The Descent of Air India (31 page)

Old timers in Air India recount an interesting aside. When the Jyotirmoy Basu Parliamentary Committee was auditing Air India in 1978–79, it used to, for justification on various counts, ask Air India officials, ‘What is the consideration?’ His question hinted at external factors playing a role in the airline’s internal decisions and the growing influence of the political class. In the wake of the mammoth increase in capacity increase granted in recent years, it is perhaps time for Air Indians to ask the government, ‘What is the consideration?’

If the hue and cry on the allotment of mining rights for coal, a natural resource, could lead to a political impasse, I can’t help but wonder why no such enquiry has been initiated for air traffic rights, which is akin to a natural resource, even though there has been such a demand by a parliamentary committee.

DELUSION OF GRANDEUR

An organisation undertakes an expansion plan when either one or all of the following conditions are met: it has a healthy reserves position; market conditions favour expansion; and the expansion is done in a phased manner with a built-in revenue realisation mechanism. At Air India, none of the above conditions was met, and yet it went ahead with a hugely ambitious growth plan. Air India was about to acquire 50 Boeing aircraft and Air India Express was to acquire 18 Boeing aircraft. The total expenditure envisaged was
38,149 crore; Air India would incur a cost of
33,197 crore and Air India Express,
4,952 crore. The state of its finances was not robust enough to justify an acquisition of such scale.

In the five years prior to fleet expansion, profits were meagre. And if one takes into account the 10-year period from 1997–98 to 2006–07, the figures are worse as the airline made a net loss of
532.52 crore. During 2005–06, the year in which the order for aircraft was placed and in 2006–07, the year before the merger, the airline made a net profit of
14.94 crore and an operating loss of
399.60 crore and a net loss of
447.93 crore and an operating loss of
1431.18 crore respectively. Air India thus had hardly any cash reserves, which meant that the project would have to be financed through debt as was projected in the reports sanctioning the acquisition. There was to be a small infusion of equity, too, worth
325 crore. The interest burden and the repayment of the loan would be met through internal accruals, according to the report. Given the size of the acquisition and the amount it was valued at, Air India would have had to set aside a sizeable sum every year for the repayment of the principal amount. The aircraft induction was to commence from 2007 and the industry practice was that payments had to be a year before the delivery of aircraft. Air India took its first loan in 2006 for delivery of aircraft in 2007. The loans, as per industry practice, were payable over a 12-year period. Since all aircraft were to be delivered by 2012 (the delay in delivery of 27 B787 Dreamliner was a later development), the period of repayment was expected to be 2007–2023. And the amount to be paid out was expected to be around
2000 plus crore in 2009–10 by which time 38 aircraft - 20 B777s and 18 B737-800s would have been delivered and peak during the 2012–2018 period to over
3500 crore, when all 68 aircraft would have been inducted. Given Air India’s financial situation and going by its past performance, there was no way the airline could have met this requirement.

It is common knowledge that the airline industry works on wafer thin margins. At best, an efficient airline can generate about 5 per cent of its revenue as profit. For Air India to be able to earn a net profit amount sufficient to pay back the loan it would have had to generate
75,000–
80,000 crore as revenue, which, incidentally, is not even the combined turnover of all the Indian carriers put together. What, then, was the basis for the projections and their underlying assumptions?