The Descent of Air India (30 page)

The acquisition has come in for heavy criticism in recent years. Many have questioned its rationale and timing, to which the stock response from the minister and representatives of the ministry has been that although the government was responsible for the policy, the plan was formulated and operationalised by the Air India management. But, contrary to what is being conveyed, the Ministry of Civil Aviation—not the management—has been the
primus inter pares
in the entire exercise. There is a vital difference between laying down the policy guidelines and remote-controlling the operational decisions, which was the reality on the ground.

Thus, even though there was no significant change in market dynamics between the time the decision was taken by the board and August 2004, Air India was made to review the fleet plan. There were clearly external factors dictating the decision. Says Sunil Arora in his letter, dated 2 June 2005, to the cabinet secretary, ‘We received a notice on 21.12.2004 to the effect that there is a Board meeting (104
^th
) at short notice in Hansalaya Building, which housed Air India office in Delhi, on 22.12.2004. No agenda papers were made available.’ That apart, it has also been alleged that the agenda of the meeting was discussed among ministry officials. Moreover, prior to the meeting, one of the aircraft manufacturers had sent a letter to the chairman about the possible impact of some changes in specifications on the economics of the evaluation. And in his letter, Mr Arora said that the secretary for the civil aviation ministry and the minister told him, Raghu Menon and the chairman what the common stand should be. Clearly, this calls the ministry’s bluff when it says that it was in no way connected with the nuts and bolts of Air India’s aircraft acquisition programme. Mr Arora described this meeting as historical because a decision was taken even when agenda papers were neither circulated in advance nor placed on the table during the meeting. Only a mention of the issue was made by the chairman during the meeting, and a decision was taken as instructed.

For the sake of appearances, however, the board of directors of Air India considered the report of the Techno-Economic-cum-Negotiating Committee, which assessed the airline’s fleet requirement until 2012–13 and identified the nature of the aircraft to be considered while outlining the phase-out plan of the existing aircraft. In a meeting on 26 April 2005, it set out its recommendations based on the committee’s report, which included the following:

1.  For the period 2006–07 to 2012–13, the committee sought the induction of 50 wide-body aircraft, comprising eight ultra-long-range planes to the fleet—the eligible aircraft for this purpose being A340-500 and Boeing B777-200LR. In addition, 15 MCLR-A (medium-capacity long-range) aircraft were to be inducted, for which the planes to be considered were A340-600 and B777-300; and 27 MCLR-B, for which the planes being considered were A330-200 and B787.

2.  The report recommended that the acquisition of two-third of the aircraft be done on a firm basis and the rest on ‘option’.

3.  It was also recommended that the selection of the aircraft should be based on the report of the Techno-Economic Committee and their projection of a futuristic airways network for 2012–13, which envisaged an expansion of over 10 per cent annually for the first 2–3 years and at 5–6 per cent thereafter and an expected long-term growth rate of 7–8 per cent.

There is no quibble with the recommendations, except that acquisition of even two-third of the aircraft on a firm basis would not have been justified given Air India’s financial state and revenue earning potential. The problem arises when one considers the report in the context of Mr Patel’s pronouncements. He had clearly stated that the original aircraft order was being reviewed in the backdrop of recent developments, such as the introduction of non-stop flights by competing airlines in Southeast Asia and the Gulf region and the proposed launch of a no-frills airline Air India Express for narrow-body aircraft. However, the expansion plan that was subsequently put into force was based on a futuristic projection of air traffic and network strategies up to 2012–13. There is no explanation provided as to who changed the terms of the review or why it was done. And given that the aviation industry was undergoing a series of changes, including the liberalisation/open skies agreements that were being piloted by Mr Patel, it is a moot point whether the airline should have undertaken such a large investment commitment for an extended horizon. Also, the fleet projections were carried out on the basis of a future network, which was expected to be in place after six years. For this, the capacity growth had been assumed at an average of 12–14 per cent per annum, compared to the expected traffic trend of 7–8 per cent. Analysed in conjunction, it was likely that Air India may not be able to profitably deploy the fleet as planned, stated a board member in a letter to Air India. How prophetic, considering that this was stated way back in 2005! The fact that Air India was saddled with excess capacity was established in January 2013 when B787 Dreamliners were grounded and Air India could pull out its B777s as substitute aircraft.

