Another blow to national carrier

Drowning in debt and struggling to survive, Air India's one reliable profit centre has been its budget subsidiary, Air India Express, the operator of the stricken Flight 812.

NEW DELHI // The crash at Mangalore could not have come at a worse time for Air India, the country's beleaguered national carrier. Drowning in debt and struggling to survive, Air India's one reliable profit centre is its budget subsidiary, Air India Express, the operator of stricken Flight 812. Following Saturday's crash, Praful Patel, India's civil aviation minister, stood in front of television cameras and tried to answer difficult questions about safety standards, while offering condolences to the bereaved. Nobody asked about the numbers, or how they might be linked with safety concerns.

While Air India's safety record has been relatively good, the management of its balance sheet has not. Once a flagship symbol of national pride, Air India is now a massive, state-owned colossus, bleeding money. Losses for the financial year that ended in March could top US$1.8 billion (Dh6.6bn), nearly double last year's deficit of US$1bn. Mr Patel has given warning of $2.65bn more in losses over the next three years. With debts of more than $3.5bn on the books, more government handouts seem inevitable.

Arvind Jadhav, the chairman of Air India, has secured enough government funding to keep the airline afloat. Any drop in revenue from Air India Express would hurt. The budget carrier runs short-haul international flights, mainly from Kerala into the Middle East and South East Asia. It is considered the most successful of India's recent international start-ups, with revenues rising for five years in a row.

Air India has not produced a profit in years. It would be easy to blame the carrier's woes on a struggling airline industry brought to its knees by the global financial crisis. But they are almost exclusively self-inflicted. The consultancy Booz & Company recently warned the board that Air India was in an extended decline and about to slide beyond the "point of no return". "The majority of flights are not profitable. Productivity is low and the airline is overstaffed in multiple areas," Booz said in a presentation that was leaked to the media.

Air India has 30,000 staff, with a further 20,000 on contract. Analysts say that is twice the number it needs, but every time Mr Jadhav lifts the axe, workers strike. In the past 12 months, Mr Jadhav has secured government financing, renegotiated aircraft leases, cut capacity, refinanced debt, and consolidated business units. But the one thing he has not done is perhaps the most important - cut jobs.

All these restructuring moves are being made in anticipation of privatisation, which, in all likelihood, will be a bloody battle, with labour unions fighting to hang on to their sinecures and resorting to powerful political friends and bureaucrats to interrupt any downsizing. "The people issue is the most important thing to be sorted out," said Kapil Kaul, the head of the Centre for Asia-Pacific Aviation in south Asia.

There is now a lot of competition in the Indian marketplace. The industry still suffers from excess capacity, but load factor - the number of seats filled per flight - has been rising as competing airlines cut fares to draw in customers more accustomed to travelling long distances by rail. Jet and Kingfisher both now fly internationally, and SpiceJet and IndiGo are expected to qualify for international licences soon. This increased competition, at a time of high fuel prices and uncertain economies, has created pressure on all airlines to cut costs while boosting load factor.

Mr Kaul said budget airlines accounted for 75 jets at the start of the year, but that number will reach 160 by its end, with airlines ripping out business-class seats to pack in more passengers attracted by rock bottom prices. Despite the uncertainty, history is on Air India's side. "The problem that Air India faces today are not all that different than the ones that confronted several state-owned European airlines," Perry Flint, the editor of the American magazine Air Transport, told Forbes India.

"A bloated workforce, constant meddling and interference from the government, weak balance sheets and an overall mindset among staff, and many managers, that their status as a state-owned airline guaranteed them jobs for life, were common at British Airways, Lufthansa and Air France." All three are now successful, privately-owned, flagship carriers. @Email:[e-mail]