Air India — A National Flag Carrier
National Aviation Company of India Limited (NACIL) was incorporated under the Companies Act 1956 on 30th March 2007. With effect from 24th November 2010, the name of the National Aviation Company of India Limited has been changed to ‘Air India Limited’. This nation flag carrier is headquartered in New Delhi. This government-owned identity operates a fleet of Airbus and Boeing aircraft serving 102 domestic and international destinations. Air India is the largest international carrier out of India with a 12% market share.
Air India also operates flights to domestic and Asian destinations through its subsidiaries Alliance Air and Air India Express. Air India’s mascot is the Maharajah (Emperor) and the logo consists of a flying swan with the wheel of Konark inside it.
Timeline:
Subsidiary Companies
The following are the wholly-owned subsidiaries of the Company:
- Air India Air Transport Services Limited (AIATSL)
AIATSL, a wholly-owned subsidiary of Air India Limited was operationalized on 1 February 2013 and started its independent operations effective April 2014. Presently, it provides ground handling services at 80 Airports in India. Apart from handling the flights of Air India and its Subsidiary Companies, ground handling is also provided to 37 Foreign Scheduled Airlines, 3 Domestic Scheduled Airlines, 4 Regional Airlines, 12 Seasonal Charter Airlines, 23 Foreign Airlines availing Perishable Cargo handling.
2. Air India Engineering Services Limited (AIESL)
AIESL is a leading MRO (Maintenance Repair and Overhaul) service provider in the Country providing both Line Maintenance and Major Maintenance for various types of aircraft for the fleet of Air India, Air India Express Limited, Alliance Air, third party airlines as well as Defence Forces. Further, the Company had in past technical handling agreement with 15 International Airlines and 2 Domestic Airlines for Line Maintenance work.
3. Hotel Corporation of India Limited (HCI)
HCI provides catering services to Air India Group at Mumbai and Delhi through Chefair, it’s Flight Catering Unit. Besides, HCI earns revenue through its two Hotels viz. Centaur Lake View Hotel, Srinagar and Centaur Hotel, Delhi, and by operating Lounge at T3, Delhi.
4. Air India Express Limited (AIXL)
AIXL operates a Low-Cost Airline under the brand name “Air India Express”. Launched on 29 April 2005 with a fleet of 3 leased B737–800 aircraft, it operated from 3 stations in Kerala to 5 stations in the Gulf. As of 31 March 2019, AIXL had a fleet of 25 B737–800 NG aircraft. The airline operated to 17 Indian and 13 foreign on-line stations. AIXL has 17 owned Aircraft and 6 leased aircraft and operates 237 weekly flights linking 12 Indian stations and 13 international stations in the Middle East and Southeast Asia.
5. Airline Allied Services Limited (AASL)
The Company operates under the brand Alliance Air. Alliance Air is one of the leading regional airlines in the Country providing connectivity to Tier II and Tier III cities in India as well as a feeder to its parent company, Air India Limited, and its subsidiary Air India Express Limited. Alliance Air has been awarded 17 routes under Regional Connectivity Scheme (RCS) UDAN. Currently, it operates passenger service with 15 leased aircraft. It operates to 48 domestic destinations and daily carries approx. 4500 passengers.
Fleet Size:
Physical Performance Parameters
Every industry is studied based on some physical parameters to gauge the real scenario of its performance. Before analyzing it, let’s understand the basic parameters of the Airline industry:
✔Available seat Kilometre:
Available Seat Kilometre (ASK) measures an airplane’s passenger carrying capacity by multiplying the number of seats available on the aircraft to kilometers flown by aircraft. ASKs determines supply in the airline industry. Lesser the supply higher is the impact on prices.
✔Revenue Passenger kilometer:
Revenue Passenger Kilometre (RPK) shows the number of kilometers traveled by paying passengers. Since it measures the actual demand for air transport, it is often referred to as airline “traffic.”
