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The king is dead; long live the king

While efficiency and quality of customer service suffered, the way Air India chose to implement its merger with Indian Airlines resulted in diseconomies of scale

Tarun Shukla
New Delhi: Praful Patel, 52, the civil aviation minister, has been quick to wash his hands of the mess in Air India. On Wednesday, he said at a media conference that he wasnt responsible for the airlines problems. The airlines 31,000 employees were, he added. And its senior managers were. Thats why we have seen a change of management; a change of guard at the top. Indeed, Air India has seen four chief executives since the appointment of Vasudevan Thulasidas as the chairman and managing director of the merged entity in August 2007. Still, while many of Air Indias problems predate Patel, who has been aviation minister since 2004, at least some part of the current crisis at the airline can be attributed to the solution he came up with in 2007the merger of Indian Airlines Ltd, the state-owned carrier that flew largely to destinations within the country, and Air India Ltd, which flew international routes, into one company, the National Aviation Co. of India Ltd, or Nacil, which uses the Air India brand. Patel was also the man behind the 2005 decision by Air India and Indian Airlines to buy aircraft for Rs44,000 crore, a move that can explain some of the current financial problems at the airline. Ground realities: (top) An Air India B707 aircraft; civil aviation minister Praful Patel (left); and Nacils Arvind Jadhav. Both Patel and Jadhav will have a considerable effect on Air Indias future. Harikrishna Katragadda / Mint While Air Indias problems are many and complex, they can be summed up pretty simply: The airline has run out of money to handle its operations, and expects to be bailed out by the government. This is the first time in its history of 60 years that the airline will be looking at equity support, Patel said on Wednesday, soon after meeting Prime Minister Manmohan Singh to seek financial support for Air India. No handout, however large, can help the airline, said one expert, who says there is little option but to restructure the operations he has seen from close quarters.

For the glory days of Air India to return, it would undoubtedly call for some very harsh measures which may not be palatable to all but have to be taken in the long-term interests of the airline, M.S. Balakrishnan, former director of finance and board member of Indian Airlines. He retired in 2007. And the merger, which looked so good on paper, hasnt delivered because of delays in the total integration of the two airlines, say Air India executives and aviation experts who have closely watched the merger unfolding. The problems Air Indias numbers paint a picture of decay. The airline employs one in three people working in Indias aviation sector and has 210 employees for each of its 147 aircraft. In comparison, British Airways has 175 workers for each of its 228 aircraft and Lufthansa, 196 for each of its 545 planes. Some, such as Malaysian Airlines, have more employees235 each for its 81 planesbut as Air India itself admits, overstaffing results in limited scope to boost productivity and accountability. Since March 2006, as expenses related to aircraft purchase, fuel and staff soared, the working capital needs, or funds needed to run annual operations, at Air India jumped nearly seven times to Rs16,300 crore as on 31 March 2009. That this happened without much change in revenue (which has remained more or less flat at Rs15,000 crore in fiscal 2009, compared with Rs14,600 crore in 2005-06) has made lenders wary of recouping debts from the airline. Accumulated losses have ballooned to Rs7,200 crore as of end-May, with at least Rs600 crore logged just in April and May. Latest financial data such as debt and net worth were not immediately available, with Air India and Indian Airlines having published their balance sheets and financial results only until March 2007. Air India uses its 147 planes to fly to 70 destinations within the country and 47 destinations (including code-share routes) outside. Even Air India regulars have stopped flying the airline because of the quality of service. Kolkata resident Sumit Mazumdar is one such. Of the nearly 70 domestic flights and a dozen international trips he makes a year, just one in six today is on Indian Airlines and Air India, down from four in six two years ago. I was (an) ardent fan of Indian Airlines because the crew were more experienced, I felt the checks before flight clearance were much (more) stringent, chances of getting another aircraft in case of problems in remote routes were much higher, and the timings were more convenient, says the managing director of tractor maker TIL Ltd. The first class service of Air India was much superior to other airlines (three-four years ago). But after the merger of Indian Airlines and Air India, that has changed, says Mazumdar. The morale of the staff is so low...its almost like they are just going through the motions. This is not the Air India I used to know. Somebody needs to wake up and smell the coffee, he says.

