Up in the air

In his letter to Tata Sons’ board, Cyrus Mistry was particularly critical of the extreme fondness of the Group to keep investing in the airline industry and blew the whistle on a possible diversion of ₹22 crore in Air Asia.

Early in 2013, the Tata decided to enter a joint venture called Air Asia with an investment of $9 million. A few months later in 2013, they decided to take a 51 per cent stake in another JV which is now Air Vistara. Mistry claims he was against these ventures but he had no powers to stop them from being entered into.

He probably missed a trick by putting down his objections against the airline ventures in writing to the Board. One of the best methods to prove one’s independence when questioned is to produce an authentic document that corroborates the stand taken. It is possible that these ventures happened when he was still wetting his feet in the role of chairman but independence does not give anyone the benefit of time. The affinity (which borders on weakness) that the Tatas have for the airline sector is nothing new — JRD Tata commenced Tata Airlines (now Air India) in 1932 and flew the first plane himself.

The only reason that can be attributed to their desire to have an investment in two airline ventures is that they wanted to be a player in both segments of the market —Air Asia is predominantly a low-cost carrier ( Average fare of ₹3,138 in the April-June 2016 quarter) while Vistara seems to want to cater to the traveller who doesn’t necessarily look at price while booking his ticket.

Air Asia India has had to face quite a few air pockets during its existence in India. At the outset, they surprised everyone by appointing their legal consultant as their CEO. Every now and then, there were reports that the airline was being remote controlled from Malaysia — the location of the other Joint Venture partner Air Asia Berhad. At the end of his term, the CEO quit which was an indicator that something is amiss in the corporate part of the airline. With six aircraft, revenues have been rising due to volume, however profits seem many air miles away.

For the June 2016 quarter, the airline reported a loss of ₹20 crore. As per the diktats of accounting standards, Air Asia Berhad has stopped recognising their portion of losses from the joint venture since their entire initial investment has been wiped out. The Tatas must also be doing the same, resulting in a situation where the losses keep accruing but don’t impact anyone! Air commerce is not far behind e-commerce in offering discounts to acquire customers which would mean that losses would be the new normal.

With all this happening, it is not surprising that internal controls were lax resulting in the alleged payment to non-existent entities in India and Singapore. The airline has issued a generalistic statement that action will be taken against the guilty and such like. It is a fact that had Mistry not been fired, no one would have known about this.

Since there appear to be no gains financially, it is probably the right time for Tata Sons to take a call on whether they want to stay invested in Air Asia for emotional reasons. Along with their search for a new chairman, they should probably look for a partner who will buy out their stake in Air Asia.

The writer is a chartered accountant