✔Load Factor
The passenger load factor measures the capacity utilization of an airline. A high load factor indicates that an airline has full planes with most seats occupied by passengers. PLF above 75% is desirable for the sustainable and profitable operation of an airline. Since airline works on operating leverage (high fixed costs) it becomes imperative for an airline to have as high as PLF to make a reasonable amount in the bottom line. PLF is calculated by dividing RPK with ASK.
✔Revenue per available seat kilometer (RASK):
It measures the average amount of revenue received by airlines per unit of capacity available for sale. A higher RASK is an indication that an airline can operate its fleet more profitably when compared to other airlines assuming cost remains constant. This metric takes total operating revenue.
✔On-time performance (OTP):
On-time performance refers to the level of success of the air services remaining on the published schedule. OTP could be considered as an important indicator of an airlines’ service quality.
✔Yield:
It shows an average fare per passenger per kilometer. It is useful in evaluating changes in fares over time. This metric takes only revenue from ticket sales.
✔Block Hours:
The number of block hours for a flight is the time from the moment the aircraft door closes at the departure of a flight until the moment the aircraft door opens at the arrival gate following its landing. The number of block hours for an airline for a given period of time (like a year, quarter, or month) is a measure of the total time that its aircraft were in use during that period. The lesser the idle time, the higher the aircraft utilization.
Here, we can observe that many of the parameters are exceeding its minimum baseline indicating a potential risk for AI.
Financial Performance
Total Revenue increased from Rs.266,292.3 Million in 2017–18 to Rs.298,007.0 Million during 2018–19, an increase of 11.9%.
Passenger Revenue increased from Rs.210,691.1 Million in 2017–18 to Rs.247,283.9 Million during 2018–19, an increase of 17.36%.
The above data shows that by 2019, AI had accumulated debt of 50,000 crores leaving no potion but to go for the privatization of AI.
What went wrong and why has this situation arisen?
Air India has amassed a debt of Rs 50,000 crore over the years, half of which is on account of buying costly aircraft beyond its means, with the interest burden alone estimated at Rs 4,000 crore a year. While Rs 25,000 crore has been pumped in over the last five years, a similar amount has been committed until 2032.
Flights are routinely delayed, the equipment is old and mouldering, the foodservice offered by airline is often not acceptable, and the prospect of good service depends upon the whims of the flight attendant who happens to be assigned to you.
The airline has come to be seen, with ample justification, as a platform through which politicians and officials enjoy the perks of office, at everyone else’s expense.
A large part of the blame is on the way the national carrier was operated during 2005–07 when an aircraft acquisition plan of Rs 50,000 crore was implemented. The airline’s turnover was around Rs 15,000 crore. That put Air India under a severe debt burden.
Air India, which is surviving on a 30,000-crore rupees bailout package spread over 10 years announced by the UPA government in 2012, is working on ways to improve its financial position.
Ashok Gajapathi Raju, the Civil Aviation Minister, said the Rs 30,000-crore bailout plan charted out in 2012 to save Air India has not solved problems. “TAP [Turn Around Plan] or the financial reconstruction plan was good intentions and money has been infused from the government’s kitty, but it has not solved any problems,” said the minister.
On the operational front, there are signs of a turnaround with improvement in passenger load factor, on-time performance, and utilization of aircraft. However, the company is facing a legacy issue, which is pulling the national carrier down.
It turns out that, while the move is logical, it is not without challenges:
✔Restructuring plan fails to cut debt
In 2012, the government approved a Turnaround Plan (TAP) and Financial Restructuring Plan (FRP) for Air India, promising to infuse Rs 30,231 crore till 2021.
The government infused Rs 6,750 crore worth of equity in 2011–12, apart from offering equity for cash deficit support of Rs 4,552 crore till 2017–18, equity for guaranteed aircraft loan of Rs 18,929 crore till 2021.
Yet, Air India’s debt has piled up to nearly Rs 50,000 crore, according to Jaitley. Of the total debt, around Rs 25,000 crore are related to aircraft valuation, he said.
