There has been much debate over infusion of taxpayer monies into Air India. Fine, but is there an option?
National carriers are ‘protected species' with sovereign governments going ‘all-out' to infuse billions of dollars to avoid bankruptcy. Emerging economies need strong national carriers for economic growth, tourism and trade.
Thai Airways, Malaysian, Qantas and Air New Zealand are all classic cases of government bail-out, clubbed with formal turnaround plans. Post 9/11, the US government committed $15 billion to bail out bankrupt carriers. What Air India is going through today is not at all uncommon!
Scope for turnaround
The Turnaround Plan will need to alter some fundamental parameters of Air India's operations, which will be challenging and frustrating. But, India's traffic potential gives a lot of leeway for Air India to get its act together; many of the global carriers would not have this luxury.
With less than 2.5 per cent of the Indian population travelling by air, ‘per capita trips' being just 0.05 (China is 0.3, US 2.1), with only 125 of the 450 airports functional and top 25 Indian airports accounting for 95 per cent of the passenger traffic, a huge potential for air traffic growth in India is clearly visible.
With Indian carriers expecting to order 1,300 aircraft in the next 20 years, Air India alone would possibly buy 200 aircraft, which leaves enough scope for Air India focus on its core ‘airline business' (and hive off non-core activities such as maintenance and ground handling ) and steadily improve its low staff productivity, without the need for immediate staff retrenchment.
Now, should Air India be bailed out, at any cost? With such growing traffic, the existence of five to six viable carriers is important. In the last seven years, the number of carriers has dwindled; Sahara merged with Jet, Air Deccan with Kingfisher, and Indian with Air India. Paramount is gone; Air India and Kingfisher have had serious flight disruptions, shrinking capacity — all of this resulting in increased air travel cost. Hence it makes sense for the government to go all-out to revitalise Air India, provided the ‘turnaround plan' is made workable.
Merger pains and gains
There is much talk about how difficult it is to merge Air India and Indian Airlines. Globally, airline mergers have proven to be effective for reducing costs, in spite of challenges. A number of merger integration models are also available.
In the case of US Airways' merger with America West in 2005, given the salary and cultural disparities, the two sets of pilots refused to operate aircraft that came in from other airlines, until the combined seniority list was agreed upon; this reduced operational flexibility for more than seven years.
It took more than two years for United and Continental to complete the merger integration process until which time independent operations under a combined leadership continued. In 2004, Air France and KLM took advantage of their merger to reap benefits of scale, in spite of vast cultural diversity; only the back-end is integrated. The front-end retains two respective brand identities, separate web sites and independently operating respective hubs in Charles De Gaulle, Paris and Schiphol, Amsterdam.
All mergers are frustrating, but have to be managed for synergies and economies of scale.
Implementing the Air India-Indian merger at the earliest is thus inevitable, irrespective of challenges involved. The government needs to bite the bullet now.
This will reduce cost, avoid duplications in aircraft, routes, staff, spares, office space, improve capacity utilisation and load factor, and provide bargaining power in terms of aircraft, fuel and insurance procurement. This is a ‘low hanging fruit' which should be seized upon.
Leadership factor
Mr Rohit Nandan is the fifth CMD of the carrier, in four years. Infusing funds without empowered leadership, free from political interference, is a waste of taxpayer resources. Air India needs focused leadership, more than anything else.
US Airways went into two successive bankruptcies within three years of 9/11 attacks; what turned it around by 2006 was the strong leadership of David Siegel and Doug Parker, who established the necessary trust with the pilots unions, negotiated salary cuts to the tune of $1.5 billion and successfully merged US Airways with America West.
Piyasvasti Amranand, an economist from London School of Business with no aviation experience, turned around Thai Airways when government infused a billion dollars in 2008, restoring the airline to record profitability by 2010, increasing share price ten-fold.
Air New Zealand merged with Ansett and subsequently slipped into bankruptcy during 2001, when the government nationalised it back and infused billions of dollars. Ralph Norris, a banker, successfully turned around the airline by 2005. Malaysian collapsed in 2005 when faced with severe competition from low-cost carriers such as Air Asia. Idris Jala, professional of repute working for Shell, turned around Malaysian by 2007, aggressively restructuring and taking Air Asia ‘head-on' in pricing. If Air India is provided with an empowered leadership, why can't it turn around?
A common thread in all the above successful turnarounds is gaining staff trust in negotiating staff compensation linked with productivity, entering ‘low cost' model directly or through a subsidiary, deploying technology to enhance Internet bookings, hedging fuel, all of which significantly reduces costs. These can be achieved only by a strong leader, not necessarily with aviation expertise.
staff productivity
Staff is a major contributor to any airline's success. With severe shortage in pilots forecast over the next ten years, nurturing them becomes critical.
Pilots also need to realise that unreasonable demands, holding the airline to ransom, would affect the very viability of the airline. Pilot unions in the US negotiated benefits so much in pilots' favour that eventually they had to forego a large part of it, when their airline entered bankruptcy protection.
Pilots should objectively negotiate compensation linked with productivity, in line with regional benchmarks.
Possibly, when an empowered leadership is in place, Air India employees may open up to ‘less pay-more work' type negotiations, realising that their compromise will make a difference to the airline's profitability; today they may not have that comfort factor.
Turnaround plans have helped global carriers become efficient; benchmarking with low-cost carriers, parameters such as load factor, yield and employee productivity have steadily improved. Clearly, it is the strong leadership that has been instrumental in successfully turning around carriers.
However, the financials of these carriers are still very sensitive; profitability is still minimal even at close to 80 per cent load factors, signalling that a minor drop in demand for air travel, due to whatever reasons, could spell catastrophe.
In spite of infusing capital, empowered leadership and effective turnaround, Air India may still be exposed to difficult times; after all, even the most efficient airline in the world, South West reported third quarter losses in 2011. The story thus does not just end with the infusion of Rs 30,000 crore, but the efforts, for sure, could strengthen Air India.
(The author is Associate Director, International Infrastructure Consultants (P) Ltd, Chennai.)