The Descent of Air India (29 page)

Mr Patel, however, termed these charges as false and preposterous, and made three points in a letter that he wrote to the prime minister. He said: one, the project was scrapped virtually at the inception; two, he was not responsible for decisions of this nature and; three (this he mentioned in the annexure to the letter), the technical evaluation committee had visited Cryptometrics in December 2006 to assess its credentials. Soon after the letter, the prime minister cleared Mr Patel of all wrongdoing. This is surprising because the CBI investigation into the case is still open and senior officials from Air India were asked to provide details of the case as late as June 2013.

Let us consider Mr Patel’s assertion that the project was under consideration for an extremely brief period. The truth was that the project was active for at least a year after the tender had been issued and for a substantial period of time after two of the three tender committee members had signed a note recommending Cryptometrics. As for Mr Patel’s contention that such tenders for procurement of various items are routinely issued by Air India and at no stage are dealt with or sent to the Ministry of Civil Aviation, much less the minister; the prime minister’s office ought to have considered the manner in which the airline was functioning at the time. Mr Sunil Arora, a board member, had, in his letter to the Cabinet Secretary on 2 June 2005, stated, ‘During the last one year, almost all Board meetings of Air India, and even some Board meetings of Airports Authority of India have become a farce. Instructions on key agenda items are communicated beforehand on telephone or personally by Minister, Civil Aviation, or by his Officer on Special Duty, Shri K. N. Choubey. No suggestions to the effect that the issue in question requires a more detailed examination or that there are some implications are countenanced. The key word is “immediate and unquestioned compliance”.’ As Mr Arora described and as we who were a part of the airline during the period knew, the chairman and managing director, V. Thulasidas, was more than willing to be led by the bureaucrats and political leadership in Delhi. Thus, even if we were to accept Mr Patel’s statement that the issue didn’t come to him for approval, we still need to know who authorised the tendering procedure because of the huge cost involved, but that is for the investigating agencies to determine. With respect to the visit to Cryptometrics by the technical evaluation committee, this came about after the commercial bids had been opened and the tender committee had finalised its recommendation whereas, as per the rules, the visit should have taken place before these steps had been taken. Also the visit did not include the other contender for the project.

The biometrics project and the way it was handled revealed the rot that had set in within the airline. It also showed that those who were in power during the period cared little for the airline’s financial stability and its future. The fact that the airline could do without such an expensive project is best understood when we look at the situation today, more than seven years later, when one can still see no need for passenger identification systems.

It is ironical that the period that saw the maximum financial turmoil and window dressing was also when the airline made a bold proclamation in its annual report of 2006–07, the last one before the merger, ‘Air India’s corporate governance philosophy was to continuously strive to attain higher levels of accountability, transparency, responsibility and fairness in all aspects of its operations. The company remained committed towards protection and enhancement of overall long-term value for all its stakeholders—customers, lenders, employees and society… The Company follows sound business practices and conducts its business in a transparent manner. The Company remained committed towards ensuring observance of Corporate Governance principles in all its dealings.’

The examples mentioned in this chapter, whether cited to highlight inflated incomes, suppressed expenditures, or decisions relating to unwarranted expenditure, are not exhaustive. There were many more such instances. It is, therefore, difficult to gauge the damage inflicted on the company’s finances. One can, however, aver that if the accounts had not been dressed up to show the finances in a better state than they actually had been and acts of unwarranted expenditure had not been resorted to, and if instead, the management of that era had acted judiciously, Air India would not have been struggling to stay afloat today. While the system infirmities and the role of the senior management, employees and unions had reduced the airline to an ‘also-ran’ status, the injudicious decisions thrust on the airline during the 2004–08 period inflicted fatal blows.

The mismanagement of accounts was so blatant that it could not have escaped the expert eye of the board members including the independent director. Yet, none raised the red flag. How does one explain the silence of the independent directors and other members of the board? As the airline crumbles, it may be a good time to bring all of those who contributed with their collusion and their silence to account.

NOTES

1
.  For further information, please see
http://www.theglobeandmail.com/news/politics/canadian-accused-of-bribing-cabinet-minister-in-india/article543625/?page=all
.

2
.  For further information, please see
http://www.theglobeandmail.com/news/national/executive-convicted-in-indian-bribery-conspiracy/article13804839/

CHAPTER TEN

flight from reason

A YOUNG FLEET is the aspiration of every airline. It reduces operational costs, improves customer experience and makes the airline more competitive. So too it was with Air India. The airline had been a cautious expansionist, however. Since its establishment in its original avatar as Tata Airlines in 1932, the fleet had grown at an average of no more than one or two aircraft a year. Many global airlines that made their debut much later grew more rapidly in terms of fleet size and network. Air India added 17 Lockheed 749s and L1049s over a 10-year period spanning 1948–58. The 11 next-generation Boeing 707s were inducted during 1960–68; the 11 B747-200s were added during 1971–79; the eight Airbus 310s were added during the four years between 1986 and 1990;two B747-300 in 1988 and the six 747-400s were inducted during the four-year period between 1993 and 1996. In all, 55 aircraft were added to the fleet over a period of five decades, if one did not take into account the aircraft taken on lease for brief periods at various times.

Air India had for long nurtured a grouse against the government for not supporting its aircraft acquisition plans. When the board finally approved an order for 28 aircraft—10 medium-capacity long-range aircraft and 18 small-capacity short-range aircraft in November 2003— it was seen as a sign of hope by all of us in the airline. A few years earlier, a recommendation for the seventh B747-400 and three A310 aircraft had been rejected by the government; the latter on the grounds that Indian Airlines had surplus capacity. Thus, the government’s change of heart was seen as a major victory and when Praful Patel, on his maiden visit to the Air India headquarters as the civil aviation minister in June 2004, promised to fast-track the acquisition, there was still greater reason to cheer.

