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Divest Air India

Because, to remain in the black, it needs to double paying passengers every 2.5 years for the next 10 years.

For far too long now, the Indian taxpayer?s money has been used to keep Air India afloat. A bailout of R3,000 crore in April 2012 came on the heels of the November 2011 package of R1,800 crore. With the national carrier annually losing somewhere in the region of R1,850 crore, such subsidies might as well become a regular feature of the Budget! In fact, its sovereign guaranteed debt of over R50,000 crore could also become the government?s liability if the current status quo is maintained in the airline?s operations.

Whichever way you look at it, the government would be hard put to justify its actions of repeated injections of public funds into AI on any credible grounds of public interest. Attempting to compensate for its own past actions of saddling AI with a $10 billion purchase of 111 new aircraft in 2005-06 (four times the number in its fleet then) and forcing through a badly conceived merger with Indian Airlines can hardly be seen as a cogent reason. Civil aviation minister Ajit Singh has already admitted that the days of national carriers are over. Yet, for the last five years, countless efforts have been made to turn the fortunes of the airline around. In attempting to do so, the airline management and the government are, excuse the pun, missing basic ground realities as the odds of AI?s survival in a business-as-usual scenario are rather slim.

Let?s start with some basic facts first. Global airline mergers have had abysmally low success rates even with timely and concerted managerial actions. There is far too much overstaffing in the reincarnated AI?estimates range from anywhere between a staggering 20 to 30 times the global average per aircraft including the engineering and the 17,000 non-technical staff of ground handlers, air hostesses and sweepers. Despite five years having passed since the merger was announced, the staff of the two erstwhile entities continue to have separate identities, working hours, pay scales and other HR regulations. Seemingly, the only aspects they agree on are resorting to industrial action at the drop of a hat, opposing the cutting of existing layers of management, aligning staff by role and bringing in lateral hires! Only a professional management?one that is not constrained by the compulsions of coalition politics and union pressures, is well-versed in operating in a competitive market, and is not held hostage to multiple authorities in government?can expect to get AI out of its current staff related quagmire.

The financial mess AI is in also warrants strong intermediation. Cutting tariffs to gain lost market share is, at best, a short-term option to be exercised once in a while. There is far too much competition from private airlines ever since Indian skies were opened up a few years ago. Low-cost airlines like Indigo (which coincidentally happens to be the only profitable Indian airline) and possibly SpiceJet have come to stay in the domestic market. Indigo?s business model of offering bare amenities to passengers but ensuring on-time departures in virtually new airplanes, often at a quarter of the tariff of other airlines, is difficult for AI to emulate. Accustomed to providing free upgrades and a host of expensive facilities to hundreds of government functionaries (including the 800-odd members of Parliament) and all its senior staff and their families even after retirement, AI will undoubtedly find it impossible to trim its expenditures. To remain in the black, without the R30,000 crore bail-out package promised by the government, it needs to double the number of paying passengers carried every two and half years for the next ten years without adding to its operating costs.

While AI gasps to survive, the Indian aviation industry meanwhile continues to grow. Passenger traffic increased by 20% annually in the last two years and air cargo by over 10% for each of the last three years. Currently, the average Indian travels by air only once in 10 years, while an American flies 1.7 times a year. With growing disposable incomes and more traffic, it is estimated that both, the number of air passengers and the air cargo throughput at Indian airports, should grow approximately eight times in the next 20 years, i.e. a CAGR of 10.5%. In anticipation, several metro airports are being modernised and proposals for green field as well as brown field private airports entertained. FDI regulations have also been amended to permit liberal doses of foreign investment for such aviation infrastructure.

On the bright side, AI still has many traffic rights internationally and over-capacity in airline seats may not remain an issue for too long. The government already has a proposal to allow 49% FDI in domestic airlines. In a favourable industry environment, there are options available to the sole owner, the government, which otherwise may not come its way. This includes letting go of management control, which inexplicably still remains in the government?s and not the company?s managers? hands.

The government has already publicly expressed its intention to partially meet its burgeoning fiscal deficit by disinvesting in several businesses it owns this year. AI should head the list and be amongst the earliest to be put on the course of operational and financial prudence. The quantum of equity offered should also be substantial lest the company meet a similar fate as the recently bombed follow-on issue of ONGC. A number of foreign airlines, including Virgin Airlines owned by the irrepressible Richard Branson, have shown interest in investing in India. The exact stake and related terms can be negotiated as long as operational control goes to the acquirer and there is tangible value-add to its operations. Only then would the Maharaja recover some of its lost glory and the Indian taxpayer finally realise the full value of his investments made over the years.

The author, a Rhodes scholar and graduate of the Harvard Business School, works with Goldman Sachs, New York. Views are personal

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First published on: 16-07-2012 at 01:35 IST
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