For Air India its glory days seem long gone, today the once-proud airline is a shadow of its former self. In 2017, the government finally decided to let go of its stake in the airline and approved its privatization, however so far this has been a hard sell. Even though the airline has a lot to offer in terms of aircraft, a professional workforce, and rights over some of the most lucrative air routes, investors have been hesitant to touch the airline with a ten-foot pole. This is because for all that Air India has to offer, it’s massive debt obligations have practically chased investors away over the years. As of December 2019, Air India’s total debt amounted to Rupees 60,000 crores (approximately 8.2 Billion Dollars), whereas it’s total assets as of the same period were just about Rupees 52,352 crores (Approx 7.3 Billion dollars). Even after various concessions are given by the government including transferring nearly Rupees 30,000 crores to an SPV (Special Purpose Vehicle), investors still seem very hesitant to invest in the airline.
Air India’s unfortunate run has made it the poster child for loss-making government entities and strengthened the argument for privatization of sectors which has been hemorrhaging the public exchequer over time. However is privatization the answer to Air India’s woes? Have Air India’s problems been caused by ineffective management and corruption by the government, or are there other factors involved? And can private management which is more profit-oriented resolve these issues for Air India? In this article, we shall seek to answer these very questions.
The Rise and Fall
In 1953 the government decided to nationalize the aviation sector in the country and as a result, passed the Air Corporations Act of 1953. As per the Air Corporations Act, two companies were to have an absolute monopoly over the aviation industry, Air India for all International routes, and Indian airlines for all domestic routes. This monopoly would continue up until 1994 when the government repealed the old Air corporation act effectively allowing private players to participate in the sector.
Till early 1989 both entities were very profitable, the table below illustrates the profits reined in by Air India and Indian Airlines up until 1989.
Source: ICAO civil aviation statistics. Paper source: Mazumdar, Arijit.
If we refer to the above mentioned figures it is evident that despite various setbacks which include the bombing of an Air India flight in 1986, the company’s profitability has remained firmly intact.
Part of the reason for this profitability can be attributed to the monopoly it enjoyed in the sector, with virtually no competitor on the horizon the airline reigned supreme in Indian skies. Air India had for over 5 decades cemented its position in the industry, even when private players entered the market Air India was virtually the only Indian airline which was operating flights abroad. Even after 1989, Air India continued to post hefty profits crossing the 300 Crore mark in the financial year 1992-1993.
Coincidentally it was in 1994 when Air India’s profits took a plunge and in the financial year of 1994-1995 Air India registered a profit of Rs 105 Crores. As per official sources, this plunge in profits was the result of the addition of 4 jumbo jets (Boeing 747) to the fleet, and competition from private airlines was still minimal if not nonexistent. The government did take action concerning the plunging profits and fired the Managing director Durga Mathur. Little did Air India know that at this point troubles had just begun for the Airline.
Post 1995 the airlines slowly descended into chaos, as private carriers such as Jet Airways started picking up steam. Air India which was already burdened with expensive aircraft acquisitions started bleeding money. Between 1995 to 1999 airline losses amounted to billions of Rupees and the company had been marred with corruption scandals. Still being a public sector company, Air India was being given credit extensions by the government and Public sector banks alike. Although the company was making a loss due to stiff competition, given its focus purely on international routes it was able to sustain itself.
An ill-fated Merger
In 2007, an ill-considered government decision to merge Air India with Indian Airlines served as a major blow to the Airline’s profitability. Both Air India and Indian Airlines were loss-making companies and by merging them the government had essentially just ballooned Air India’s debt size. But it was one particular aspect of the Merger which essentially caused Major trouble for the Airlines.
Operating as two distinct entities for decades, Air India and Indian Airlines hired separate pilots who formed separate trade Unions. Air India pilots were unionized under the Banner of Indian Pilots Guild (IPG), Indian Airlines Pilots under the Indian commercial pilots association (ICPA). Long story short, IPG did not like the fact that Air India has been sending pilots from ICPA to train on the newly acquired Boeing 787 Dreamliner as they believed that International routes should be solely reserved for Air India pilots who had been with the company before the merger. The disagreement resulted in a strike by IPG pilots in 2012, where within a matter of 10 days the airline lost close to 625 crores. This entire episode was particularly embarrassing for the Aviation ministry as they had just secured a 42000 Crore package to revive the airlines.
Despite government bailouts, the airlines failed to perform and slipped further into losses. The following graph list Air India’s losses since the government Bailout
Though the entire blame for Air India’s misfortunes cannot be blamed on its merger with Indian Airlines, it is very evident that the merger of another loss-making entity was simply an added financial burden for the Airline.
Privatization of Air India, what does it entail
In 2017, the government had burnt a huge hole in their pocket and decided to exit Air India. The government initially planned on selling 76% of its stake which was however later revised to a full 100%. At present companies like Tata and Indigo are considering the offer although neither has made any commitment.
Privatizing Air India would mean a drastic overhaul for the company. This would mean it is possible that the company will be operationally restructured and will result in the downsizing of staff and Aircraft. It is also possible that the airline’s international and domestic service can be split into two separate entities to increase efficiency and profitability.
Air India’s market share has been constantly slipping in 2019 Air India’s market share was down to 11.9 percent from close to 16 percent in 2016. In the pie chart down below we can see the market share of different airlines in 2019.
From the chart, it is evident that Budget Airlines such as Indigo and Spice jet have seen more success in terms of captivating Market share due to their comparatively low ticket pricing. Air India already has a budget airline subsidiary Air India Express which operates flights exclusively to the Middle East and Southeast Asia,. However, Air India express only serves International destinations and Air India does not have a domestic equivalent for the same.
Given that the competition in the Indian aviation sector has been hijacked by Budget airlines there can be a possibility that Air India’s domestic service can be converted to a Budget Airline model while allowing it’s International operations to continue as it is. This model has already been partially adopted by Air India as it uses only airbus aircraft for its domestic operations whereas Boeing aircraft for International operations
One of the biggest advantages of privatization is the bringing of new management. Typical of most Public sector undertakings the affairs of the company are mostly run by government servants who may not have the necessary expertise in running the business. Private management would ensure the recruitment of experts to run the day to day operations of the company and relive it from massive government oversight.
We could also see a reduced tolerance for strikes and disruption and increased discipline in the ranks. Air India has been particularly notorious for various instances of unprofessional behavior wherein pilots have turned up drunk to work or staff has been excessive with passengers. Private management could also see greater accountability on part of the airlines in response to delayed or canceled flights.
However, privatization can also result in conflicts between the new management and the government. The Government of India uses Air India aircraft for all official purposes including VVIP travel of the President, Vice President, and the Prime Minister. Currently, Air India is remunerated for its service by the Defence ministry. Earlier the aircraft that were used by the defense ministry was also in commercial service of the airline. However, this issue is being addressed at present as the government of India is considering acquiring new aircraft and placing them under the operational control of the Indian Air force. Another point of conflict that will arise is the realization of dues owed by the government to Air India. As of September 2019, the government of India owes Air India 1146.86 crores for overseas travel of VVIP’s including the president, Vice president, and the Prime Minister.
It is still speculative as to whether privatization is the answer to the airline’s woes. While the government has indeed been trying awfully hard to sell Air India, there is a good chance that even after the privatization the airline may be too onerous to revive. At present, there are no active bidders for the company and it seems likely that the government will continue to control the reins of the company till either some private player is willing to take the risk or the government may have to shoulder more of the burden before it can finally let go of the airline. Ultimately what is left to be seen is whether the Maharaja’s second act can redeem it and return Air India to its former glory.
This article was first published in Legally Bullish