With Air-India's losses likely to cross Rs 340 crore, disinvestment appears only option

Priority no. 1: Michael Mascarenhas has to cut flab to be able to meet the competitionIt is not as if the signs were not there: depleting funds, falling traffic, an ageing fleet and a sagging image. With each passing day it seems national carrier Air-India (AI) is flying closer towards bankruptcy and the Board of Industrial and Financial Reconstruction (BIFR). Unless, of course, drastic measures are taken.Worse, the airline knows it can no longer look to the Government for funds. Civil Aviation Minister Ananth Kumar has made that abundantly clear. "If AI needs money," he recently stated, "it will have to find it elsewhere." In other words, AI may have to find itself a strategic partner which will provide it not only the finances but also technical and managerial support for greater efficiency. Senior AI officials say the carrier needs a minimum of Rs 1,000 crore - and immediately - to prevent it from collapsing under the weight of its own debts. With a debt-equity ratio of 9.8:1, a productivity-linked incentive package of Rs 135 crore and a 48-month inventory of unutilised spares worth Rs 89 crore, AI's bills have been steadily mounting. While the total losses for 1997-98 stood at Rs 289 crore, the figure is expected to touch Rs 340 crore by the end of this fiscal. "We are facing a financial crisis," says AI Managing Director Michael Mascarenhas. "Steps will have to be taken to arrest the slide."Click here to EnlargeIn fact, the inherent strengths of AI demand that a turnaround is attempted. For one, it is a national carrier with a network with 34 international and 11 domestic stations. Despite its share of traffic to and from India falling to 22 per cent from 33 per cent in the '80s, it is still the biggest when compared with other airlines. Gulf Air, for instance, has a meagre share of 6.1 per cent and British Airways 4.4 per cent. AI also has real estate with a substantial market value.And its 100 per cent subsidiary, the Hotel Corporation of India, has valuable properties in Mumbai and Delhi. Why the low yields then? Till 1994-95, AI was raking in average profits, enough to see the airline through spells of rough weather. A series of rash decisions by the management in the subsequent years is said to have brought things to such a pass.The biggest of these follies perhaps has been the way the management has handled employee unrest, a factor that has long plagued AI. The numerous agreements to placate striking pilots and unions pushed AI's wage bill to Rs 840 crore in 1997-98, up from Rs 474 crore in 1994-95. The best-paid in the public sector today, AI pilots on an average get around Rs 2.5 lakh a month while a flight engineer draws Rs 1 lakh. Even the cabin crew members average Rs 50,000. Redundant employees have compounded the problems. The average manpower per aircraft is 700 in the case of AI as against the international average of 200-250. Losing direction: Ananth Kumar has done little to show he is capable of rejuvenating AIAnother major factor that has contributed to AI's losses has been its wishy-washy manner of deciding on routes and schedules. AI often begins a service only to withdraw it after some time. For instance, Amsterdam was added to its schedule last year but was terminated without notice soon after. In 1995, the flight to Zurich met with the same fate. The service to South Africa which underwent a change in frequency at least five times since it was started in 1993 was also stopped in 1997, resulting in a loss of Rs 13 crore.Of all the routes AI flies, only India-Gulf, India-US and India-Japan are found to be profitable. Flights to UK, Germany, France, East Africa and Canada are the regular loss makers. One reason for this has been AI's inability to attract passengers in the high-yield business class. The first class constitutes about 11 per cent of the total passenger revenue for AI as against the industry average of 25 per cent.This in spite of the freebies offered both to passengers and travel agents. In fact the cut in fares and the frequent flier programmes have only compounded AI's losses. For instance, when AI slashed its fare from Rs 28,000 to Rs 18,000 on the Mumbai-London-Mumbai sector in July last year, it sparked a discount war among the international airlines. The end result: AI passengers deserted the airline in favour of British Airways, which came up with a more innovative offer. .preferred-source-banner{ margin-top: 10px; margin-bottom:10px;}In addition to such fiascos, most of AI's destinations are not serviced due to the lack of aircraft. AI simply does not have the fleet capacity to match other airlines. Nor are they functionally up to the mark. While the accepted average age of an aircraft is 10 years, AI's planes average 12. The plan to expand the fleet by acquiring 30 medium commercial long-range aircraft has been in cold storage for the past four years.Given the ills plaguing AI, any further delay in restructuring its finances would render it a sick undertaking. As the Disinvestment Commission has pointed out, there are four options before the Government:Refer AI to BIFR in case the Government does not pump in funds.Continue sustenance support - which means inject Rs 1,000 crore immediately. This will at best postpone the inevitable by a few years.Address "all financial needs, including expansion". Besides Rs 1,000 crore, it will have to pump in Rs 4,500 crore to replace old fleet, Rs 15,000 crore to expand it. Even then, AI will be one of the smaller global airlines.Disinvest and induct a strategic partner. Will make AI commercially viable."The Government doesn't have funds to finance AI due to budgetary constraints," says Disinvestment Commission Chairman G.V. Ramakrishna. He has recommended a set-up where the strategic partner and the government will have a holding of 40 per cent each, with the remaining equity dispersed among domestic institutional investors, employees and the public.At the moment, it seems the only way out. If the Government does invite bids from the private sector, those like the Tatas who are keen on entering the aviation sector may evince interest. It's early days yet. So far the Tatas have been typically mum. But should they come to AI's rescue, the wheel will turn a full circle. After all, it was J.R.D. Tata who in 1932 launched the Tata Airlines which later on went to become Air-India.Published By: AtMigration Published On: Sep 21, 1998--- ENDS ---

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With Air-India's losses likely to cross Rs 340 crore, disinvestment appears only option

With the airline's losses likely to cross Rs 340 crore this year, disinvestment appears the only option.

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