The descent of Air India

Published: March 28, 2018 - 12:59 Updated: March 29, 2018 - 13:14

The bullish certainty with which today’s policy believes that disinvestment of Air India will yield results is worth reflecting on

JRD Tata was passionate about flying. He was the first person in India to qualify for flying an aircraft and went on to set up Tata Airlines, which was later nationalised and renamed Air India. It was the strength of the Tata family that opened the skies for the Indian people.

In a matter of a century, post economic liberalisation and better choices, India has no longer any requirement for a publicly aided airline. It can definitely use a carrier, which is run professionally with the people in mind. However, Air India’s efficacy in being a trustworthy option for the traveller within and outside India has severely dipped, due to lack of transparency and poor financial acumen of the many governments that did not do much to improve it. The airline has been ailing for quite some time. In 2000-01, talks to sell Air India failed and Singapore Airlines pulled out of a joint bid with Tata Airlines (Vistara) to take over Air India.

Despite the economic failing of Air India, it seems that the utility of the national carrier has been forgotten, especially with regard to providing employment and for people whose lives are dependent on the airline. 

The trade unions of both the Right and the Left have categorically opposed the NITI Aayog’s suggestion that the NDA government strategically disinvest from Air India. The Centre of Indian Trade Unions (CITU), a group affiliated to the Communist Party of India (Marxist), has voiced its concern regarding the sale. CITU has said that the Air India management should not be held responsible for “the bungling and disastrous experiments by the successive governments” which had left the national carrier, which was registering profits till 2007, debt-ridden. Terming the airline’s huge debt as the main reason behind its accumulated losses, it criticised any move to write off the airline’s debt to pave the way for private investors. The Rashtriya Swayamsevak Sangh-affiliated Bharatiya Mazdoor Sangh (BMS), India’s largest trade union, has also been vehemently opposing the move to sell Air India and has warned the government of a confrontation with all the stakeholders if the sale proceeds. 

Because of being under financial strain, Air India has been constantly laying off people and has also failed to clear its employees’ dues for a long time. In January, it issued a notice to terminate 400 contractual workers. And since 2012, it has received Rs 25,000 crore as equity from the government. That a deal could be in the offing has made many anxious as there is little clarity as to how the large number of people under its wings, including stewards, air hostesses, cargo men and multiple layers of officers and management, will be managed post-sale. The BJP government, on its part, has blamed decisions taken by the previous UPA regime for much of the financial mess that the airline is in — its debts run in excess of ` 50,000 crore. The broader picture is that the government believes in the theme of disinvestment.

Although post the liberalisation of 1991, the government functioning required in certain sectors was to a certain extent depleted, the country couldn’t do without the PSU sector. Historically, PSUs have worked in sectors that private players are afraid of entering and are crucial to the development of the nation. Indeed, India’s development today without the public sector’s role in the economy is hard to imagine. The PSUs’ share of GDP was just 10 percent at the beginning of the 1970s, which grew rapidly in the following two decades and more than doubled to 25 percent by 1990-91. The share of the gross turnover of Central Public Sector Enterprises to the Gross Domestic Product (GDP) of India at current prices during 2014-15 was 15.9 percent; lower than before, but still respectable.


CITU has said that the Air India management should not be held responsible for “the bungling and disastrous experiments by the successive governments” which had left the national carrier, which was registering profits till 2007, debt-ridden. Terming the airline’s huge debt as the main reason behind its accumulated losses, it criticised any move to write off the airline’s debt to pave the way for private investors.
 

As a political policy and a financial tool, the government desires to disinvest its public sector undertakings and window-dress the loss of tax due to implementation of GST, a fact not lost in the Budget which has a disinvestment target of ` 80,000 crore in the financial year 2019.

Disinvestment means divesting stake to private players in government-owned assets by inviting private financial participation and control. Laissez faire experts may believe that disinvestment is the only way to improve key metrics, and thus should be implemented, but it is the bullish certainty with which today’s policy believes that disinvestment will yield results which is worth reflecting on.

It’s hard to define what our country would be with the absence of main street economics. A recent study by The Economist showed that it’s difficult for an emerging economy with a small or non-existent public sector to achieve sustainable economic growth. Having a public participant often guards citizens from the vagaries of the market and the welfare of the common man is kept in mind, as opposed to being driven purely by margins. Over a period of time, multiple PSUs, like the Life Insurance Corporation of India (LIC), have made the government profits, managed their balance sheets and offered the consumer a choice in the market. These utility-led PSUs also showcase strength when private market fails. The LIC, for example, bought domestic shares during the 2008 turmoil.  

