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The Flagging Flag Carrier

Riding over declining oil prices, Air India looks to overcome its blues

Policy Pulse
Publish Date: May 12 2016 1:11PM | Updated Date: May 23 2016 4:35PM

The Flagging Flag Carrier

Riding over declining oil prices Air India looks to overcome its blues and usher into an era of profit making. Thus, Amresh Srivastava tries to make out the difference between hope and hype vis-à-vis the fate of the national carrier  

 
A bloated work force among other reasons has been crushing Air India under the heels of mounting losses for two decades or so. Yet, now for the first time it has started showing signs of a turnaround. Its losses are declining and the airlines is expected to soon become operationally profitable. In the name of restructuring the successive Governments attempts went in vain and left Air India at the mercy of the Finance Ministry’s bailouts. The tax payers’ money has often been squandered away for the so called revamp of the national carrier.
 
If a recent report of the Government is to be believed, the Air India is hopeful of cutting losses by more than half to Rs 2,636 crore in the 2015-16 fiscal from a net loss of Rs 5,859.91 crore. This it had incurred in 2014-15.
 
"With regard to Air India Limited, it is likely to suffer a total net loss of Rs 2,636 crore in 2015-16," said Minister of State for Civil Aviation Mahesh Sharma in a written reply in the Lok Sabha. As per the official figures, Rs 10 crore has been saved due to declining cost of aviation fuel through the last fiscal year. The airline has been facing huge losses for several years due to multiple factors, he added, while tabling his written reply. As per the Government’s TAP or turnaround plan, AI is expected to turn cash positive by fiscal year 19-20 and will show profit by FY 21-22. But now it hopes to be cash positive by FY17-18 due to various steps taken by the company. This would in turn make the AI to report net profit by FY18. “We may also have operating profits this year. For the whole carrier to have profit after tax is not possible at this stage as we have loan liabilities of around Rs 50,000 crore,” said Sharma after the closure of the last financial year. 
 
The reduced loss, as claimed by the Government, almost by half is largely due to low jet fuel prices and Government’s bailout fund. But the question that remains unanswered is that the when the projected profit is going to show in the company’s balance-sheet. The national carrier has Upto now the restructuring of AI was limited to cost cutting only which in turn affected the performance of the airline adversely. This stopped fresh recruitment of manpower. No wonder the AI is still struggling to find better pilots. No efforts were made to increase the revenue of the company. The business share of the airlines in the market took a beating. 
Therefore, the AI must change its focus and strive for revenue generation. It is essential because it reduces the cost effect further.
 
“We are discussing several options for revamping Air India’s corporate structure, including offering equity to banks for the value of debt and divest some stake to a third-party,” Sharma said in an interview to a national daily. The Government is seriously contemplating to lower its stake in Air India to below 51 percent. He also indicated that a part of the airline could also be divested in favour of a third party so that the Government’s holding is to remain at the minimum of 26 percent. This could be the banks which have financed the AI. But the time frame for this is yet to be decided and so is the price at which the banks would take the proposed equity. The banks have not reacted so far to this move as it has not been communicated to them officially.
 
The Minister did not explain how the corporate culture will be infused in the ailing public sector airline? The policy makers have to think out of box to make it as a commercial organisation. For example, AI has introduced few new sectors and shut down some others depending on operating viability and traffic volume. Yet, the fact remains that feasibility of a sector has to be assessed in advance so that the taxpayers hard earned money does not go waste. Normally, it takes two to three years to make a sector profitable. Thus, opening new sectors in preference over others should be based on cool logic instead of whims. 
 
The biggest problem lies with the leadership of the organisation. An able leader plays a vital role for the success of any public sector for he or she motivates employees to achieve the target. The head of the organisation should be given freedom to take path breaking initiatives and the accountability must be fixed at the top rung. “The last chairman and managing director of the airlines Rohit Nandan had done some wonderful job. He brought order in the company and under his stewardship the AI got the Star Alliance tie up in 2014” commented Harsh Vardhan, former chairman of erstwhile Vayudoot Airlines. The Star Alliance was formed in 1997, making it the first modern group of 28 global carriers working to provide passengers with seamless travel.
 
“The aviation industry is commercial in nature. Why should it be supported by the Government? Ideally, it should be self-earning and except for our national carrier, all our subsidiaries like the AAI or Airports Authority of India and Pawan Hans, are profitable. Our aim is to make ourselves self-sufficient,” says Sharma. 
 
But the Ministry is yet to take a decision on bilateral seat sharing with other airlines. “We have still not taken a decision on it. It will be premature to talk about it at this point of time. The group of ministers is at the final stages of clearing the policy but many of the policy decisions are complex. So we are still ironing out some of the issues,” added Sharma.
 
The Government has so far been silent on the acquisition of the new aircraft to increase its fleet strength. Without this, the revamp will not be possible. This can be understood by taking into account the fact that another domestic carrier IndiGo, started in 2006. It has a fleet of 107 aircraft. In August 2015 IndiGo placed an order of 250Airbus-A320 new aircraft worth $27 billion, making it the largest single order ever in Airbus history.The Air India which has built a network in last 50 years or so is limited to 78 aircraft.
 
Again the Egypt Airlines was non-existent a decade ago. Now they have more than 400 aircraft operating across the world. This airlines has a limited traffic generation base as compared to India. So how can AI justify its smaller fleet with a larger traffic generating base? Aviation expert Harsh Vardhan also quotes the example of the Austrian Airlines which was almost shut down in 2005 but they made their presence felt on the global aviation sector in last five years. So, the aggressive strategies are required to make Air India profitable.
 
The Government may take consolation over the decline in loss incurred by AI. But this has mainly been because of the reduction in oil prices and not because of the airlines efforts to increase its passenger volume and tap other sources for revenue generation. Thus, the fact remains that AI is yet miles to go before it becomes commercially viable.