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September 28, 1998


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Business Commentary/Dilip Thakore

A Maharajah's sorry plight

A public sector company which is ripe for denationalisation and/or drastic restructuring is the nation's showpiece international airline Air-India which has already crash-landed and is floundering in a sea of red ink.

The fortunes of the beleaguered airline have turned a full vicious circle with steadily declining post-tax profit which was Rs 3.33 billion in fiscal 1992-93 and is likely to transform into a loss of Rs 3.40 billion in the current fiscal -- only a marginal improvement over the massive loss of Rs 3.91 billion in 1996-97.

And the tragedy is that even this abysmal bottomline does not adequately reflect the rot which has permeated Air-India. On every parameter of performance measurement -- average age of aircraft, fleet size, aircraft utilisation, employees per aircraft, passenger load factor, percentage of revenue from first and business class passengers and on time performance -- Air-India compares unfavourably.

Decades of decision-making delays, political interferences and mismanagement have corroded the vitals of the government-owned airline.

Even its audited balance-sheets are unreliable: in fiscal 1996-97, the airline's management published a healthy profit which was later discovered to be Air-India's largest ever loss by the incumbent successor management. Any which way you look at it, the airline is in deep trouble. Perhaps the only thing still going for this 50-year-old airline is the witty optimism of its advertising and publicity managers speaking through the airline's symbolic maharajah mascot.

But even the maharajah's perpetually cheerful banter seems to be faltering. Not that the Air-India management is unaware of the airline's dismal predicament. To its credit, the incumbent management headed by Air-India veteran Michael Mascarenhas is making a valiant even if belated effort to stem the rot within the yet high-profile airline.

Several politically correct but financially unviable routes have been cancelled and to address the problem of heavy overmanning within the highly unionised airline, innovative downsizing schemes allowing flexible three day work weeks, up to two years leave without pay, lay-offs and attractive revised voluntary retirement schemes have been introduced.

Yet without radical restructuring and the expansion of the airline, the efforts of Mascarenhas and his rejuvenated team are likely to prove of limited value. Saddled with a huge debt-equity ratio of 10:1, the airline immediately needs at least Rs 10 billion injected into its equity base. This will enable it to begin the process of purchasing new aircraft to renew its alarmingly ageing fleet (the average age of Air-India's planes is 12 years against the civil aviation industry norm of 7 to 8 years).

The Disinvestment Commission which was appointed with great fanfare several years ago but whose business-literate suggestions about divesting government equity in several public sector companies have been largely ignored by several governments in New Delhi, has shown a healthy awareness of the awesome mess that has been made of Air-India ever since it was snatched from the business house of Tata and nationalised almost five decades ago.

Without mincing its words or couching them in gratuitous bureaucratese, the Commission has recommended the government to address all financial needs, including expansion of the airline which means providing Rs 10 billion immediately by way of sustenance support, pumping in Rs 45 billion to replace overaged airplanes and another Rs 150 billion to expand the airline's fleet. Even so warns the Commission, the airline will remain a small airline by international standards.

Well aware the Union government does not have the resources to inject this magnitude of funds into the troubled airline, the Disinvestment Commission report advises the government to divest 40 per cent of its equity in Air-India to a strategic partner: an international civil aviation major (such as British Airways which was denationalised some five years ago) or a consortium of international airlines.

Such a strategic partnership will not only inject funds into the bankrupt airline but will also provide marketing advantages. The Commission recommends that the government also restricts its shareholding in Air-India to 40 per cent with the remaining 20 per cent being offered to employees and the public.

Yet the big question is whether any of the world's civil aviation major would be interested in purchasing 40 per cent of this beleaguered airline's equity at a price which is likely to satisfy India's raucous politicians who are sure to politicise the issue, and then doing business with the Government of India as an inevitably interfering partner. The prospect does not seem as unlikely on further reflection.

Despite the poor health of the airline and its steadily declining market share, Air-India still has a 22 per cent share of the inbound and outbound India market with its huge potential. Besides, over the years, the airline has created a route network of 34 international stations where its cheerful maharajah mascot/symbol still inspires some confidence. Moreover the airline owns valuable real estate in major Indian cities including the sub-optimally managed hotels owned by its wholly owned subsidiary, the Hotel Corporation of India.

So it is not as though Air-India has nothing to offer potential suitors. But the vital prerequisite for the rejuvenation of the ailing maharajah of the Indian skies is the willingness of India's powerful politicians and bureaucrats to let go control of a milch cow airline which provides them savoury perquisites by way of unlimited free first class passages (if not entire refurbished aircraft for prime ministerial aid hunts), VIP treatment and, last but not the least, juicy commissions on purchases and stores.

True the airline doesn't make a profit -- and is unlikely to do so in the foreseeable future. But who's complaining? Most lay citizens and tax-payers don't even know that they are paying for the expensive perquisites and tastes of socialist India's new maharajahs.

Dilip Thakore

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