Air India nose diving to history

With new airlines planned by SIA and Tata Group, after India relaxed foreign investment rules in the aviation sector to allow overseas airlines to invest up to 49 per cent, the state carrier faces additional headwinds.
Air India is expected to post a loss of 39 billion rupees in the current financial year. Pascal Rossignol / Reuters
Air India is expected to post a loss of 39 billion rupees in the current financial year. Pascal Rossignol / Reuters

With bloated staff numbers, soaring debt levels, and a multitude of more nimble rivals in the skies, Air India (AI) continues to face a bumpy ride in its efforts to improve its fortunes.

The loss-making state-owned flag carrier is guzzling hundreds of millions of dollars of taxpayers’ money every year.

“Air India’s outlook is bleak,” says Saj Ahmad, the chief analyst at StrategicAero Research. “You cannot use ‘profit’ and ‘Air India’ in the same sentence. It simply is never going to happen while the airline remains in its current messy state. You have more chance of finding a dodo alive than you do of seeing Air India becoming a well-to-do airline. It would take years and billions of rupees to overhaul this dinosaur. The sad reality is that Air India cannot be saved. It has passed the point of no return.”

The carrier is expected to post a loss of 39 billion rupees (Dh2.31bn) in the current financial year, which runs until the end of March. These results would actually be a significant improvement on the previous year, when AI reported a loss of 52bn rupees compared with a loss of more than 75bn rupees the year before that. The airline’s debts amount to 350bn rupees. AI has some 24,000 permanent employees, meaning that it has one of the highest numbers of workers per aircraft of any airline in the world.

In 2012, the government in New Delhi approved a turnaround plan for the airline, which aimed to restructure debt and improve operational efficiency. It included a government injection of 300bn rupees to be drip-fed to the airline over eight years.

AI’s turnaround plan highlighted that the airline would be able to achieve profitability in 10 to 15 years. Marketing efforts and steps to improve efficiency seem to have helped but analysts remain sceptical and say that there are deep structural issues hampering the airline.

“The likelihood is that despite the best intentions of Air India’s management, the carrier has an almost insurmountable challenge,” according to Capa (Centre for Asia Pacific Aviation) India, an aviation analysis firm.

“Its domestic competitors will be increasingly strengthened by foreign airline investment, overseas carriers are likely to be granted greater access to the Indian market and meanwhile Air India itself will be politically hamstrung with regard to taking the difficult restructuring decisions required to develop a competitive cost base or investing in new fleet.”

With new airlines planned, including a full service carrier by Singapore Airlines and Tata Group, after New Delhi relaxed foreign direct investment (FDI) rules in the aviation sector to allow overseas airlines to invest up to 49 per cent, AI face additional headwinds. Etihad Airways’ purchase of a stake in Jet Airways is expected to add to these pressures.

“Air India is expected to face increased pressure on its United States operations from this summer schedule as a result of the strong market proposition that Jet Airways-Etihad will offer between India and North America, which will become more formidable as they expand their network coverage,” Capa says.

Mr Ahmad believes that privatisation could be the best solution to save the national carrier.

“Air India has struggled because of its poor top-down management that only know how to run an airline into the ground and the restrictive governmental aviation policies under which it operates,” says Mr Ahmad. “Turning things around at Air India will not be easy, quick or cheap. For a start the management needs to go and be replaced with people who know how to run an airline and will not shirk from laying off the excessive staff numbers either. The government needs to sell it off so private investors can use its assets better.”

Along with internal problems, AI also faces a turbulent operating environment that make India one of the most expensive places in the world to run a carrier. Most Indian carriers are struggling to achieve profitability. Indian airlines collectively lost more than US$500 million in the quarter which ended last September, according to Capa.

“India is perhaps the costliest place to run an airline,” says Amber Dubey, a partner and head of aerospace and defence at KPMG.

“The key problems include excessive taxation on ATF [jet fuel], a small flyer base (less than 0.5 per cent people in the third largest economy of the world travel by air), high operating costs, declining rupee (nearly 70 per cent of airline costs are dollar linked), suicidal price wars, high airport charges.”

But Air India is facing more troubles than other Indian carriers.

“Juxtaposing the performance of Air India with other domestic airlines shows that for comparable fleet size the state entity employs close to five times the manpower,” says Sanjay Kaul, the director of the Centre of Aviation Studies in India. “It is believed that Air India has more than 4,000 to 4,500 employees costing more than 500,000 rupees per month, including their salary; a costly social initiative for a country where 450 million people live below the international poverty line of $1.25 a day,” he adds.

“Air India has seen biblical proportions of money pumped into it over last decade. Why should the taxpayer’s money be pumped into an inefficient proposition, when with a similar amount you may provide basic facilities like airports?”

In an effort to lure customers, Air India this month plans to start offering a premium economy class on some of it flights which use the all-economy A320 planes. It has also been offering steep discounts to compete with other Indian carriers. Air India a few months ago sold off five of its Boeing 777 wide-bodied aircraft to Etihad. AI had been struggling to sell the planes, which were contributing to losses on its international routes. They were put up for sale as part of its turnaround plan.

AI is hoping that joining the Star Alliance (SA) global airline network later this year will give the carrier a much-needed boost, as it will give it access to facilities including airport lounges. Last December, AI was invited to join SA again after its invitation was suspended in 2011 because it did not meet the minimum requirements.

“Joining the Star Alliance will only expose Air India’s failings and there will be many a chorus pretty quickly from Star Alliance members as to how poor the airline is,” say Mr Ahmad.

With general elections slated to be held by May, a new government will have to face the challenge of dealing with AI.

“Privatisation is now a certainty and will be a priority on the agenda of the next government,” according to Capa. “Despite the fact that Air India’s performance has improved significantly across operational, commercial, customer service and financial metrics under the current management team, we rule out the possibility of Air India’s return to profitability under its current ownership structure given the underlying structural problems and fast changing market dynamics,” it says. “With the carrier expected to post continued losses, the next government must finally bite the bullet and commence the privatisation of Air India. ”

Published: February 15, 2014 04:00 AM


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