How Air India flew into red

Air India's books have not always been in the red. Much before the state-owned airline's numbers were written in red ink, it used to record decent profits.

Its reported net profit was Rs 96.36 crore in 2004-05. In the next fiscal, it fell to Rs 14.94 crore. And then, in fiscal 2007 it sunk to Rs 447.93 crore, only to slip deeper in 2007-08 to Rs 2,226 crore. Next fiscal, its losses swelled to Rs 5,548 crore.

The recent Air India's financials showed a net loss at Rs 5,765 crore in FY17, and is expected to be around Rs 3,500 crore in FY18 (yet to be announced). Burdened with a total debt of Rs 55,000-crore, its accumulated losses reportedly stood at Rs 46,805 crore as on March last year.

What went so wrong to push the national air carrier into the quagmire of losses?

Pankaj Pandit, a Bengaluru-based analyst, attributes Air India's losses to a lot of factors coming together. One of them was the airline's monopoly being shaken after the opening up of India's skies to domestic private airline operators in the late 1990s. He said players like Deccan Air, SpiceJet, Kingfisher Airline, GoAir and IndiGo took off in a big way in the mid-2000s, which challenged the national carrier's complete grip on the domestic market.

According to him, the new airlines ate into Air India's market share with a more efficient operational and cost structure. And thus began the rapid decline of the government-owned airline.

In its bid to retain market share, Air India began its aircraft acquisition process. That's when it skid further. It ordered a staggering 111 aircraft from the US-based aerospace company Boeing Inc, which was funded through debt.

"It was making small losses till it bought 111 aircraft. Losses just burgeoned after that. It blew so big that it became unmanageable. Initially, Air India board had passed a resolution to order 10 aircraft from Airbus. This became 111 aircraft. By what logic, only those who took the decision know. Also, these planes were not bought with their own equity but through debt. Another folly was that they were bought in a three-class configuration. Just to recover cash cost, these aircraft needed 270% load factor" said Pandit.

A former Air India employee said the Comptroller and Auditor General (CAG) has pinned most of the blame on the government but also blames the national carrier equally for the current financial mess.

A former chairman and managing director (CMD) of India, who spoke off the record, defended Air India's decision to buy the aircraft. He said the airline strayed into the turbulent zone because of adverse environmental and circumstances that unfolded after the aircraft orders were placed.

"When the decision to buy the planes was taken in 2003-04, the aviation sector was doing very well. It was at the peak with so many new airlines entering the market. It appeared to be very rosy. It (decision to buy aircraft) was a very ambitious and bold decision. However, nobody knew that in 2007-08, the world will go topsy-turvy; oil prices went up to $144 per barrel. At the time when aircraft decision was taken, oil was just $35 a barrel but when the planes actually started rolling in, oil prices shot up to over $100 a barrel," he argued.

The ex-Air India chief said disturbance in aircraft delivery and refinancing schedule also contributed to the troubles; "It was not an effort on part of somebody to damage Air India. Things that were not anticipated happened," he said.

And as the private players intensified competition, Air India – operating on a high-cost structure – could not fight back and lost market share. The high-interest burden on loans taken to purchase aircraft chopped off its operating profits, thus forcing it to take working capital loans. This trapped the airline into a debt cycle.

"Profitable airlines like IndiGo do not have any working capital loans. They have only aircraft debts. The airline industry is such that people pay first and then travel. It is a working capital surplus industry. But if your debt is high then the interest payout is a big drag on the cash generated by the airline. Airlines can also be cash negative if fuel prices shoot up and crew allowances are steep," he said.