Banks had turned down a request to convert close to Rs 9,000 crore of debt into equity in the year 2017. So, the situation is that if a company acquires Air India, it has to repay the debt or face liquidation action from lenders.
✔Not a profitable venture
High debt coupled with expensive operating costs, including for staff, have prevented Air India to book net profit for more than a decade now. As per provisional figures for 2020, the airline is projected a net loss of Rs 80,000 crore.
Last fiscal, Air India had an operating profit of Rs 300 crore and a net loss after tax of Rs 3643crore. According to the civil aviation ministry, Air India’s losses have come down significantly in recent years from Rs 6,865.17 crore in 2010–11, Rs 7,559.74 in 2011–12, Rs 5,490.16 crore in 2012–13, Rs 6,279.60 crore in 2013–14 and Rs 5,859.91 crore in 2014–15. Air India is trying to shore up revenues through streamlining routes, phasing out of the old fleet, and consequential reduction in maintenance cost and closure of some overseas offices.
✔Falling market share
Since the entry of private airlines from the early 1990s, Air India’s market share has fallen every passing month. Market share had declined from 18% to 12%
The latest government data show Indigo, which started operations in 2006, dominates the Indian sky with a market share of 41.4% as of April 2020. SpiceJet has cornered 12.9% of the pie in the last 12 years, while Go Air has 8.1%. New entrants Vistara now have 3.2% of the market share while Air Asia 3.3%.
✔Competition from road and railways
Over the decades, air travel has become relatively cheaper but the competition from road and rail transporters remains intense.
Air India is offering lower fares to match Rajdhani’s second- and first-class fares in select sectors. Low-cost private players have curtailed Air India’s efforts by lowering their fares to lure customers.
✔Valuation
The government will face problems in justifying the valuation of Air India as and when it opts for a strategic sale.
Air India will be valued much less considering its market share of about third of India and carrying a legacy of mammoth debt burden and losses.
So, we can say that everything that could possibly go wrong with a public sector company has gone wrong with Air India. It is operationally inefficient and unable to compete with private sector operators.
What were the steps taken by the government to address the situation?
There are various majors had been taken by the government to revive the AI.
In 2007, Air India merged with the erstwhile Indian Airlines based on the recommendations of Justice Dharmadhikari committee report. A new company called the National Aviation Company of India Limited (now called Air India Limited) was established, into which both Air India and Indian Airlines were merged.
The reason for the merger was the Central government felt that it would make better business sense to merge the two airlines. It could help achieve economies of scale in maintenance, ground operations, use of landing slots, and parking rights. But it turns out to be a failed merger because IA and AI were organizations with complex layers of departments run in obsolete bureaucratic ways.
In 2001, the government attempted to privatize the airline by putting it up for sale. A consortium led by the Tata group and Singapore Airlines made a bid for it, but the deal fell through.
In 2004, it was decided that Air India would boost its passenger traffic by adding more routes and services. An order was placed for 50 aircraft at a cost of Rs.50,000 crore.
In 2006, an additional order for 60 narrow-bodied aircraft was placed. There was still no viable plan, and so the new fleet of aircraft was useless. It eventually had to scrap routes such as Mumbai-San Francisco to cut back on expenses. This situation leads to higher criticism as the decision to acquire a large number of aircraft in excess of Rs 50,000 crore unleashed a pile of debt from which Air India has never recovered.
Then the government came up with a 10-year Restructuring Plan for Air India (2012–2022). Under a financial restructuring plan in 2012, Air India was slated to receive Rs 30,231 crore equity infusion over 10 years. It has received some Rs 23,993 crore so far. Even after pumping in huge money, the airline has not shown significant financial and operational improvement.
In 2017, the Cabinet approved strategic disinvestment in five of Air India’s subsidiaries — its MRO unit Air India Engineering Services (AIESL), ground handling arm Air India Transport Services, Air India Charters which operates Air India Express and Airline Allied Services which operates Alliance Air and Hotel Corporation of India (which owns Centaur Hotels), along with a joint venture AISATS.
