Report lays bare Air India woes

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In early September, an Indian newspaper reported that Air India's management was considering hiring a younger batch of female crew, and changing their uniform from the sari to something more "modern". The aim, according to the report, was to "refresh" the airline's image and increase service standards, thereby attracting more passengers and increasing revenues.

If only the solution to the Indian flag carrier's problems were so simple.

At the start of August, Star Alliance suspended Air India's membership efforts, citing the airline's challenges in returning to profitability and restructuring its operations. Industry sources say, privately, that there is a realisation the airline is unlikely to join Star Alliance and talks have begun with India's largest domestic ­carrier, Jet Airways.

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Twelve days later, India's civil aviation ministry replaced airline chairman and managing director Arvind Jadhav with another career civil servant, Rohit Nandan. It came amid news of the carrier's estimated loss of Indian rupees (Rs) 69.94 billion ($1.44 billion) in its 2010-2011 financial year.

The extent of the problems at the carrier have been laid bare in a subsequent report by the Comptroller and Auditor General of India, blaming both the ministry and the airline's management for the woes.

According to the audit, presented to the country's Parliament in September, the airline has not been profitable since 2005. Debts reached Rs384 billion as of 31 March 2010 because of plans to purchase new aircraft, inefficient operations and competition from domestic and international carriers. Acknowledging Air India had become a political football, the audit concludes the government has to take a comprehensive approach to rehabilitating the airline and ensuring its survival. It emphasises the best solution is to ensure Air India's board and management have both independence and transparency when it comes to decisions.

The report dates debt problems back to Air India's 2005 decision to buy 68 Boeing long-range aircraft and the decision by Indian Airlines, which later merged with the former, to order 43 Airbus narrowbodies that year as well.

It describes the plan to fund the acquisition through debt, to be repaid via revenue generation, a "recipe for disaster" and says assumptions that extra capacity would lead to a rise in market share and yields were not validated and unduly optimistic.

"Aircraft acquisition has contributed predominantly to it [the debt]. The government must lay down a road map for liquidating the liability within a short span after making a realistic assessment of revenue generation capacity. Piecemeal infusion of small amounts is merely going to, at best, delay the certain closure of the airline," it says, calling previous government attempts to shore up Air India with equity infusions as a "drop in the ocean".

External factors, such as high fuel prices and the 2008 economic recession, exacerbated the situation. "The airline's weak financial position, inadequate equity capital and undue dependence on debt funding provided little or no cushion for the financial shock when it came," the audit notes.

Several steps have been taken to help Air India during the past two years, including the rationalisation of the network and shutting down many loss-making routes. The development of hubs such as New Delhi and Mumbai will also help the airline in its long-haul operations. The report urges that management and the government renew Air India's efforts to join Star Alliance, and puts more emphasis on the airline's on-time performance, increasing online and premium ticket sales.

One of the biggest challenges Air India's management faced was to figure out how to shrink its bloated workforce and spin-off divisions such as maintenance, ground-handling and cargo.

Internal and political opposition have scuppered both efforts. Nonetheless, the audit recommends human resource policies should also be reviewed to ensure that the workforce is integrated, and the staff pay be revised sufficiently to incentivise or disincentivise actual performance.

"Unless the government takes cognisance of [these] factors and decisions thereupon, the airline does not have a future as a vibrant public sector entity," it says. The reality is some in the industry believe this conclusion should have been reached years ago.

IN THE ARCHIVES: See our December 2008 cover interview with then Air India chairman Raghu Menon