Thursday, September 8, 2011

CAG should have recommended selling off Air India….

Every now and then a new development forces us to ask the question about what we need to do with Air India. A few months back, it was the Air India pilot’s strike that made us ask the question. Yesterday, it was the CAG report on Air India. Till the time Air India becomes a professionally managed profitable company, the same question will keep being asked. But is at all possible for Air India to become professional as long as it stays a government company? Can Air India ever become viable? In my opinion, no, it can’t. It should be sold off….

One of the most serious allegations made by the CAG is that the government allowed Air India to acquire so many aircraft. An associated allegation is that all of this was funded by debt. Generally speaking, funding any large purchase only with debt would be called a poor financial strategy for any company. If it was financially as weak as Air India, it would be a sort of financial hara-kiri. So much debt would weigh it down with a burden it wouldn’t be able to bear. Clearly, there should have been an infusion of equity – a proper debt: equity ratio is a critical component of large capex spendings. The real question to ask then is not why 111 aircraft were bought, but why no equity was brought into the company.

Air India has been a touchy subject for successive governments for many years. The airline suffers from very fundamental issues – most of them related to it being a government company. On the one hand, we have seen Air India pilots go on strikes demanding more wages. On the other hand, we have seen the airline unable to bear even the present burden of salaries. Further, we have seen innumerable complaints against the airline. Also, Air India’s safety record must be amongst the worst in the world. No wonder then that over the years, Air India’s market share has been dropping inexorably.

It’s not difficult to understand why Air India is in so much trouble. The airline industry belongs to the “hospitality” sector, which needs high service standards to be maintained. Now in a government company, the last thing on any employee’s minds is customer service. No wonder then that the air hostesses are rude (and crude), the food is ugly to look at (and tasteless) and even the basic facilities inside the aircraft (upholstery, toilets, air conditioning, choice of newspapers and magazines) leave much to be desired. Yet, the pricing is as high as that of the much better private airlines. Why? Because Air India’s costs of operations are high…..and they must be passed on to their customers! And why is that so? Many reasons but primarily because it has a bloated work force. The number of people who work in Air India is some 40000 odd; in comparison, the number of people in the much larger Jet Airways is less than 10000. Such a big workforce – leading to a huge salary burden – and such a work attitude clearly makes Air India an unviable airline.

An airline is made by its people.....its pilots, its in-flight crew and its front-end staff. The right people deliver the right experience. On people issues, no government company can ever compete with private players. Air India cannot pay its pilots well enough. So the best pilots keep deserting it. Likewise, the government cannot attract the best crew. To make matters worse, its policies are such that it cannot force air hostesses and stewards to even do the basic things that airlines typically need them to do. They cannot put weight restrictions on them; they cannot mandate them to look even reasonably presentable. They cannot enforce even basic service standards. I remember an old joke about Air India hostesses.....the youngest air hostesses (“least experienced” though “best” looking!) would be assigned to the “lowest-grade” government airline: Alliance Air. The “relatively young” middle aged ones (“experienced” in government jargon.....but starting to look unpresentable!) would be assigned to Indian Airlines (economy section). The “relatively older” “getting old” ones (“very experienced but very unpresentable”!) would be in the business class of Indian Airlines (ouch!).....and the “really old” ones (“most experienced but most unpresentable”!) would be in what was then the international airline, Air India (after all, flying abroad is a perk reserved for the most experienced)!

Besides this, we see in Air India the same problems that we see in the Indian Railways. Since salaries take away most of the revenues generated, there is very little money left for investments. In the case of railways, the problem of less investments can be hidden away for a longer time since railway assets – tracks, trains, engines – last longer and don’t need replacements that fast. But in the case of airlines, an aircraft becomes old in 20 years and needs to be replaced shortly thereafter. If Air India had to continue to be in operation, and compete at least notionally with private airlines, it had no option but to order new aircraft. The only alternative was to sell off the airline. The question that has not been asked to the government is about why the government is not selling off the airline. The CAG even yesterday in its report has asked the government to do something to revive the airline. The new minister of civil aviation – Vyalar Ravi – has again committed to taking steps to revive the airline. But in my opinion, it’s impossible for Air India to be revived. To revive the airline, the owners (government) need to take many tough steps. Which government has the guts to take tough action on what has been called a “national pride” in the past? The old Maharajah image still lingers on in the minds of older people who patronized the airline in the “good old days”.

That’s why merely ordering new aircraft is not enough to revive the airline. While Praful Patel’s decision may have been correct in the limited context that the airline would have perished without new aircraft, his decision was wrong in the larger context. That Air India is fundamentally unviable. If this larger context had been kept in mind, maybe the ministry would have refused to order more aircraft; maybe it would have recommended selling off the airline. In the new world order, nations have no pride in owning a national airline. The US has no airline owned by the government. Even British Airways was privatized in 1987.

To be honest, this is not Praful Patel’s problem alone. The same problems are found in all government companies in the service sector. Just look at MTNL and BSNL – both should be shut down or sold off. These companies cannot attract talent; and they cannot provide topnotch service quality to their customers. There is always a risk of a big scam occurring since the size of their procurements is very large. There may have been some rationale a few decades back for the government to have started these companies (extending telephone services to rural areas etc); today that rationale doesn’t exist. The government should have divested its stake in these companies long back. It didn’t because of political reasons. Today, the market cap of these companies has fallen drastically. The companies are losing money. The government has lost most of its investment. In a similar way, if the government doesn’t exit Air India soon, there will be no value left in Air India to sell off later.

Except for having been unable to sell off Air India, Praful Patel should be called a successful minister. He’s done a lot for the aviation sector. For that, we must applaud him. In the 6-7 years that he was minister, he changed the look and feel of the Indian aviation sector. The airports in India are now starting to look like global airports. At least one airport – Delhi – is truly world class. Two other airports – Hyderabad and Bangalore – are nearly world class. Hopefully the new airport in Mumbai will be world class as well. A number of airports in smaller cities like Nagpur are starting to become neat, clean and efficient. Airline travel has dramatically increased in our country. Domestic traffic has apparently increased by some 200-300% in the 6-7 years that Praful Patel was the minister. Today, the service standards of private Indian airlines are generally speaking extremely good and much better than what we find even in many developed countries abroad. It’s the government policy of liberalization that has made all this possible and for all that Praful Patel should take a bow.

The real truth is that the government should sell Air India off. Even the CAG has erred in not recommending this. It appears that not only the government – even the CAG is afraid of making this recommendation. We should have a larger debate on this…..

1 comment:

  1. Fully agree with Mr.Prashant. This CAG's actions seem to be politically motivated. He should be impeached and tried.