It is also significant that in the meeting of the board of directors on 24 November 2004, while discussing the new fleet plan envisaging the induction of 50 wide-body aircraft and 18 narrow-body aircraft in the time span of six years, one of the board members asked whether Air India had factored in the likely competition from foreign carriers and possibly domestic private carriers. Air India’s response was that while other airlines could be expected to expand their international operations, it had developed a strategy to grow at a rate faster than the market rate and add a large number of new destinations.

The board member also suggested that a conscious view ought to be taken on whether the decisions taken with respect to private Indian domestic carriers and Indian Airlines being designated for new destinations and the likely intensification of competition from foreign carriers in the aftermath of the ‘open skies’ agreements with the USA, UK, China, etc., would or would not result in Air India facing stiffer competition than ever in the past. Was this aspect factored into the evaluation report?—asked another board member. The queries went unanswered. And as I have pointed out on several occasions, Air India has had to suffer the consequences. It has had to absorb the excess capacity, losing money by grounding its aircraft while servicing a huge debt burden. How could this have been allowed, and why did the board members not pursue the matter? The member who had raised the issue did write to the prime minister’s office complaining about political pressure, but nothing came of it.

It is equally perplexing that despite the recommendations of the techno-economic committee and the Air India Board that two-third of the 50 aircraft should be ordered on a ‘firm basis’ and the rest on ‘option’, the empowered group of ministers decided to order the entire lot on a firm basis. No explanation has been forthcoming except that it helped enhance the discount quantum offered by Boeing. While such an argument may be acceptable to those unfamiliar with the industry, those conversant with the airline sector will dismiss it out of hand. Air India had tendered for 33 aircraft and Boeing, as per established industry practice, would have offered a discount for that many aircraft in their original bid. The increase in the amount offered as discount was only to be expected because the number of aircraft ordered on firm basis was enhanced to 50.

THE BILATERAL BONANZA

The acquisition of aircraft was sanctioned at an inopportune moment. As the government was beginning to get increasingly liberal in handing out air traffic rights to foreign airlines, Air India’s share of the skies was on its way down. It was more critical for the airline to protect its market than to purchase new aircraft in such large numbers, and it should have looked at consolidating its position instead of increasing its debt burden.

Why the government behaved in the manner that it did is subject to conjecture and speculation. But I would like to focus on a larger question: should the government have given away bilateral rights in the manner that it did?

There are two reasons for the need to question the rush to grant air traffic rights. First, such rights, once granted, are rarely, if ever, rescinded or withdrawn. In India’s case, there has not been a single instance of the government even temporarily withdrawing the traffic rights of any airline. In aviation parlance, once the rights are granted to an airline, they become ‘grandfather’ rights, according to M. P. Mascarenhas, the former MD of Air India and one who had strongly resisted the giving away of rights in the mid-nineties. What this implies is that once an airline bags the rights to operate a certain number of flights or is allowed to offer a specific number of seats per week on a route, it can operate that number of flights or seats on that route in perpetuity. And second, most governments take into account the interests of their own airlines before granting air traffic rights. They consider the ability of home airlines to mount incremental capacity to utilise their share and do not grant rights to foreign carriers till the home carriers are ready to mount the routes within a short term of 3–6 months or at best 6–12 months. Similar caution was not exercised by the Indian authorities.

I believe we have been reckless in the way our air traffic rights have been handed out in the years since 2004. In January 2004, the total number of seats to/from India was 4.31 lakh per week for both foreign and Indian carriers. At the end of March 2010, the comparative figure had risen to 16.49 lakh seats—an increase of 280 per cent in a matter of six years. The number of seats per week available to foreign and Indian carriers separately this year has crossed the million seat mark.

