Stock Analysis, IPO, Mutual Funds, Bonds & More

Why only a Satyam-like restructuring can save Air India from losses and mounting debt

A Satyam-like administration can work because it will not be a direct stakeholder in the airline and will have no political masters to answer to.

, ET Bureau|
Updated: Nov 12, 2011, 11.20 AM IST
Why only a Satyam-like restructuring can save Air India from losses and mounting debt
There was no expectation this time. When a group of ministers (GoM) met last month on a 'turnaround plan' for shipwrecked Air India, it barely drew the attention an endeavour to save the country's number one aviation asset would.

So many times has Air India been through a cycle of destruction - airline messes up, government disassociates itself, losses and debt mount, government steps in, heads roll, government cobbles up new plan - that any intention to heal draws more mirth than sympathy, ridicule than belief.

Belief is in short supply in the government too - the latest plan has been in the works for about nine months now. As are business ideas and political will. The latest plan, like the three that preceded it, is to grease the airline's operations with cash. This is an operation that, in 2009-10, lost Rs 5,500 crore on revenues of Rs 13,100 crore and can't service its Rs 43,000 crore debt.

Yet, the GoM wants to infuse Rs 23,000 crore - of taxpayer money - into Air India by 2020, starting with Rs 6,500 crore this year. It also wants to restructure Rs 22,000 crore of its loans and give the airline a breather on repayment, for which it has sought a view of the banking regulator. In other words, the GoM, headed by finance minister Pranab Mukherjee, hopes that more cash will revive the airline.

“That's the problem,” says aviation analyst Kapil Kaul. "The airline needs a financial restructuring plan, but a credible and comprehensive business plan, spread over five to 10 years, must come first." All turnaround efforts have been either silent or have not addressed the business plan adequately.

Such a plan should cover how much Air India will fly, how it will source its planes, what will it do with employees surplus to needs, how will it improve service and market share, will it join a global alliance, what ancillary activities it will focus on and what it will let go...Put another way, how will it restructure its operations, which are all over the place?

For example, Air India has 38,000 employees - about three times the industry norm - and they reside in two camps that don't get along. Or, despite accumulated losses of Rs 13,000 crore, it has committed to spending about Rs 20,000 crore to buy 27 Dreamliners from Boeing in the next few years.

Why only a Satyam-like restructuring can save Air India from losses and mounting debt

These are issues that need to be resolved. Now. "This is the airline's last chance," says Jitender Bhargava, a former executive director of Air India. Kaul asks who will craft a business case and decide if Air India is viable or not. "The current set of people can't take that decision. It needs a Satyam-like administration," says Kaul, CEO (South Asia), Centre for Asia Pacific Aviation (CAPA). "The government should reduce its stake to 26% if it thinks ownership is important for strategic and security purposes, and then exit."

Why only a Satyam-like restructuring can save Air India from losses and mounting debt

Kaul is referring to the swift and measured government action in 2009 to save Satyam Computer. India's fourth-largest IT company was hit by a Rs 7,000 crore accounting fraud perpetrated by its promoter Ramalinga Raju. When it was revealed, on January 7, it triggered a series of upheavals that struck at the very survival of the company. Raju was arrested, Satyam's management disgraced, its board disbanded and its auditor implicated. Investors filed classaction suits, and its 690 clients and 53,000 employees had no idea what lay ahead.

On January 11, four days after it all unravelled, the government reconstituted the Satyam board and appointed three new directors: HDFC executive chairman Deepak Parekh, former Sebi member C Achuthan and former Nasscom president Kiran Karnik. They dealt with the government, regulators, investors, bankers, auditors, clients and employees, among others.

The new board, later expanded to six, kept the operations going, while looking for a long-term solution. On April 13, Satyam was sold to Tech Mahindra. Recalls Karnik: "Our mandate was clear: there would be no downsizing and we were not there to serve the company, but to just do a turnaround."

Karnik believes that, theoretically, any organisation can be turned around "given the right flexibility, decisions and management". But, he adds, a Satyam cannot be done on Air India. "There is a glaring difference in political will," says Karnik. "The government had tremendous foresight for Satyam. But there is a complete lack of political will in the case of Air India."

Anurag Goel was the secretary in the ministry of corporate affairs and steered the Satyam rescue. An interview of his published in ET on May 5, 2009, provides a glimpse of the political will that helped Satyam - and could help Air India if the government wanted. "An effective partnership forged between the industry and the government made this happen," he said. "The government at various levels - the highest level, the political leadership and the bureaucracy - acted in tandem with a remarkable degree of decisiveness and swiftness."


That government intent has never come Air India's way. What has come its way is repeated interference in business decisions. Take aircraft acquisition, as explained by the government's auditor, the Comptroller and Auditor General (CAG). Between December 1996 and January 2004, Air India's plan to acquire 28 aircraft was tossed around various government offices.

Once the airline increased the order to 68 aircraft, the process gained momentum and a Rs 33,000 crore contract with Boeing was signed in December 2005. In its performance audit report submitted to Parliament on September 8, 2011, CAG said the demand projections did not justify the order and that it was "supply driven".

Bhargava gives some numbers to explain the unfeasibility. "In the 10 years prior to the acquisition plan, Air India averaged a profit of Rs 750 crore. The acquisition was worth Rs 33,000 crore. Add 4-5% interest, you are talking of repayment of Rs 40,000-odd crore over 15 years," he says. "That means you must make an annual profit of Rs 2,500 crore.

