|Making Air India fly|
|Thursday, 11 November 2010 00:00|
If the government doesn't give it money, big money, it's best to close the airline down
AI needs to increase its revenues 2-3 times to service just its interest and repayment obligations along with depreciation expenses!
Talk about Nero fiddling: as Air India hurtles towards the biggest disaster of its life, its directors, both independent and others, are squabbling over appointments, and in public at that. When independent directors go to the Prime Minister’s Office to complain, you can pretty much write off any chances of a company being turned around since a Board is supposed to support a management not be antagonistic. Put the aviation ministry in the equation, as its nominees are clearly opposed to the current management, and you have all the makings of a perfect storm.
Nor is it clear what the fight is all about. Pawan Arora, the new COO of the low-cost operations, is said to have been found to be unsatisfactory by the DGCA in his role as an examiner of flight safety of various airlines—well, he’s being hired in a completely different role. Sure, the Board should have been told about this, but the real issue is what the Board is doing with what it already knows.
Air India’s performance has improved in the first half of this year, yields per route kilometer have gone up 10% as have passengers carried, and load factors have risen from 62.2% to 67.1%—the airline is projecting it will be Ebitda positive by the end of the year, thanks to this and a 28% reduction in loss-making routes as well as closing various offices. The problem, however, is that none of this is good enough.
Air India’s depreciation is Rs 1,500 crore this year and is likely to double in the next 4-5 years; interest costs are around Rs 3,000 crore on both long-term and working capital loans of Rs 40,000 crore. Add to this the repayment of principal (for the aircraft bought) of around Rs 2,000 crore this year (going up to Rs 3,500 crore by 2019-20). So, just to service this requires it to have revenues that are around 2-3 times what they are today! In other words, the airline doesn’t really have a hope in hell of turning around, and not just with the current management—even if Singapore Airlines was to take over the management of Air India, it can’t turn it around, with this kind of a debt and depreciation profile.
This is where AI’s original turnaround plan comes in. The airline had asked for fresh equity of Rs 10,000 crore and an interest-free loan of Rs 10,000 crore with a 5-year moratorium on repayments. The fact is that increased bilaterals handed out by the government increased the competition dramatically over the past few years, on top of which the airline was asked to buy $11 bn worth of new planes—surely the government didn’t think this could have been serviced on an equity base of Rs 145 crore?
By way of response to the Rs 20,000 crore package, the government agreed to give AI Rs 800 crore of equity last year and another Rs 1,200 crore is to be given sometime around now, provided AI was able to match this with cost cuts! There’s a problem even on this count since it is the government that holds all the controls here as well. Ideally, as in the case of airlines the world over, the larger share of profits comes from ground handling and engineering services—Air India had a plan to transfer around half its staff to two separate companies doing precisely this, but the Cabinet has yet to clear this, for over a year now (by the way, Air Canada’s revival took place a few years ago after these services were hived off into separate profit centres). And with every ground handler in the airline having a direct line to a senior politician, it is clear no management can do much on its own, either by way of transferring employees or by way of reducing their salaries.
Singapore Airlines, by way of example, has half the number of employees per plane that AI has—no plan to revive AI can ever work unless this basic factor is tackled. But this is precisely what efficient managers, as in the private sector, are supposed to take care of, will be the reply you’ll get when this issue is raised. Not quite. In the case of the vastly overstaffed Delhi airport that was privatised a few years ago, all staffers had the option, which most exercised, of reverting to their cushy government jobs.
None of this is to suggest that the current management under Arvind Jadhav and Gustav Baldauf is the best in the business. Much of airline traffic the world over has shifted to low-cost operations and Air India has a long way to go on this; its brand new fleet also looks lopsided. Apart from the issue of whether the airline should have had more A320s instead of A319s, the absence of smaller turbo-prop aircraft limits its ability to service fast-growing markets in smaller cities where runways are smaller. The merger of Air India and Indian Airlines never ever took off ...
But it would be interesting to know the views of Air India’s warring Board, the independent directors in particular, and the aviation ministry, on the issue of the huge debt load the airline carries and the huge employee base it has. When it cleared Air India’s purchase of aircraft (or did Air India management just do the government bidding?) instead of closing the airline down or privatising it, the government took a call on running it. So if AI is to be run, its management needs the money and the operating freedom to do so. That’s the fundamental question the Board has to ask, even while it ponders over whether the existing management is good enough. If it is not, and that may well be true, why not privatise the airline? Of course, a significant part of the debt will still have to be written off by the government. And, yes, no one’s going to buy an airline with 40,000 employees. Chew on that before the next Board meeting this time next week.