Facing up to Air India

Facing up to Air India
Opinion
May 12, 2011  >>

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The Air India saga which is unfolding is beginning to look more and more like what happened to Sabena and possibly Alitalia. (To some extent, the Varig demise in Brazil has some similarities.)

In Belgium and Italy, the governments mismanaged the airline for the longest time.

In both cases, the government pressured by unions and clinging to the out-dated concept of retaining a national flag carrier, was reluctant to carry out the difficult task of restructuring the carrier to operate as a business and not as a government department.

The Indian government made the right decision, several years ago, to liberalize totally the domestic market allowing many new airlines to emerge, actively compete and stimulate the market.

It made the right decision to engage in a number of “Open Skies” Agreements and many liberalized air bilaterals.

But it made the wrong decision not to pursue in parallel with that action, the privatization of Air India.

To continue to support a government-owned airline to compete with private enterprise using the tax-payers’ deep pockets, makes no business sense.

The “Economic Times” reported a few months ago that Air India was accumulating losses of 13,000 crore, and total debts of 40,000 crore. Having infused 2000 crore in the past two years, it is reported that another 1200 crore have been earmarked for Air India for the next financial year (which is unlikely to be sufficient in any case).

Despite announcements of several restructuring plans no one, obviously, is willing to face up to the tough decisions. This is like continuing go give alcohol to an alcoholic!

The government does not have the competence nor the time to manage the airlines – yet it cannot refrain from meddling on every occasion.

The “Mail Today” reported recently that on August 2, 2004, four months after he took over as civil aviation Minister, the then Minister of Transport chaired a meeting that decided to inflate Air India’s purchase order from the original proposal of 28 aircraft to 68 at a stupendous cost of 50,000 crore. Worse, the inflated purchase order, the paper reports, was not backed by either a viable revenue plan or expansion of routes.

The Ministry of Civil Aviation had to step in to end a four month dispute between the Board and the COO. The Minister is then reported to have held a two-day discussion with the representatives of twelve unions. (The Hindu Business Line)

And then the Union Leaders made allegations that Air India had withdrawn its flights on thirty-two profitable routes over the last two years to benefit private carriers! (Why would anyone in their right mind close down thoroughly profitable routes?)

More recently, the Pilots’ Union went on strike. With accumulated losses amounting to nearly $3 billion, the 10-day crippling strike of Air India pilots may have come at the worst possible time for the flag carrier – but it has also raised the pitch for privatization like never before.

The most ridiculous proposal advanced recently by Air India’s management is to increase the fleet from 145 aircraft to 400, to make the ratio of employees to airplanes look efficient! As long as the government provides the funds, this is a lot easier than the action required to reduce the staff by one half to two-thirds.

Announcing plans to become operationally profitable in four years is further evidence of its desire to avoid painful but necessary decisions from being made today. Having privatized Air Canada some years ago, I have some experience on the subject.

The “Hindu Business Line” appropriately asks “who is really running Air India”? The Board and the management appear to be in disarray and not in control.

In typical government fashion, rather than act on the management problem, the government has commissioned two external agencies to carry out a study on the impact of having started to open domestic skies to foreign airlines back in 2004!

As if it was not already obvious that the restrictions imposed on the private Indian airlines, and the inability of Air India to compete, had resulted in the Indian carriers’ shares of the country’s international traffic coming down from 35% to 25% in the past five years. (KPMG analysis)

Clearly, the government is fiddling while Rome is burning!

What is likely to happen to Air India?

Unless the government is able to wipe out the huge debts burden, put in some professional management, walk away from direct negotiations with the Unions, and resolutely abstain from interfering in the management of the airline, Air India is not privatizable and is doomed.

But unfortunately, before it is allowed to disappear, it will likely cost the Indian tax-payer a lot of money. There are in my view only two likely scenarios:

The Sabena outcome where eventually the airline reaches bankruptcy and simply dissolves;

Or the Alitalia scenario where restructuring is allowed, the airline is split and eventually various functions are re-sized and merged with a private enterprise. In this last case, there is some face-saving value, as the prestigious name of Alitalia was preserved.

The government and tax payers of India must face up to the fact that Air India is no longer essential ,and that it should now be privatized – or left to die!

Bringing about a conclusion to the Air India Saga is to be hoped – for the sake of the Indian tax-payer and India’s private airlines – and the sooner the better!