The Descent of Air India (32 page)

It was assumed that an increase in capacity would automatically result in an increase in market share from 19 per cent to 30 per cent by 2012. There was nothing to warrant such optimism. Air India’s market share had remained static at 19.4–19.5 per cent from 1999–2000 to 2003–2004, even though the number of aircraft had increased from 23 to 35 (aircraft had been taken on lease). The revenue estimates were exaggerated and based on unrealistic passenger yields, while costs were kept more or less constant, ignoring inflationary trends. The revenue yield from direct flights to and from the USA was projected to go up by 10 per cent even though other airlines plying the same route had not achieved anything close to that figure. Long-term traffic was projected to grow at 8 per cent even though the average growth registered during the period 1998–2004 was only 6.5 per cent. The ministry had also announced a liberal bilateral rights policy, which should have alerted all those concerned with the airline’s expansion that Air India’s traffic was unlikely to go up. But none paid heed; nor was there an attempt to seek a moratorium on further grant of capacity, as had been suggested by Accenture and which should have been the logical course of action since the airline was under pressure to scale up the number of long-haul aircraft.

The project report was also unrealistic with its fuel price projections, which constitute the largest component of an airline’s operational expenses, accounting for as much as 35 per cent of the total bill at times. A prudent accountant will always take current fuel prices and arrive at an estimate after factoring in the inflationary trends. However, what did the decision makers at Air India do? They calculated an average fuel price based on the previous three years’ prices and did not account for inflation at all. Clearly, the projections that were made on the basis of such figures were not worth the paper they were printed on.

COMING TO GRIPS WITH GRIM REALITY

Air India’s expansion plans were based on a set of projections that fell apart almost as soon as they were inked. When it began posting losses year after year, post the aircraft induction, its working capital requirement ballooned substantially, as did interest costs. Currently, the amount drawn as working capital loans from the banks has already crossed
21,000 crore, and with losses mounting daily, it is set to increase every day. Air India had also argued in the feasibility report that a larger fleet would help operate new routes, which would yield greater revenues. This was like to building a house of straw to escape a cyclone. Prime routes, such as those between India and the USA and Europe, had been yielding very little. For most foreign airlines, however, these are profitable sectors because of huge capacity deployment, feeder networks and carriage of sixth freedom traffic. For Air India more than 50 per cent of flights did not and do not recover even the cost of fuel and almost 80 per cent can’t even realize their operating cost. The CAPA report of February 2013 states, ‘Of the 189 routes that Air India operates only 12 meet operating costs. A further 82 cover their cash costs but not their total costs and 95 routes or just over half do not even meet cash costs.’

It appears as if the airline was either unable to or preferred not to anchor itself in reality. This seems odd given that the board of Air India was not only peopled with professionals from different quarters but also had a financial expert, N. Vaghul, former chairman of ICICI Bank, as an independent director. Air India also has a vigilance department, which was headed by a deputationist from the Indian Revenue Service during the period under review. Today, Air India is reeling under accumulated losses and loans of around
78,000 crore. It made a loss of
2,226.16 crore in 2007–08,
5,548.26 crore in 2008–09,
5,552.44 crore in 2009–10,
5,489.09 crore in 2010–11,
7,853 crore in 2011–12 and an estimated loss of
5,198 crore in 2012–13.

Even if we were to ignore the obvious folly of approving an order of this magnitude, there is no explanation for the decision being upheld even when the reviews showed that the revenues were falling year after year. Were these periodic review exercises a sham? The minister and ministry officials were was present at several review sessions conducted at the Air India building, and were briefed about the state of the airline’s revenues. How is it that the ministry can then say that it failed to ‘discover’ the real state of the airline’s finances?

The Comptroller and Auditor General (CAG), which went into the acquisition in detail, has questioned the quantum jump in the requirement of long-range aircraft from 10 to 50 in its report. It observed that it took just four months to prepare a revised project report after being advised by the ministry of civil aviation to ‘revisit’ the original proposal. How was it that such a large and ambitious expansion did not merit greater consultation, especially given the airline’s history with aircraft purchase?

The ministry submitted that ‘strictly speaking, it is for the Air India board to take a view in the matter, and its advice should have been regarded more as a suggestion’. While that would have been true in any other organisation, the growing politicisation of Air India made it difficult for the chairmen to protest or raise an objection. The incumbent chairman did not have the gumption to resist even the meekest of suggestions, let alone ignore a direct order from the ministry. The CAG report further observed, ‘The logic advanced that expanding capacity faster than the market/competitors would enable it to grow and increase market share, since the market from India was booming was flawed. The assumption that increase in capacity share would automatically lead to an increase in Air India’s market share—projected increase from 19 per cent to 30 per cent by 2012–13—was not adequately validated. For the year ending 31 March 2012, the size of the domestic and international markets is 55.8 million seats and 36.6 million seats, with Air India’s share of about 17 per cent in both cases. Likewise, the two Parliamentary Committees namely Parliamentary Standing Committee on Transport, Tourism and Culture and the Committee on Public Undertakings in their Reports have faulted the acquisition on several counts.’Why did no one protest? We may find a clue in a statement from V. Subramanian, who was on the Board of Directors of Air India and Indian Airlines as additional secretary and financial adviser to the ministry of civil aviation from February 2000 to January 2005. He was scathing about the manner in which Air India would conduct its board meetings. There was hardly any discussion over matters of critical importance, and some chairmen merely carried out the wishes of their ministers with little thought for the airline’s future, he said. The member was transferred out of his post in the ministry for seeking an explanation from the then chairman V. Thulasidas about the airline’s fleet plan.