The events that followed, however, showed that our hopes had been premature and even misplaced. With total disregard for Air India’s experience with aircraft induction, its annual turnover and its ability to generate profit over the years, a small but powerful team comprising Praful Patel, V. Thulasidas, a few bureaucrats from the ministry of civil aviation decided and a handful of officers from the commercial, planning, and finance departments lent support to the proposal to increase the number of long-haul aircraft being ordered from 10 to a staggering 50, a five-fold increase.

The rationale for the quantum leap in numbers was not clear. It flummoxed everyone because Air India did not have the finances to afford such a large fleet. Moreover, market conditions had changed dramatically, and Air India’s turf was getting smaller by the week. It seemed imprudent at the time to expand one’s fleet on such a massive scale. Mr Patel was well aware of the changing market situation, especially since he was the one piloting the policy to grant more bilateral rights to foreign carriers, allowing foreign airlines access to more Indian cities and Indian private airlines the rights to fly the international skies. All of this had already had a negative impact on the airline, and there was no way Air India could have profitably deployed its expanded fleet. Subsequently, the decision came under flak from the CAG, which criticised the way aircraft orders were managed in its report in September 2011. But the damage had already been done with the signing of the deal.

It may be relevant here to mention a conversation that I had with Mr Patel a couple of days before the CAG released its report on aircraft purchase. He was apparently unhappy about my article published in
Governance Now
(‘Big thinking for quick sinking’, Governance Now, May 16-31, 2011) and remarked that my understanding of the aircraft deal was incomplete. Mr Patel said that he had acted in good faith and had sincerely wanted Air India to become a major airline. In my response I pointed out that even if that were the case, the board members and chairman should have assessed the airline’s capability before making those purchases and hence they were as much to blame for the debacle. The point is that whether it was a case of the minister being overambitious or misreading the ground realities, there was no one looking out for Air India. Mr Patel was also known to have chided the officials associated with the departments of planning and commercial in Air India, on several occasions, that they were not thinking big like other airlines, notably Singapore Airlines and Emirates, which may have prompted them to take a more generous view of the aircraft requirements.

Let us trace the sequence of events that followed the purchase decision. Soon after the order was sanctioned, Air India and Indian Airlines were merged. And over a period of 30 months, commencing July 2007, Air India inducted 38 (20 B777s and 18 B737-800s) aircraft and the erstwhile–Indian Airlines part of Air India inducted 40-odd Airbus aircraft. An airline that had seen its fleet increase by barely a couple of aircraft every year had added several times that number in just over two years. It was a quantum leap! Besides, for Air India, the total order of 68 aircraft, which included 23 B777s, 27 B787s and 18 B737-800s, and was expected to cost the airline over
40,000 crore, was way more than it could afford. Already reeling under the onslaught of the competing airlines, the purchase was sure to strain the airline’s precarious financial situation.

If we fast-forward to the state of the airline today, the debt incurred to service the acquisition, coupled with operational failures, has led to its financial downfall. One can only imagine the catastrophic implications on Air India’s financial health if the production of B787 Dreamliner aircraft had not been delayed and Air India had begun its phased induction from August 2008 as originally scheduled. Considering that the government had vehemently opposed fresh acquisition of aircraft in the past, its silence when such a huge order was being pushed through is also inexplicable.

RUNWAY TO RUIN

There was no doubt that the acquisition would impose a huge financial burden on the airline, but the prevalent market situation made it worse. Competitive forces, unleashed by the changing policy of the government, were growing stronger. Passengers were becoming more and more demanding, and there was a steady erosion of the airline’s operational and strategic efficiencies. The writing was on the wall, but Air India chose to ignore it. And even though the future of the airline was at stake, all stakeholders—the politicians, the bureaucrats and the senior management of the airline—watched silently while the expansion plan was operationalised.

Praful Patel, in a meeting held in the civil aviation ministry on 2 August 2004, asked both Air India and Indian Airlines to revisit their fleet acquisition plans. Mr Patel suggested that Air India should take a comprehensive view of its fleet requirements, keeping in view the following developments:

•  Introduction of non-stop services with ultra-long-haul aircraft to USA by competitor airlines in the Gulf/Southeast Asia and the consequent need for a competitive product offering by Air India.

•  The low-cost, low-fare operations envisaged under a separate airline—Air India Express—to the Gulf/Southeast Asia with short-range B737-800 aircraft.

•  Induction of aircraft on lease (to meet the interim capacity requirements of Air India and Air India Express) pending the purchase of the aircraft.

Indian Airlines rejected the suggestion and stuck to its original demand for 43 aircraft. But Air India increased the requirement of long-haul aircraft five-fold, and its board passed the order without considered debate or dispute. The truth is that if we were to look at the plans today and compare those with the projections made on earlier fleet expansion plans, they would not stand scrutiny. In November 2003, at the time of the original fleet acquisition plan, an internal study had revealed that the acquisition of 10 wide-body aircraft would result in a positive net present value (NPV), while it would be negative if the number went up to 17. However, when the order for 50 wide-body aircraft was being considered, the same head of the planning department presented a report that showed the overall NPV to be positive as a member of the airline’s board pointed out. How could 50 aircraft generate a positive NPV when 17 did not? Most members of the board were privy to both reports, and yet they cleared the expansion without a note of dissent. Those who facilitated the aircraft acquisition plan are now willing to open up. They say that certain officials in the commercial department tinkered with the projections to show enhanced revenue earnings from the increased number of aircraft. Only an enquiry can reveal who influenced the change.