Turbulent skies ahead

A company that delays salary payments to its disgruntled staff by two weeks must be in deep trouble. Air India has been in poor shape — financially and otherwise — for some years. It had lost Rs2,226 crore in 2007-08, and may have lost about twice as much last year. The airline accounts for about half the losses of the entire Indian domestic airline industry.

With a paid-up capital of only Rs145 crore, Air India must be among the most grossly under-capitalised airlines in the world. At the same time, dividends paid by Air India to government have totalled several times that figure over the decades.

By contrast, Air India’s borrowings may now be about Rs15,000 crore. That may not include the dues owed by the airline to the Airports Authority of India, the oil suppliers, and others. Some years back, former Indian Airlines had been unable to pay the engine manufacturer for spares obtained.  Subsequently, when there was another requirement for spares, the manufacturer had declined to oblige till the earlier spares had been paid for — causing the grounding of some aircrafts.

A major drain on the airline is its orders for 111 aircrafts, worth Rs45,000 crore, most of which have yet to be delivered. Air India takes long-term loans to pay for them as they are received.

While leased aircraft are being returned, the present situation will still cause gross over-capacity and hurt its bottom line. Another major drain is caused by the disastrous and ill-advised Air India/Indian Airlines merger.

There have been only half-hearted attempts at cost-cutting, like the latest effort to save Rs1,000 crore a year and gimmicks such as not allowing senior personnel to fly business class. Cost control is a continuing process. These actions are like digging for water when one’s house is on fire and are grossly inadequate.

Serious cost control should have started years back — by cutting staff strength almost by half from the bloated 31,000+ figure, by eliminating populist policies in staff recruitment, by not compelling Air India to operate several “political” services, as in the northeastern region, and the like. Clearly, the airline has been used by government for its own ends.  

With Air India receiving little from the government apart from the initial, paid-up capital, it rightly asked for more cash last year — just Rs2,231 crore for additional equity and Rs2,750 crore as a soft loan. 

However, the two together totalled just about last year’s loss. The new management then made a revised request of about Rs14,000 crore, roughly equally divided between equity and loan. Frankly, it is a more realistic figure, but may also be inadequate in the long term, considering the rate of cash burn. It is bound to ask for more cash infusions in a few years. Also, that considerable increase indicates a sharply worsening situation.

The grant of this package is critical to Air India’s very survival — as indicated by the 15-day delay in the payment of the June salary due to an acute liquidity crunch. A failure to grant the package could affect the airline’s survival.  Importantly, this may now be its only available source of cash, as it is close to its working capital limit of Rs16,000 crore. Government, however, seems to be in no hurry to help.

Over the decades, Air India was used as a milch cow to pay government dividends several times its paid-up capital. Air India has lost much more than it has gained from its public sector status.

Clearly, Air India needs a complete change of direction — unlikely while it is state-owned. The Union civil aviation minister’s plan for only a “partial disinvestment” is grossly inadequate and ill-conceived.  It means Air India will continue in the public sector, with government making all the decisions — not always in Air India’s best interests.

It will be chaired by an IAS officer, when an experienced expatriate CEO will be more effective. Having unqualified personnel and operating “political” services will continue. Sadly, the ill-fated merger cannot be reversed. No serious investor will accept this “lose-lose” proposition.

In the present viciously competitive environment, no airline can survive with such built-in disadvantages. For Air India to survive, government should expeditiously grant it the desired aid package, and fully privatise it, to let it operate as a purely commercial venture, with a level playing field. Unions that oppose privatisation may end up being the greatest losers.

Unless the government lets go now, there may be nothing left to salvage in a few years. Air India seems to be in a state of terminal decline.

The writer is an expert on aviation