has been running on taxpayers money (till 2017 Rs.26500 Cr has been infused)

Air India – Reasons Behind its Failure

1. Owned by the government and hence decision making is not quick enough and there are various constraints on the operations. This was made more difficult with disruptions in the operations caused by the unions (even today two of the most powerful unions-Indian Pilots’ Guild Association which represents Air India Employees and India Commercial Pilots’ Association representing pilots of Indian Express are at loggerheads)
2. The rising fuel costs have led to higher cost of operations which have eaten up the profit margins
3. The AI has been competing with private sector airlines which are more efficient in terms of ticket pricing, decision making, choosing the right routes, providing value-added services, etc.
4. The ill-timed merger was the biggest reason as it led to huge losses
5. The number of staff/workers is very high compared to industry standards (in 2009 the then CMD A Jadhav in an interview said that he needs only 12000 employees whereas the AI has 32000 employees)

Air India – Current Crisis

• AI has a total debt of Rs.48877 Cr as of march 2017
• The government had a plan to sell 76% of the stake in Air India. It had a debt of over Rs.48000 Cr as of March 2017. The government has come to a decision to sell Air India because
  • Difficulty in competing with private sector
  • Continuous losses
• What was offered by the government in April (deadline was end of May)
  • Invited bids for a 76% stake in Air India Ltd
  • 100% stake in its subsidiary Air India Express Ltd
  • 50% in Air India SATS Airport Services Pvt. Ltd
• What is attractive for the buyers
  • Some of the profitable routes
  • Air India 42.8% share of international traffic (to and fro from India) and 12.3% of the domestic market
  • AI has 2500 international slots and 3700 domestic slots
  • Star Alliance Membership (it’s a grouping of airline operators who will provide connections across global network)
  • MRO Operations (Maintenance Repairs and Overhaul)
• Having said so, no bids were made by any of the operators. The sticking points for them were
  • AI has the largest number of employees per aircraft (it is an important metric that represents the effectiveness/efficiency of the carrier)
    • AI-234
    • IndiGo-111
    • Jet Airways-142
    • SpiceJet-140
  • Many of the prospective bidders were worried about the government’s decision to hold on to 24% of the stake and feared government’s interference in the day to day operations or the decision-making process of the buyers
  • The new owners will have to use the Air India brand name (for three years)
  • The buyer/bidder will have to take up a mammoth Rs.33000 crore with of debt of the airline
  • The selected bidder was required to remain invested in the firm for three years before any stake sale
  • The proposal to let Air India and Air India Express Ltd, its low-cost international arm, retain debt and net current liabilities of Rs.33,392 crore at the time of sale, was a major deal-breaker for parties that were initially interested
• The government (after the failed bids attempt) announced that it is looking to list the company to attract the private capital but the SEBI guidelines say that for a company to go for an IPO (Initial Public Offering), it should have registered pre-tax operating profits in the last three of the immediately preceding five years and AI has been reporting net losses since FY 08. It doesn’t look like the market regulator will be relaxing these conditions for the Indian carrier
• The GoI has put the privatization on deep freeze citing tough environment for the aviation industry. The impact of this decision will be
  • The government has to continue to infuse the capital into the loss-making airline
  • The government had set a target of 80,000 Cr disinvestment for FY 19 and with this it will be difficult
  • Concerns with the present decision of Air India
    • With no clear way forward being provided by the government, the AI may continue to eat up the capital and still incur losses ultimately leading to its shut down by the government
    • As per CAPA (Centre for Asia Pacific Aviation) report, the airline has already received a subsidy of $4 bn since 2012 and continued ownership by the government will lead to loss of $1.5 to $2 bn in the next two fiscals
    • The capital that will be infused by the government will be the taxpayers money
    • The crude oil prices have increased by 14% in the last two months and by 50% in the last one year and there are no indications that it will be reducing in the next couple of years. Hence the cost of operations of the airliner will increase further plunging it into losses
    • In some of the situations it has been found that there is an expiry period for the value of PSBs. For example, VSNL was sold by the government to Tata Group in 2001 which fetched the government Rs.202 per share (existing market price per share was Rs.179). The government had proposed to sell off AI back in 1996 and 2000 but did not go through it. The value received by it would have been much better (another example is that of MTNL, the market price per share is Rs.15 as against the highest value of Rs.216)

Way out

• Bring in experts from the private sector and try a turnaround in its fortunes
• The way to eat an elephant is one bit at a time – the government in January 2018 had proposed to break AI into various units and sell them separately. The debt of the non-core business will be transferred into its own balance sheet. The core areas are Air India and Indian Express whereas non-core areas are Alliance Air (regional arm), ground handling operations (AIATSL and AISATS) and engineering operations (AIESL).

The above details would help candidates prepare for UPSC 2020.

Related Links