Even the best of airlines do not make a profit of more than 3% of revenues. Air India's revenue in the year we placed the order was Rs 7,500 crore." Karnik says the problem with Air India starts at the top. "Its fundamental problem is that a joint secretary is made its CMD (chairman and managing director) every now and then," he says. "The government has made it a joke."

Current incumbent Rohit Nandan took over on August 12, almost overnight, while the government placated Parliament on alleged mismanagement in Air India. "It looks to me that they needed someone, and just filled the position with the person they found most easily and quickly," says Sanat Kaul, a former secretary in the civil aviation ministry. "They could have put Nandan there for six months and kept looking for someone."


A 1982 batch IAS officer, Nandan has been in several ministries, the last being civil aviation. Kaul of CAPA has interacted with Nandan, and considers him a "dedicated and serious" man. "He speaks less and that is an advantage in Air India." Yet, he adds: "I was surprised with the choice. The airline needs somebody with the ability to restructure the company and that requires a different skill set."

Nandan was not the first choice. According to two ministry officials in the know, two bureaucrats associated with the aviation sector turned down the post. One of them was EK Bharat Bhushan, who currently heads the Directorate General of Civil Aviation (DGCA), the sector regulator. "At one point of time I did want to be the airline CMD," says Bhushan. "But now the airline has deteriorated so much that the position is fraught with risks."

The "risks" that Bhushan alludes to were on embarrassing display during the 27-month tenure of Nandan's predecessor, Arvind Jadhav. Air India staff struck work thrice. The opposition party, BJP, pointed out the government panel that chose Jadhav had found him unsuitable a year ago. His A-team, three of whom came from the private sector on private-sector salaries, was sacked. As was Jadhav, with nine months remaining on his tenure.

Air India has had 10 managing directors in the last 17 years - an average of one year and eight months. Only one completed a full term. That was V Thulasidas, who, in 2007, oversaw the decision to merge Air India (essentially, the government's international operations) and the erstwhile Indian Airlines (domestic operations), which has since proven to be a bane.

Thulasidas left in March 2008. Since then, the airline has had four changes at the top, while hurtling from one crisis to another. In other words, it lacked stable leadership and strategic thinking when it needed those attributes the most. And the political leadership looked on.

It's going to be three months since Nandan stepped into this mess. "The task before me is to revive the airline," Nandan told ET after taking over. "Customer satisfaction will be my single focus," he said. Customer focus is what his predecessors, Jadhav (May 2009 to August 2011) and Raghu Menon (April 2008 to April 2009), also harped on after taking over. Typically, Air India CMDs come with a mandate that prefers continuity to change, housekeeping to restructuring. In that design, legacy issues linger.

For example, the disparity in pay scales between the erstwhile Air India and Indian Airlines employees - the latter are paid less. Four years after the merger, says the CAG report, "HR integration below the level of DGM (deputy general manager), representing 98% of the staff, has still not taken place." A Satyam-like administration, which is not a direct stakeholder in the airline and does not have political masters, can tackle such issues.

Nandan hasn't started addressing legacy issues yet, but he's shown initiative in improving customer experience. Under him, the airline is adding routes, reviving smaller aircraft on shorter routes, hiring younger cabin crew, flying each aircraft more and focusing on ontime performance (OTP). "Air travel is a touch-and-feel service," says Amber Dubey, director (aerospace), KPMG. "Passengers give clear preference to airlines with punctual flights and quick service. If Air India can achieve that, regaining market share won't be a problem."

A senior Air India official, speaking on the condition of anonymity, says that Nandan monitors OTP thrice a day, and has made regional managers and general managers accountable for it. According to DGCA data, while the best OTP is about 90%, Air India was doing 73% in August. It is now doing 88-90%. And a letter dated September 13 by Nandan to Air India employee outlines the November target at 93%.

It is also setting the price line, but industry players doubt the feasibility of that strategy. "Lowering prices without lowering costs is not the answer for Air India," says Azran Osman Rani, CEO of Air Asia X, a Malaysian low-cost carrier. "There are almost no full-service carriers in the world that have cut costs by 50%." CAPA estimates Air India will lose $1.75-2 billion in 2011-12.

Even as he addresses service, Nandan has little say in the long-term plans for the airline the GoM is designing. "His contribution is minimal," says a senior ministry official, not wanting to be identified.

"Most of the things had been done before he took over, though he is in the know." While taking over, Nandan had told ET: "My job is to implement the turnaround plan in a limited timeframe...to ensure that money flows in, in accordance with the plan, both from operations and the government side."

Kaul says, maybe, the government wants it this way. "Is the government looking to turn Air India around? I don't think so," he says. "If somebody takes a decision, it might be politically unwise for them." Another consultant, on the condition of anonymity, says the government wants to buy peace for two years and pass Air India to the next regime. "But," adds Kaul, "after two years, there may be nothing left to salvage."

Also Read

Air India launches flights between Bhubaneswar and Surat

Air India back with Amadeus for ticketing solutions

Questions for 2020: Air India, BPCL get sold?

Air India pays November allowances to pilots

Interests of Air India employees would be protected: Government

Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links

Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service