The air traffic rights allotment, in fact, has a much wider dimension than just seat numbers. Its impact will be felt for years as India’s competitive advantage as a subcontinent has been negated by allowing foreign airlines to operate services directly to more than a dozen Indian cities from their hubs abroad. Interestingly, the lion’s share of additional seats have been granted to national carriers of small city states, which have limited potential to offer to Indian carriers because of their small geographical sizes and limited population potential for travel to or from India.

The rapid increase in seats led to falling airfares, and many may therefore view the policy as being passenger-friendly, but that, I believe, would be a hasty conclusion. The increasing presence of foreign airlines has the potential to drive the home carriers out of business, and a policy must be evaluated for the positive as well as the negative impact on the economy. I am not against the increase in competition but object to the manner in which it was done. Home-grown airlines should have been allowed to build capacity before opening up the sector, just as other countries do for their carriers before embarking on similar ventures.

To understand how the unchecked distribution of bilateral rights impacted Air India, let us look at what happens when foreign airlines are allowed to increase their capacity substantially and home-grown airlines are not. The industry behaves in the following manner.

•  Market share follows capacity share; that is, as the foreign airlines increase the number and frequency of flights, they acquire a larger percentage of the passengers.

•  For national carriers, if the capacity share declines, then the market share declines.

•  When capacity and market share both decline, there is a drop in revenue load factors. To compensate for low revenue load factors, fares are slashed.

•  Low fares lead to a decline in revenue yields—measured in terms of earning per kilometre per passenger flown—and often without a proportionate increase in revenue load factor.

•  The final result is a drop in both revenue load factors and revenue yields.

The fate of Air India followed such a trajectory. How does one explain the government’s behaviour? While purportedly planning Air India’s revival through a series of strategic moves on the one hand, was it handing over the market to foreign airlines with the other? The only way to reconcile myself to such an attitude is by believing that we were playing true to our character of being the perfect hosts—as the famous Sanskrit proverb says ‘Atithi Devo Bhavo’. To keep the visitors happy, the government put the very existence of Air India at risk! On a more serious note, the government has not only gambled with Air India’s future but that of the entire Indian aviation sector. By giving away bilateral rights in this fashion it allowed foreign carriers to increase their stranglehold over the market and to manipulate fares to their advantage.

In the future, the policy is bound to come back and bite the private carriers too because of the thoughtless manner in which the rights were granted, giving foreign airlines a head start and a firm grip on the market before the Indian carriers were ready to mount operations. The story of Cathay Pacific illustrates how the liberal grant of rights put the Indian airlines at a disadvantage. In May 2008, the airline was allowed to increase the number of flights to Mumbai and Delhi from Hong Kong from 4 to 10 and 7 to 14 per week respectively. The airline was additionally granted rights to operate four weekly flights to Chennai and a new point of call, Bangalore, was granted to its subsidiary airline Dragon Air for a daily flight. Since then, additional rights have been granted to more Indian cities, including Hyderabad. In sharp contrast, the merged Air India has been unable to mount any additional capacity even five years later and though other Indian carriers subsequently commenced services to Hong Kong, the combined capacity of all Indian carriers is nowhere close to that of Cathay Pacific and Dragon Air.

Many foreign airlines have obtained huge increases in third and fourth freedoms of air traffic rights
¹
between India and their home countries. Moreover, they have also been able to gain access to interior points in India. These airlines are using their excess capacity to funnel traffic between India and the USA/UK/Europe/Australia/Japan through their respective hubs. As a result of increased capacity deployment by competitor airlines, the international skies to and from India have become fiercely competitive. In fact, such is the domination that sixth freedom traffic
²
today accounts for 40-79 per cent for Gulf carriers; 35-70 per cent for South-East Asian airlines and 61-87 per cent for European carriers.