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Air India: Melting into thin air?

Last Updated: Friday, May 7, 2010 - 17:54

Arani Basu

For a long time, Air India has been India’s aviation industry’s Holy Cow. Be it a middle class family man on vacation or the high-end business executive, Indian flyers have trusted Air India classically, devotedly, ever since. However, for the last two years, the picture is not all perfect. Air India has seen four chief executives since the appointment of Vasudevan Thulasidas as the chairman and managing director of the merged entity since August 2007. Civil Aviation Minister Praful Patel has washed his hands off of the ‘mess’ in Air India, to quote him in the least.

To begin with, Air India’s fall from grace is a classic saga of yet another public sector falling prey to unavoidable market forces and subsequently accepting a silent retreat to the last row. It is easy to keep transferring the burden of responsibility; one is constantly looking for a scapegoat, a suitable shoulder to put the blame on in such situation, and that has exactly been happening in this case too. Few weeks back, Patel said at a media conference that he was not responsible for the airline’s problems. Then whom to be blamed? According to the minister, carrier’s 31,000 employees and its senior managers should be.

An unsuccessful merger

In August 2007, the merger happened between Air India and Indian Airlines -- the state-owned international and domestic carriers -- and together they came to be known as National Aviation Company of India Ltd (NACIL), which uses the Air India brand. This business wed-lock was decided upon in the expectation that it will bring meaningful results for the company.

The idea was good: merging the state-owned domestic and international carriers into one giant airline to drive home economies of scale, even as making this giant project part of a global alliance to streamline service standards. The merger, midwifed by consulting firm Accenture’s Indian arm, was expected to result in savings between Rs 600 crore and Rs 1,200 crore from 2010. Yet, the airline continues to lose more money. “The biggest problem is the lack of continuity of a chief executive”, says a senior Accenture executive, who declining to be named.

Added an Air India board member: “In the true sense, there is little change; the two airlines have not come together, on the ground or in the air. Technically, only some things have changed. There is one balance sheet, common directors, some schedule planning and a common CEO for both the companies, and that’s it.” So at the functional level, no substantial change has taken place.

The failure of the merger is reflected at all levels. Analysts say one prerequisite for such mergers to work is that the airlines use common equipment. And Air India and Indian Airlines have always flown different aircraft – made by Boeing, in the case of the former, and Airbus SAS for the latter. That distinction cascades into different equipment at every level, say analysts. The incompetence of the merger is evident in the backend reservation system on the airline’s website. Passengers struggle with different windows that eventually lead to entirely different websites – one for domestic and the other for international. And because these reservation systems are still disparate and use the old codes, IC (Indian Airlines) for domestic and AI (Air India) for international, there can be no merger of the flight codes. Thus, failure to create one single window operating system for both domestic and international passenger online booking is one of the many indicators that the merger has gone all wrong.

The inability to complete this merger, rather than the merger itself, is strongly responsible for the airline’s current woes. In effect, the new Air India is two different airlines desperately wanting to be one.

Labour problems

Apart from the merger going wrong, there are several other factors that have contributed to the dismal state of the country’s flagship air carrier. Air India’s numbers paint a picture of decay. The airline employs one in three people working in India’s aviation sector and has 210 employees for each of its 147 aircraft. In comparison, British Airways has 175 workers for each of its 228 aircrafts and Lufthansa, 196 for each of its 545 planes. Air India itself admits that overstaffing results in limited scope to boost productivity and accountability.

Next, accumulated losses have ballooned to Rs.7,200 crore as on end-May, with at least Rs.600 crore logged just in April and May. So the debt trap for Air India is a serious issue, a potential rescue from which was contemplated in the merger. Thirdly, customer service has eddied down alarmingly, to the effect that just one in six is on Air India and Indian Airlines, down from four in six two years ago. Fourthly, the union angle has hit Air India over the years quite hard. The airline has 14 recognized worker unions and several unrecognized ones for its 31,000 employees.

Given the difficulties that Air India is facing today, one is forced to think that does the airline have any hope of turning the corner? For an answer we need to have a look at the competition and realities of the aviation market. Both Jet and Kingfisher are now significantly bigger in the domestic market, accounting between them for 49 percent of the traffic, while Air India is a poor third at 18 percent. These low cost carriers also happen to be profitable, and both now plan international operations from next year – including forays into the Gulf route that used to be Air India’s milch cow. So while Indigo and SpiceJet win out in the low-cost segment, Jet and Kingfisher have walked away with the cream of the business class market. Meanwhile, the government also has been lenient in allowing foreign airlines to operate flights to and from India. These are done through bilateral agreements; the increase of seats to gulf carriers has been over 25 percent in the last four years.

Though the first time in its history of 60 years that the airline will be looking at equity share, it is tough to see Air India melting in thin air – from the market. Market forces are undoubtedly obtrusive, and public sectors are having hard time sustaining. However, is it reason enough for such well-reputed airline to meet with a premature exit? Or it is not premature at all given that new times have new needs? While the ministers keep grappling over the issue of who loses what out of Air India’s overall lose of fame, let us not wish away the airline’s longstanding relationship with the flyers of India.

First Published: Friday, May 7, 2010 - 17:54

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