The Descent of Air India (42 page)

The government, despite its claims to the contrary, was behaving in a manner that appeared to disregard all norms of corporate governance. The Parliamentary Standing Committee on Transport, Tourism and Culture stated, ‘A company which is grappling with the problems relating to merger should have an element of permanency at the top level at this hour. Even the consultants recommended a five-year fixed period for the CMD. The committee has no hesitation to conclude that the frequent changes of CMD left the NACIL directionless and resulted in the present imbroglio.’

Instability at the top meant that it was impossible to fix accountability— the decisions of one chairman would be turned around by another and by the time the results trickled in, there would a third person in place. It was evident even to the disinterested observer that the airline was being run into the ground.

The Parliamentary Standing Committee on Transport, Tourism and Culture further questioned the logic of appointing bureaucrats to the post of the chairman and managing director of NACIL. It was direct and incisive in its observations and said, ‘An aviation giant such as NACIL should be run with the help of technocrats and knowledge experts at the helm of affairs. It is, however, noted that the CMDs, even after the merger, have been from the Indian Administrative Service.

The committee, therefore, strongly recommends that experience in civil aviation industry or open market competition must be the main considerations for appointing CMD of NACIL. The company needs knowledge experts to deliver the results, especially at this juncture when it is to meet challenges of merger, recession, less traffic, and losses due to increased costs. The NACIL should be run by professionals and not by generalists.’The parliamentary committee reports stated what should have been obvious to any sensible person. How could non-aviation personnel be allowed to run an airline—especially when the market was at its volatile best?

Even when this truth dawned on the presiding powers in the government, they messed up. In 2009, the ministry took more than nine months to select the incumbent after it made its decision to hire a professional to the post of chief operating officer public. Air India was bleeding so profusely at the time that the delay amounted to denying life support to a patient in the intensive care unit. They appointed Gustav Baldauf who had no experience in turning around an airline. He had never worked with the government and was not familiar with its ways and whims. So why was he chosen for the COO’s job? Mr Baldauf, appointed by a committee headed by the then secretary, civil aviation ministry, Madhavan Nambiar, had worked in the operations department of Jet Airways a couple of years earlier. The reason for his candidature will perhaps be hidden forever as the people who chose him have long moved out of their positions in the ministry. He lasted for all of eight months and quit in disgust citing governmental interference coming in the way of accomplishing anything significant. The Baldauf experiment did long-term damage as the government abandoned its quest for private-sector professionals to lead the airline. If NACIL has to emerge out of the mess, it is important that it brings in professionals not just for the post of chairman but also to head its different departments. It needs to be run very differently from the way in which the government has managed Air India thus far.

Air India has also suffered on account of a weak board, which should have acted as a guide to the airline through its tough years and questioned the ways of a wayward ministry. Members could have prevented the cost overrun and revenue crash if it had been proactive and responsible. But in spite of the fact that the Air India board had a galaxy of luminaries from the Indian corporate sector, their contribution was negligible. Was it due to negligence or was it lack of commitment that led the board to abandon its role?

The parliamentary committees had noted that the ministry should bring in professionals on the board. And the ministry had stated, ‘… NACIL board is going to be strengthened with eminent persons. In fact, we expect orders very shortly because that itself will give an image which is not just a few government officers but people with respect and dignity who would really bring a value added to the national board.’But to what effect? How does a celebrity board help if the people are not familiar with the airline business, lack commitment, and if their word does not count? Many of the eminent members on the NACIL board complained to the prime minister’s office in November 2010 on how the company was being mismanaged but no action was taken.

Several other suggestions made by the consultants were also ignored. For instance, Accenture had recommended regulatory support to prevent over capacity and favourable negotiations on bilateral rights. It said that the government needed to create an environment that would help the airline take advantage of emerging opportunities. In every other country, the government has taken into consideration the home carriers’ interests. But the government in India opened up the market indiscriminately. For Air India, this was like a double blow— the market was thrown open to a crowd of foreign carriers, but at the same time, its fleet was being expanded to take advantage of potential demand. In fact, the ministry increased the initial order of 10 long-haul aircraft to 50. In the circumstances, the incremental capacity generated by the bilateral agreements could not be utilised by the home carriers as the phased induction process of aircraft by Air India commenced only in July 2007, by which time the foreign carriers had launched new services and firmed their grip on the Indian market. Air India highlighted this issue in inter-governmental talks and also with the ministry in November 2008. NACIL, too, made the same argument before the Committee of Secretaries in July 2009, but no notice has been taken so far. The parliamentary committees observed: ‘The decision to open the highly lucrative international air markets to/from India may be probed by a suitable agency and all those bilaterals must be reconsidered and reviewed and responsibility may be fixed for giving away the national rights.’

