More turbulence ahead for loss-making Air India

Steep losses and debt afflict the state-owned carrier, making it less attractive to potential investors, and casting doubts on where a turnaround will come from.

Air India reported a loss of more than 35 billion rupees in the financial year to the end of March 2016. Manish Swarup / AP Photo

The Indian government is moving towards a decision on whether to sell off its loss-making national carrier Air India, as calls for privatisation gather pace.

The ministry of civil aviation is working on a plan of action, with privatisation among the options it is considering. India’s finance minister, Arun Jaitley, recently spoke about the possibility of disinvestment, or a strategic stake sale.

As it stands, the state-owned Indian carrier, which has bloated staff numbers and huge debts, guzzles hundreds of millions of dollars of taxpayers’ money each year.

The airline – sometimes referred to as “the maharaja” in India because of its mascot – is burdened by debts amounting to about 500 billion rupees (Dh28.52bn).

Air India reported a loss of more than 35bn rupees in the financial year to the end of March 2016.

“Air India is in a debt trap,” says Satish Modh, who has worked in the aviation sector for 28 years and was part of a turnaround plan for Air India before becoming the director of the VES Institute of Management Studies and Research in Mumbai. “The airline faces the issues of leadership, accountability and lack of freedom in decisionmaking at the top level. In this situation will disinvestment help? Who will invest in the airline?”

The airline needs to be completely severed from the government and therefore privatisation is the best option, he says. This view is widespread among many experts.

The aviation market in India is a cut-throat environment, with several airlines competing for business and with operating costs being high.

“What is needed is a buyer who is willing to pay a fair price for it,” says Mr Modh. “It could be anywhere between the market value of Jet Airways and Indigo. Anyone who is buying into the airline needs to have total freedom in decisionmaking without any interference from the ministry.”

On Thursday, Mint, an Indian business newspaper, reported that Mr Jaitley said, "The aviation ministry will have to explore all the possibilities on how to privatise Air India."

Speaking about the possibility of disinvestment, he told the state-run broadcaster Doordarshan, “history has given us a second chance that a good investor should come, which has credibility so the civil aviation ministry will consider it”. Taxpayers’ money which is being used to bail out the airline, could be better spent on education, for example, he said.

Mr Modh believes that the consequences will be disastrous without swift action.

“If no decision is taken in the next one year there will be no need, because it will go the Kingfisher way in spite of the government being the owner.”

Kingfisher Airlines, which was owned by the flamboyant beverages businessman Vijay Mallya, collapsed in 2012, after amassing huge debt. It never turned a profit after launching in 2005 and was hit by a storm of growing competition in India’s airline sector, a slowing economy, rising fuel prices and its high operating costs. Mr Mallya fled to the United Kingdom and as banks try to recover their funds, efforts are underway to extradite him to India.

Mr Modh explains that it is important that such a crash landing is averted in the case of Air India.

“Air India needs to be revived for a healthy aviation sector in India,” he says.

Given the airline’s steep losses and debt levels, analysts say in its current state, the airline could appear to be largely unattractive to investors. That could mean that a strategy has to be put in place to reduce the debt pile before any move to try to lure investors.

Saj Ahmad, the chief analyst at StrategicAero Research, says, “While the government has a stake, Air India is throttled.”

“While Air India remains in this lethargic and comatose state, covered in political red-tape and corruption, management apathy will ensure that Air India is going nowhere fast,” he says.

“Even if the state sells off a piecemeal stake, I’d genuinely be interested to see who has more money than sense to want to buy into it.”

The rise of low-cost carriers in India and the expansion of Arabian Gulf airlines have presented stiff competition for the flag carrier, which has been very much left behind, Mr Ahmad says. The airline’s market share has plummeted to about 13 per cent today compared with 35 per cent just over a decade ago, data from India’s directorate general of civil aviation reveals.

“Either the government should spin it off entirely and let free market economics decide Air India’s fate or it should shut the whole thing down and employ new, seasoned managers who know how to run an airline and let them have a clean sheet start,” says Mr Ahmad.

Mr Modh explains that poor decisions over aircraft purchases were one of the factors that pushed the airline into turbulence.

“The merger of Air India and Indian Airlines made the issue more complex because when the top management should have been focusing on this acquisition they were spending time solving issues created by the merger,” he says.

Although there are challenges when it comes to India’s aviation sector, there are factors that could bode well for its future performance.

The country has a population of more than 1.2 billion and a relatively small number of people travel by air at the moment, but more Indians are set to take to the skies over the coming years. India is indeed one of the world’s fastest-growing aviation market.

Archit Gupta, the chief executive of Atom Aviation Services in Delhi, has a more positive take on the Air India matter than many.

He believes that “there is just a mismanagement problem” but the carrier does in fact have the potential to be a success. It has the second-largest fleet of planes in the country and is India’s largest international carrier.

Rather than privatising the airline, he says the government should look at overhauling the way it is run and its business strategy.

“It should focus on improving services,” he says. “Air India needs to improve their on-time performance. People really want to reach on time – that’s why they pay more.”

It should also reduce staff costs and expenditure on benefits for employees, and he argues that the airline should bring in younger cabin crew.

For “a government that can take decisions regarding demonetisation, [making a decision on Air India] should be a cakewalk”, says Mr Modh, referring to the Indian prime minister Narendra Modi’s move in November to abruptly scrap 500- and 1,000-rupee notes to try to curb black money flows.

But when it comes to the government stepping away from Air India, he adds, “it is a tough decision”.

Follow The National's Business section on Twitter