In 2018, the central government offered to sell 76% of its stake in Air India & 50 % of the share of low-cost subsidiary Air India Express in ground-handling arm AISATS as a single entity. But it failed.
In 2018/19, the carrier posted a net loss of Rs 8,400 crore, and now debt it piled up to 50,000 crores. In January 2020 the government finally decided to sell 100% stake AI and as part of the strategic disinvestment, Air India also sell 100 percent stake in low-cost airline Air India Express and 50 percent shareholding in joint venture AISATS.
What needs to be done?
It is not the first time that the situation of privatization or disinvestment of national flag carrier has arrived, if we observe in history there are plenty of examples where disinvestment took place, and now those airlines are quite profitable. Some of the examples could be
✔A merger between Pan Am and Delta Airways
✔Swiss and Lufthansa Airways
✔British and Iberia Airways merger
Learning from their situation we can draw the following conclusions which can help Air India to revive and become profitable in the future:
1. Take drastic steps.
“There was never a mega-merger without retrenchment of employees, except in the case of Air India and Indian Airlines. The whole objective of the merger is to attain synergy and reduce the number of employees. But the government has reiterated that there will be no retrenchment,” says M.S. Balakrishnan, former director of finance with Indian Airlines.
He suggests that the airline needs to take a few drastic steps and retrench employees above 55 years old and do away with contract laborers.
Air India could give its maintenance and Ground handling services to foreign airways, rather than losing them. This could generate some revenues for the airline.
So, now it is time that either the government can take politically correct decisions and allow Air India to die, or take drastic steps to save the national carrier.
We will have to suspend the operations of Air India as a part of laying off people. A lock-out will help you expedite the retrenchment program. It is a tough situation but one cannot run an airline with a high employee to aircraft ratio. Heavy downsizing is required in terms of aircraft and people. AI has 26,978 employees (including permanent, contractual, casual, and on-deputation staff) for a fleet of 115 aircraft — or 234 employees per aircraft.
SriLankan Airlines cut staff numbers by a fifth, from 1,500. K.J.L. Perera, president of the Jathika Sevaka Sangamaya Employees Union of SriLankan Airlines, was quoted as saying in various websites, “Given the turmoil that existed in the global aviation industry after 11 September 2001, and particularly the damage caused to our airline in July 2001, our union decided to accede to the request of the management to extend the existing Collective Agreement.”
Mr. Jurgen Ringbeck, a Dusseldorf-based senior partner with consulting firm Booz and Co. Inc. said employee productivity has to be increased and the current employee-aircraft ratio of Air India has to be reduced.
The state-owned carrier has some 234 employees to one aircraft while the global norm for a full-service carrier is 150 per plane. Mr. Ringbeck has led several international strategy and transformation assignments in the transportation sector and worked with a leading European airline group on core assignments that addressed profit improvement.
2. Let the leader do the job.
The first and foremost thing required to turn around Air India is to have a clear and strong mandate from the government to transform the carrier. This should be supplemented by re-establishing the leadership team of Air India by incubating the best private managers who can demonstrate better capabilities to run an airline.
But this leadership team should be given full freedom to act and accomplish the mission. The government needs to make it very clear about freedom before incubating them for the airline.
In an interview for the McKinsey Quarterly in November, Malaysia Airlines’ Jala was quoted as saying: “When the government approached me for this job, I said I would need the freedom to act. Of course, they promised I would have it. For example, nobody disturbed us as we improved the yield, which often meant increasing fares. We could change flight frequencies, get rid of routes, cut costs. These were things that were virtually impossible for my predecessors to do because they did not have such freedom.”
Hence it is need of an hour to get a global CEO and a public listing in the future who will get FULL autonomy to the Chairman & CEO with a target horizon for a turnaround.