FLIGHTS OF FANTASY AND BOTTOMLINE NIGHTMARES

Over the years, Air India has been at the receiving end of the grand ambitions of its masters. Ministers and chairmen have imposed their decisions without doing a thorough check of the viability and relevance of their ideas with respect to Air India and the aviation business. A glaring example is the manner in which new routes were finalised and operationalised.

The introduction of non-stop flights to the USA by Air India is a case in point. Praful Patel, while nudging (read ‘ordering’) Air India to revisit its fleet acquisition plan at the meeting of officials from the ministry, Air India and Indian Airlines on 2 August 2004 in Delhi had said that Air India should consider introducing such flights in response to what the Gulf and Southeast Asian carriers had done. Air India did eventually purchase eight B777-200sLR when Mr Thulasidas was the chairman to deploy them on the Mumbai–Newark, Delhi–New York and Mumbai–Chicago sectors. A common feature was that all these flights arrived in the USA in the morning and left late in the evening, after almost 12 hours of ground-time. Even as old-timers with enormous experience in the industry expressed shock at the underutilisation of capital-intensive aircraft, each costing over
600 crore, the management did not demur as the decision had been taken at the highest level.

It should have been clear to anyone who was tracking the airline’s performance on the routes between India and the USA that the plans had gone awry. All that had been cited to justify the purchase of this particular kind of aircraft—such as commanding 5 per cent higher fares in economy class, 10 per cent higher fares in the premium classes and more people patronising the flight due to good arrival and departure timings for a US-bound passenger—had failed miserably. With every flight, Air India was losing at least
1 crore daily. If we had had a sound revenue monitoring system, the airline would have been able to take appropriate measures to control losses. But the Air India management was unperturbed by the huge drain on its resources. It was only in October 2011 that the ground-time at US airports was reduced from 12 to 8 hours, but this was still not good enough. The latest on this is that the airline has decided to lease out these aircraft for an extended period or sell them because the aircraft are unlikely to help recover even operational costs—even at 100 per cent occupancy. The efforts to do so have thus far been in vain.

Frankfurt folly

Air India was in a deep financial crisis since 2008. Prudence required that all cost-bearing decisions be well deliberated before being given effect. However no such caution was exercised, and experiments continued unabated.

Deepak Brara an erstwhile Indian Airlines executive director first made Frankfurt the hub for flights originating from Delhi and Mumbai to enable passengers to change aircraft at Frankfurt for proceeding from India to destinations in the USA and from the USA to various destinations in India. The fact that Frankfurt is amongst the costliest airports in the world and provides no business potential just did not seem to matter. Frankfurt has traditionally been such a losing proposition that in 1999, Air India temporarily ceased operations to and from Frankfurt when losses had to be controlled.

Compounding the financial mess of Frankfurt as hub was the decision taken to launch an Ahmedabad–Frankfurt flight to provide a feed to US-bound flights originating from Delhi and Mumbai and likewise for the returning India-bound flights. As was only to be expected, both Frankfurt as a hub and the Ahmedabad–Frankfurt flights were discontinued a few months later, and Mr Brara was removed from his position by Arvind Jadhav, but not before Air India had lost over
300 crore as per conservative estimates on these experiments.

There were several other instances of a route being sanctioned and flights being readied without a study of the market potential. Such incidents caused the airline to suffer a loss—not just in potential revenues but also on account of a burgeoning expenditure bill. The arbitrary manner in which routes were being discarded and sanctioned led to a lot of speculation. Many of us wondered if the route rationalisation at Air India was another way to open up the market to private airlines. Many a time, Air India was asked to withdraw its flights, but sometimes within weeks and months, a private carrier would launch flights on the very route that Air India had vacated.

For instance, Air India was asked to stop operating flights on the Chennai–Colombo route because it was deemed unprofitable, but SpiceJet mounted flights on this route soon thereafter. The Bombay– Nairobi flight was given up by Air India for Jet Airways to utilise this slot. The ministry, when questioned about such occurrences, said that their decision was driven by the losses being incurred on the route. The parliamentary committees said, ‘There appears to be a nexus operating for surrendering lucrative routes to favour the private operators,’ and recommended an enquiry into the issue.

The financial woes of Air India stemmed from many such projects, as also from the fact that the airline’s expenses were not subject to due financial diligence. Air India’s finances also took a hit as the government opened up the skies to foreign and private Indian players. It would have made imminent sense for the ministry, which forced Air India to buy
40,000 crore’s worth of aircraft, to inject more equity, but it required consultants from Accenture to suggest that the government should inject funds and liquidate non-core assets to put Air India on a firm financial footing after the aircraft acquisition and the merger.