Raghu Menon: Dealing with challenges at Air India

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Outside Air India's headquarters in Mumbai are advertisements that talk of the "New Air India", of a fleet that is finally being modernised and of new in-flight service standards. And indeed there is much that is new as the carrier has been going through a major transformation over the past two years. It has been inducting new aircraft for the first time in well over a decade, has introduced new long-haul flights and in-flight products that are getting decent reviews, has been merging its operations with the former Indian Airlines, is modernising IT systems and is preparing to join the Star Alliance.

In reality it is all long overdue, as Air India had been stagnating for so long. With aggressive new privately owned players nipping at its heels the national carrier would have been doomed to fail unless sweeping change finally took place. Chairman and managing director Raghu Menon is the first to admit that the change process should have started long ago, but as he puts it: "It is better late than never."

"The words 'New Air India' do have meaning because it is only after a very long time that we are able to offer a product that can match any other airline," he says. "We would have been in trouble. The fleet delays were so long that perhaps the ­airline had given up hope of ever getting new aircraft. This should have been much earlier but we are very happy that this important decision was taken. It was the first big change and now there is so much more that is ­happening."

 ©Lakshman Anand

India's air transport market has itself seen massive change over the past five years, since Air Deccan was launched as the country's first low-cost carrier. Its success led to the launch of many more airlines, which in their fight for market share brought airfares down sharply, resulting in huge growth in demand. At the same time the government opened up air services agreements to allow foreign airlines to operate more services to India, and began modernising airport infrastructure at last.

The new players put immense pressure on state-run Air India and Indian, which had long been regarded as employment machines with apathetic staff, ageing aircraft and outdated in-flight products.

Civil aviation minister Praful Patel saw the writing on the wall and helped push through long-overdue fleet modernisations that saw Air India and low-cost international subsidiary Air India Express being allowed to order 68 Boeing aircraft and Indian Airlines 43 ­Airbus aircraft.

He then began promoting a bolder plan, to merge the two airlines. It had been raised years before but caused such intense political and employee opposition that the idea was dropped. It was a gamble to try again, but remarkably it went through and legal formalities were completed in August last year.

The plan was to create a true network carrier operation to help the combined entity compete effectively with the new players. Air India had until then focused on international services while Indian focused on the domestic market, with some international services to Southeast Asia and the Middle East.

"The merger is one of the best things that has happened. It has made us an airline of competitive scale in the region, in the South and Southeast Asian region. The main gains that we anticipated have turned out to be quite realistic, particularly the network synergies and the synergies in operations, and despite all doomsday predictions the human resource merger has also been of great ­benefit," says Menon, who only became ­chairman and managing director earlier this year after moving over from the Ministry of Civil Aviation.

"Mergers by necessity are complex but overall it has been a fairly smooth process. Many of the apprehensions which the employees in particular had have been allayed and within the next six months I expect about 80% of the HR merger process would be ­complete. This is a very significant achievement because we are talking about 15,000-16,000 employees on each side.

"I don't say there have been no problems, but problems have really been at individual levels. At company level it has been very encouraging and I am quite confident that over the next one-and-a-half to two years the merger will be complete in all ways."

Air India still has real problems, however, and some rival airlines say privately that its change process has largely been cosmetic without addressing the real issues of ­improving the balance sheet and cutting staff ­numbers. Menon does not deny that it has its share of challenges, but he insists things are nowhere near as bad as some of the critics believe. "The merger was not a process which has added to our problems. It has added a lot of value to the company," he says. "It has given us a higher degree of confidence in terms of our size. It has added value by the merging of skilled manpower, and the type of financial benefits that have accrued out of the integration of the two airlines has been extremely encouraging."


Menon says costs have been reduced due to the enlarged entity's increased purchasing power. Offices abroad are being merged, and there has been a "very significant revenue boost which has exceeded our expectations".

"The feed is the major positive development. We are trying to ensure that the traffic from the domestic network feeds into our two major hubs of Delhi and Mumbai, from where most of our international operations take place, so that passengers travelling abroad as well as passengers coming to India are able to get good seamless connectivity," says Menon.

"The route duplication is almost more or less completely removed now. Also the duplication in offices and personnel in various locations has been more or less removed, which has been a big saving in cost. We still have a long way to go - I am not saying it is complete - but so far we have more or less achieved what we wanted."

Financial benefits are impossible to quantify as the carrier does not release earnings at timely intervals since results must first be ­presented to Parliament. The last published accounts were for the year ended 31 March 2007, when Air India posted a loss after ­several years of profitability.

It admits it is still losing plenty of money, however. Insiders say it lost more than Rs20 billion ($406 million) in the last financial year and the civil aviation minister himself was recently quoted as saying losses could hit Rs30 billion this year. Air India also readily acknowledges that it could do with fewer employees, although this is a politically ­sensitive issue.