This illustrates that with proper management and control, the State could improve the efficiency of existing assets, create wealth for its stakeholders and work for the country. In the case of Air India, public aid has rescued the airlines. However, the management of the airline has ensured that no amount of aid suffices in reviving the airline, perhaps due to political reasons such as offering freebies to politicians.

Hence, the honest question to establish whether we need to disinvest from any business that the government runs would be to wonder if the goals of the PSU are the same as a private corporation, and if the management has taken decisions in line with its stated goals — social welfare and social profit being one of them.

Without proper management, any corporation would flail, and so is the case with public undertakings. With many PSUs needing capital from government treasuries, it is easy to wonder why the government continues to have held these aspects for so long. In spite of many calibrating Air India’s profits as per a private player, it would be better to look at the many functions that Air India serves — deliberately choosing to connect small airports and unviable routes, as well as flying cheaper than most private players.

Before throwing Air India to the auction bids, and we can be sure that it will be done, it would be prudent to observe whether the private corporations that will bid for its assets will fare any better. How can we be so sure that the airline’s growth will be better with any foreign capital? Is it likely that the disinvestment will cause loss of jobs? Is there any value that may get eroded, or hived off?

The airlines industry is globally known to have long cycles, with most of the international airlines also suffering from deep financial distress. In the US, for example, it’s been almost 40 years since the airline industry was deregulated in 1978. Since then, it has lost nearly $60 billion on US operations. Indian airlines themselves have seen turmoil due to fluctuation in oil prices, and the failure of big airlines to control their debt and input costs is well documented — be it Kingfisher or other carriers such as Air Deccan.

Airlines don’t have an option on the supply side, since only two majors — Airbus and Boeing —  are well-equipped manufacturers of aircraft, and no private player has any shield from the major input cost of aviation turbine fuel, comprising almost half of operating costs. With increased competition and discounts, margins in the airline business are wafer-thin. Can we really expect that Air India’s business, once sold, will do
much better?

In January, the government allowed foreign airlines to buy a stake of up to 49 percent in Air India with prior government approval. Haste in disinvestment can cause losses not only to the exchequer but also to all other stakeholders in the process. 

A case in point is government-owned Air New Zealand which was privatised in 1979. The company went on to suffer massive losses and almost became bankrupt. Finally, in 2001, the government decided to renationalise the airline.

Further, if we look at hiving off its subsidiaries, it becomes clear that not all of Air India is in the red. In the midst of policy talks regarding privatisation of Air India, it is worth noting that an arm of Air India, called Air India Express — the international budget arm — is actually being operated with efficiency, and is also making profits. The airline has three profit-making subsidiaries: Air India Express (low-fare international carrier), AI Transport Services (ground handling unit) and AI-SATS (a 50:50 ground-handling joint venture with Singapore Airport Terminal Services). Air India Express reported a net profit of ` 296.7 crore in 2016-17. 

 


How can we be so sure that the airline’s growth will be better with any foreign capital? Is it likely that the disinvestment will cause loss of jobs?

Also, while Air India is being flogged for poor performance, it is noteworthy that the passenger load factor, which indicates capacity utilisation of an airline, has been improving. Air India’s load factor has improved consistently over the years and has equalled the worldwide average for the airline industry. Financially, the airline’s large asset base is also valuable, including its large fleet of aircraft. Air India has a fleet of 120 planes, with a 17 percent share of the traffic on routes linking India to international destinations and a 13 percent share of the domestic market.

It is hard to imagine the social costs of selling the airline. With a workforce of nearly 30,000 and no options available to train or reallocate, it seems that many would be left in the lurch.

The privatisation of Air India seems inevitable. However, being aware of the risks is essential. Risking the sale due to haste or making up the numbers in a fiscal year is in any case a recipe for disaster. A national carrier of a country is a lifeline of tourism and hub of connectivity in that country. In India, where not all airlines fly to smaller airports, it is also a symbol of national identity. Perhaps its eulogy would read better than its present story — Farewell, Air India, national carrier and protector.  

This story is from print issue of HardNews

ADVERTISEMENT