Air India - a way out of the mess sans tax-payer's money by Archie D'Souza

Air India's mess only strengthens the case for throwing open the domestic aviation space to foreign airlines.

Viewed purely from a public policy perspective, the decision to use taxpayers' money for bailing out Air India cannot be justified. This is a company whose operations cannot even remotely be seen as touching the lives of the vast majority of Indians. Also, the sums involved are, by no means, small. The Government is trying to save a company with accumulated losses of over Rs 27,000 crore and outstanding debts of Rs 43,000 crore. The absurdity becomes even more manifest as it is engaged in a business that does not really demand the Government's direct involvement, whether for socio-economic or strategic reasons. Having said that, it must be admitted that the Government was left with little or no option in what it has undertaken to do. The company is saddled with a vast workforce, whose livelihood concerns it cannot be totally indifferent to. Some of the bailout money for Air India is actually going towards paying salary arrears. Another chunk is also going to be used for settling the dues of public sector oil companies, who would not have accommodated the airline with liberal credit for extended durations without some gentle nudging by the Government in the first place. Besides, one cannot ignore the series of managerial blunders – presided over by a succession of ministers in charge of the aviation ministry – that had brought the national carrier to its financial ruin. Taken all in all, there is some serious moral imperative behind the Government's actions to save the company.

That does not however take away the fact that the so-called turnaround and financial restructuring plan for Air India, approved by the Union Cabinet on Thursday, runs the risk of throwing good money after bad. While there may be leakage of resources of monumental proportions on the expenditures the Government incurs on subsidies, the National Rural Employment Guarantee Act and a plethora of other welfare programmes, these can be criticised only on grounds of poor implementation or their benefits not reaching the intended beneficiaries. But the basic idea of state funding for schemes aimed at the poor and vulnerable sections cannot be questioned. That cannot be said, though, about civil aviation, which is hardly a priority area for direct government involvement. The irony is complete when one considers that the Government has been niggardly in its support of the Railways, which carries in three days what the entire domestic aviation industry does in an entire year.

The best solution for Air India is for the Government to create conditions, which enable the airline to be taken over in a manner that does not generate industry-wide turbulence. The mess that Air India has slid into, indeed, only strengthens the case for throwing open the domestic aviation space for foreign airlines. It would be a win-win not only for consumers (who stand to benefit from new players coming in), but also existing cash-strapped airlines (including those other than Air India) whose promoters want to sell out. The latest approved plan, by contrast, neither envisages Air India's takeover nor sees it generating even cash profits till 2018-19. The country's taxpayers should be spared from such ‘turnaround' and ‘restructuring' packages.

(This article was published in the Hindu Business Line on April 13, 2012)
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My comments

This is my third article in a series about what ails the aviation industry in India and what the right and wrong solutions are.  In this article I shall confine my discussion to Air India.  I am not going into the pros and cons of nationalisation and public sector monopoly, although I’ve always maintained that the government has no business to be in certain businesses and aviation & hospitality top that list.

The entity that is Air India today is a result of the merger of two culturally diverse organisations – Air India which is also the name of the merged enterprise, and Indian Airlines.  When the then Civil Aviation Minister, Mr. Praful Patel, decided on a merger, his thoughts were purely from a commercial point of view.  Remember, Mr. Patel is a businessman and his thinking would be on those lines.  The merger of the two airlines has been mooted in the past too.  Mr. Patel had a valid point when he talked about synthesising the strengths of the two organisations.  His calculation went awry when he decided to overlook the individual and combined weaknesses.  Here are some moot points I’d like to mention – some cultural, some commercial:
• Up to 1992, Air India was one of the best international carriers in the world.  It operated in a very competitive environment and competed with the best
• Indian Airlines, on the other hand, was more of a bureaucratic organisation enjoying a monopoly in its market.  The moment it faced competition it started losing business.  Its market share started declining rapidly and in no time it lost its number one status.  The service levels of Indian Airlines, or rather its new avatar Air India’s domestic services, are much better than what it used to be, but just not good enough compared to the competition.  If I am to take a domestic flight today, Air India is my last choice.  Before private domestic airlines came into being, I had no choice but to use Indian Airlines.  On the international sector, a choice always existed and we exercised it very often in favour of the national carrier.
• Air India and Indian Airlines had between them some of the best training facilities in the world.  This applied to both technical and non-technical training.
• The same can also be said with regard to maintenance facilities
• In Chef-Air Air India had one of the best flight kitchens in the world.  It was a division of the now defunct subsidy of Air India – the Hotel Corporation of India which, also ran the Centaur chain of hotels
• The real estate, both commercial and residential, that these two airlines own is phenomenal
So, what happened and how did things come to this sorry state of affairs?  I will go into that at some later date.  Right now I’d like to offer solutions which can be worked out if the government of the day has the political will to make it happen.

The newspaper report I’ve quoted in the beginning offers the following:
“The best solution for Air India is for the Government to create conditions, which enable the airline to be taken over in a manner that does not generate industry-wide turbulence. The mess that Air India has slid into, indeed, only strengthens the case for throwing open the domestic aviation space for foreign airlines. It would be a win-win not only for consumers (who stand to benefit from new players coming in), but also existing cash-strapped airlines (including those other than Air India) whose promoters want to sell out. The latest approved plan, by contrast, neither envisages Air India's takeover nor sees it generating even cash profits till 2018-19. The country's taxpayers should be spared from such ‘turnaround' and ‘restructuring' packages.”

So, the Government needs to “create conditions, which enable the airline to be taken over in a manner that does not generate industry-wide turbulence.”  How exactly would these conditions be created?  If I were in the Civil Aviation Minister’s shoes and assuming, as highly improbable as it may seem, that I was carrying the coalition partners with me, these are the steps I’d take:
• Demerge the two carriers.  May seem to be a Thuglak-like solution but if the carriers have to be saved (using national resources paid for by taxpayers to prolong their life is not saving them) there is no alternative
• Hive off some of the facilities into separate companies/entities.  Examples of these would be:
o Training – technical & commercial, separately
o Maintenance
o Real estate – commercial & residential separately
o Catering
o Medical clinics (these are huge with some of the best equipment in them)

Once these steps are taken, let each new entity be evaluated by one or more teams of experts.  Other than the training facilities, convert each unit into a company and auction them individually to the highest bidder.  Allow the existing players to bid with the condition that Air India and Indian Airlines must go to separate buyers.  Allow potential buyers to form consortia, but the names and investments of all parties must be made public.  Foreign airlines may be part of these consortia.  This will result in no loss of jobs, with not a penny coming from the taxpayer.  In fact the companies so formed will need professional and non-professional staff.  Instead of money flowing out of the national exchequer it would actually flow in.

What should be done with the training facilities?  These should be converted into centres of excellence.  I’d moot separate centres for commercial and technical training.  Convert them into not-for-profit organisations with financial contributions from all players involved in the aviation industry.  IATA too could be a player here.  This would result in India becoming one of the biggest centres for aviation education in the world.  What we need is a political establishment with the necessary world vision.