Critical blow: Wobbly Air India now grappling with CBI FIRs

The CBI FIRs on Air India have opened a stinking can of worms. Air India was made to order 68 aircraft by the government, instead of the originally planned 28. The total order for Air India and Indian Airlines combined was for a mind-boggling 111 aircraft. The FIRs point out that as the aircraft on order started coming in, load factors predictably began to fall. There was no way the two airlines could absorb such large-capacity infusions. The gross over-capacity situation thus created had caused many of the flights to operate at well below break-even load factors. This means that load factors (percentage of the seats occupied) was too low for the airline to make a profit. The FIRs state that, at one time, five long-range B777s and as many B737s were  grounded as they represented surplus capacity.

It seems  likely that some government bigwigs compelled the airline managements to do so, against their will. That placement of  unreasonably large orders needs to be thoroughly investigated.

As for the ill-fated merger of the profitable Air India with the unprofitable Indian Airlines, that seems to be a common — through grossly ill-advised — practice of governments in the past. The government had similarly merged the loss-making National Airports Authority with the International Airports Authority of India — and had thus badly hurt the latter. Apart from adding the losses of Indian Airlines to the joint airline’s balance sheet, it had caused severe damage  due to the sharp differences in the two airlines’ corporate cultures.

Air India was at that time managed according to the best private-sector  management practices. The stodgy Indian Airlines was a bastion of shoddy public sector corporate culture.

Regarding Air India being made to give up its profitable routes — something no sane airline management would accept — this needs to be also thoroughly investigated.

There is one point on which I wish to disagree with the CBI FIRs. It had been stated that the airline had bought aircraft worth Rs 70,000 crore, when its profit was just Rs 100 crore. What should the level of profitability be when placing an order for aircraft ? That is a commonsensical approach to what is essentially a financial and commercial matter. The Rs 100-crore profit in that day and age was good. Even a modest order would have been worth hundreds of times that profit. Obviously, every airline takes loans to meet its aircraft-purchase requirements, and pays it back, with interest, from its profits.

Amazingly, there continue to be mindless calls favouring Air India’s privatisation. The NITI Aayog Vice-Chairman had recently said that selling a stake in Air India would be “very, very difficult”. True. However, the suggestion that the government may have to write  off the entire debt — or at least a large part of it — while very essential, may be very difficult. It is an enormous debt, that could have financial consequences for the government. Also, it would set a bad precedent. Numerous other sinking public-sector companies would also want to be bailed out. Worse still, after having their debt burden lifted, they could be back to square one in the next few years.

Should the government wish to write off Air India’s debt, it should first appoint a globally respected turnaround specialist to operate the airline for at least the next several years, and to place its management on a sound footing. Also, they should disinvest 100 per cent to avoid future meddling by governments. Otherwise, the entire effort will have been wasted. Unless the government takes some quick and bold decisions, Air India cannot be saved.

It is immensely sad that one of the world’s very finest and most respected airlines of its day, noted for its exceptional in-flight service, an unbroken record of profitability and an enviable on-time performance, should have been reduced to this pathetic state.

The author is a civil aviation industry analyst