3. Bring in talent from the private sector.
Air India should also focus on its long-term market positioning, keeping in mind that it will be the stock market listed and engage private capital in future. The immediate next step would be bringing executives from private companies in the top management of the airline.
Strategic leadership is the key element for airline restructuring. This was the case with several other international airlines. Incubating private management had worked in several instances. International senior management who knows how to manage commercial operations and fleet development will help an airline to quickly turnaround.
The best case of airline transformation is Emirates and Lufthansa. Lufthansa posted huge losses in 1993 but turned to be a profitable airline and got publicly listed. Swiss Air is another example. In all these, leadership played a crucial role.
Leadership is very important in two ways. One, the leader should be able to simplify complex structures of business and communicate that to the employees. Secondly, s/he should also be able to convince his/her employees that they can do it. S/he will have to communicate a sense of urgency and excitement to employees while scripting a turnaround plan.
4. Learn from the Past experience.
It is generally observed that Independent directors have never reacted when the carrier was flying towards huge losses. You need to have independent directors from various sectors who will take an active interest in the carrier.
A special administration body for Air India is needed as was done with Satyam Computer Services Ltd. After the accounting fraud at Satyam came to light early this year, the government superseded the company board by appointing six directors. If the government is unable to help Air India in retrenching people, it has to extend a special administration status to Air India, with independent directors and fiscal grants.
5. New network, new fleet.
Varadarajan of Boston Consulting says small changes in the schedule can yield bigger results. Realigning of flights will help in better utilization of planes and ground assets, apart from load factor. For instance, instead of all flights to key metros starting at 9 am from Mumbai, Air India can spread the timings with 10 minutes gap. This will ensure better utilization of airport gates, counters, and staff efficiency. Balakrishnan, former Indian Airlines director, says the carrier needs to review its aircraft acquisition plan and initiate heavy cost-cutting as it is unable to increase revenues in the current downturn.
Many experts suggested cutting down the loss-making routes, especially in the US, the UK, West, and South Asian routes.
If AI is forced to operate such routes for political or other pressures, then the government should subsidize these routes. The next thing is the maximum aircraft utilization. The block hours of AI range in 106879 hours if we reduce this idle time then we can generate more profits. For example, three Boeing 777 jumbos had to sit idle at New York’s JFK and Newark airports. Then we can have a rule of thumb, such as optimum economic utilization of around 4,000 hours for each aircraft. If all three flights were rescheduled to turnaround after 3 hours, we would have 24 hours of available aircraft capacity daily. Multiplying this by 365 days, we get an annual figure of 8,760 hours or the equivalent of more than two complete aircraft.
6. Marketing, yields, and revenues.
The new management should implement quick ideas to get its customers back and stop losing market share. Therefore, marketing activities should be at the top of the list of new management. India carriers are known for their very bad customer reputation and the load factors. Therefore, it should have smart network management with a competitive pricing policy. For this, a carrier should need advanced technology and IT tools. Smart pricing and market will hold the key. Hence, complete integration with Indian Airlines for revenue enhancement.
Many of the airline experts suggest creating small groups per aircraft and to deliver the best results in terms of services, profitability, and standards. Ideally, it is better to avoid external benchmarking for the short term. It would be useful to benchmark internally to meet targets.
Earlier, private airline Jet Airways (India) Ltd had adopted a program among employees to “adopt a plane” wherein a small group of employees will be liable for break-even of one particular plane and for offering the best services. A similar strategy could be implemented by AI.
Mr. Jala of Malaysia Airlines had created groups of 10–15 people, called laboratories, from various functions and backgrounds. All people had a direct stake in a given activity and were told to come out with solutions for a problem. “In the first three months, we got rid of routes that were bleeding cash and not contributing to the profit and loss. Within another six months or so, we got rid of most of the ones that were unsalvageable. But we rescued a lot of routes, too,” says Jala.
These are some of the steps we can implement just by observing peers in the same industry and can learn from their mistakes.
The most important thing is to provide full moral support to the Chairman and airline staff for all tough measures that will be required.