"One of the assurances which the government gave at the time of the merger was that there would be no retrenchment of employees. So what we are doing is, other than in operational areas, we are not going in for fresh recruitment," says Menon. "In many administrative areas there is scope for reducing the number of people. But this is being done through a process of attrition. The numbers are coming down and I think we would reach an optimum level over the next two years."

Another major problem is with information technology, particularly the lack of a single reservations system. This means that although only the Air India name is now used, the old Indian Airlines code remains. Passengers booking online, for example, still need to choose their flights from one of two websites.

Changing this is a priority and Menon says a new booking system should be in place by the middle of 2009 from vendor EDS which will allow the two airlines to merge fully under the Air India code. Pushing it to speed up the implementation is the fact that it is due to join the Star Alliance in 2009.

"The new system coincides more or less with our entry into Star Alliance. That is an initiative that will add a lot of value to our customers. In the process it also helps us to upgrade our systems to meet Star Alliance requirements," he says. "We are absolutely on track as far as Star Alliance is concerned. We are very confident that we will stick to the timeframe that we have been looking at. There has been no set date but we are looking at around May."

Air India will be the first Indian carrier to join an alliance and Menon says this should give it an edge over its competitors at home, all of which are struggling financially as a result of increased costs, overcapacity and a recent drop in demand.

The tougher times have led to major changes in the operating environment and over the past two years there has been a wave of consolidation. Aside from the Air India-Indian merger, Jet Airways acquired the former Air Sahara (now JetLite) and Kingfisher acquired the former Air Deccan.

These three groups now control 77% of the market by passenger numbers, based on the latest official July-September statistics. And the Jet and Kingfisher groups, which now have larger individual domestic market shares than Air India, recently announced a wide-ranging alliance, further putting pressure on it as well as smaller players GoAir, IndiGo, Paramount and SpiceJet.

"There is not just room for more ­consolidation but it will definitely happen as there is huge overcapacity. I would not like to hazard a guess as to the parties concerned but I think ultimately there is space for about five airlines in the domestic market," says Menon. "The major reason is the price of fuel. Such an unprecedented rise has hit the Indian ­industry very badly as our fuel prices are much higher" than in other countries due to high taxes. "I confess that I sometimes do not understand the low-cost model given the price of fuel, but they continue to be in the market."

Menon says fuel could make up 50% of Air India's expenditure this financial year. He claims there is no link, however, between its losses and the fact that it is seeking financial aid in the form of a Rs20 billion loan from the Indian government plus an increase in its equity base.

"I strongly resent the word bailout. We haven't asked for a bailout in any way. We are able to manage our working capital. What I have asked for is an injection of equity, because our equity base is very low. The second proposal which I am making is for a soft loan," says Menon.

"Firstly, there are certain integration costs we still have to bear. Secondly, for the Star Alliance there are expenditures involved, both the joining fee as well as certain upgradations. Thirdly is the passenger reservation ­system which is quite an expensive product. What we are seeking is a loan on soft terms, such as low interest and maybe a moratorium for two or three years before we start making repayment. But it has nothing to do with a bailout. We are not in any trouble where we need the government to intervene."

New players have, however, been eating badly into Air India's market share as its financial position has continued to weaken. Government statistics show its domestic market share stood at just 18.1% in the July-September quarter, compared to not many years ago when the then-Indian Airlines had a ­dominant share.

"On many sectors we didn't have a good product and it is only now that the new aircraft are coming in and we are able to deploy that. So definitely we did suffer because of the product that we were offering," says Menon.

"Secondly, the market share has dipped not just for us but all full-service carriers because of the low-cost airlines, a number of which have come up in a very short time. They have dumped a lot of capacity. It is important that we improve our market share but our priority has to be on yields rather than market share. The market share doesn't worry me as much as the yields."

This financial year has been one of cutbacks as Air India has slashed around 15% of domestic flying and 12-13% of international capacity, in part by dropping services to four international destinations. But Menon expects to enter expansion mode again from the latter part of next year (see box on p32).

"Now we are going through a process of consolidation given the state of the aviation industry but we will be prepared to take off in quite a big way by the winter of 2009 and that is primarily because of the new aircraft," he says. By then Menon expects the airline will also start looking at further expansion through new aircraft orders.

His upbeat tone may seem unrealistically optimistic given the current state of the market but he insists he is indeed realistic and accepts there is still much to be done to put Air India into a position of strength.

"There is a lot of work to do but Air India has gone through difficult phases like this in the past," he says. "And I am not looking too far into the future for things to get better. Within a year's time we should be able to improve our performance in terms of returns and expand our operations to new destinations and restore some of the destinations from which we have withdrawn. Air India holds a lot of promise and should not be underestimated. It is an airline which has performed for over 75 years, and with the transformation that is taking place it will perform even better."

"The merger has made us an airline of competitive scale in the Southeast Asian region"

Click here to read our cover interview with Indian civil aviation minister Praful Patel.