Customer service has eddied down alarmingly, agrees a travel industry insider. The success of any merger must be assessed by the quality of service provided to its customers, and the new Air Indias inability to provide satisfaction is its most significant failure, said Robey Lal, the former country head of the International Air Transport Association, or Iata. Lals father, late retired Air Chief Marshal P.C. Lal, took over the reins of Air India in 1978 from the airlines founder chairman J.R.D. Tata. And so, while efficiency and quality of customer service suffered, the way Air India chose to implement its merger with Indian Airlines resulted in diseconomies of scale. Meanwhile, the government has been lenient in allowing foreign airlines to operate flights to and from India. These are done through agreements called bilaterals, and the government hasnt just allowed foreign airlines to fly more to and from India, but also to more destinations in the country. The increase of seats to Gulf carriers has been over 250% in the last four years, and they operate to over 15 destinations in India. In addition, many low-cost Gulf carriers have been permitted to operate to India, which will kill Air India Express, says a senior government official with close knowledge of the situation at Air India, who didnt want to be named. Air India Express is the low-cost subsidiary of Air India. No other country allows such reckless entitlements. A detailed report was sent to the ministry for consideration, which was ignored and also not appreciated. Recently, Chandigarh and Lucknow were also given to flydubai, even without formal discussions, this official added. A merger gone wrong The idea was good: merging the state-owned domestic and international carriers into one giant airline to drive home economies of scale, at the same time making this giant part of a global alliance to streamline service standards. The merger, midwifed by consulting firm Accenture Ltds Indian arm, was expected to result in savings between Rs600 crore and Rs1,200 crore from 2010. Yet, the airline continues to lose more money. The biggest problem is the lack of continuity of a chief executive. In under two years, you have had four CEOs at the airline, says a senior Accenture executive, declining to be named. We had suggested a five-year term for the CEO (running the merged airline). This executive points to Jean-Cyril Spinetta, who took over as chief executive officer (CEO) of Air France-KLM after the two airlines merged in 2004. Spinetta, chairman and CEO of Air France since 1997, is credited with making the merger one of Europes most profitable airlines (since January, he has held only the chairmans position, making way for a new CEO). At Air India, there has been some change. For instance, Mumbai and Delhi have become hubs from which passengers checked in at Chennai, Hyderabad, Bangalore, Kochi, Ahmedabad and Kolkata can fly out of the country. And the senior managementexecutive directors and general managersof the two airlines has been integrated. Even as it is roiled by financial trouble, the airline is working on doing this at the level of deputy general managers. That may seem easy, but combined, Air India and Indian

Airlines have at least 750 managers between the levels of deputy general manager and chairman, and integrating their functions is proving to be a tall order. As a member of Air Indias board says on condition of anonymity, In the true sense, there is little change. The two airlines havent come together, on the ground or in the air. Technically, only some things have merged: There is one balance sheet, common directors, some schedule planning and a common CEO for both the companies, this person says. The inability to complete this merger, rather than the merger itself, may be responsible for some of the airlines current woes, although there is enough evidence to show that even the merger wasnt entirely thought through. Analysts say one prerequisite for such mergers to work is that the airlines use common equipment. And Air India and Indian Airlines have always flown different aircraftmade by Boeing Co., in the case of the former, and Airbus SAS for the latter. That distinction cascades into different equipment at every level, say the analysts. In effect, the new Air India is two different airlines desperately wanting to be one. IT woes and more The incompleteness of the merger is evident in the backend reservation system on the airlines website. Passengers struggle with different windows that eventually lead them to entirely different websitesone for domestic and the other for international. And because these reservation systems are still disparate and use the old codes, IC (Indian Airlines) for domestic and AI (Air India, for international), there can be no merger of the flight codes. The result? Analysts say a merger in the skies will have to wait. The original plan was that the IT (information technology) integration would happen within 18 months; they havent even finalized the contract, says the Accenture consultant. Without this, he explains, a passenger travelling from, say, London to Kochi is presented with two separate tickets: London to Mumbai on Air India and Mumbai to Kochi on Indian Airlines. If the IT systems had been merged, Air India would have been the first option on the GDS (for the London-Kochi reservation), says the consultant. GDS is short for global distribution system, a term used in the travel business to refer to computerized reservation systems, such as Sabre or Amadeus, that book tickets on multiple airlines. And a new reservation system is nowhere close to being put in place, partly because of the way government contracts are tendered. It was a very technically complex project and the tender process took nearly one year to finalize, from August 2007 to August 2008, says the government official quoted earlier. However, just as the process was nearing completion in January 2009, the L2 vendor (the company with the second lowest bid) made some complaints, as is usual in such projects, and the CVC wanted a report. A report has now been sent by CVO, Air India, to CVC. The constraints that a public sector undertaking has to work under have to be appreciated in such projects.

The Central Vigilance Commission, or CVC, oversees award of contracts by government and state-owned companies to ensure that the process is fair and transparent. Each government department or company has a chief vigilance officer, or CVO. The member of Air Indias board quoted in the first instance says the tender is out again and will be awarded by September. Around 10 months after that, Air India will have a single flight code. Without this flight code and a new reservation system, Air India cannot join Star Alliance because a key benefit of being part of such groupings is the ability to book tickets across member airlines. Theres also a peculiar problem that arises from the dual codes the airline currently uses. Around 30-40 senior managers who used to be with Indian Airlines, which was based in New Delhi, fly to the capital from Mumbai every week because there are decisions only they can sign off on. Worse, they man two offices with support staffin Delhi and Mumbai. The union angle That Air India has more people than it needs is evident in the numbers. Last year, 17% of the airlines expenditure went towards salaries; the comparable figure for private carriers was 9.5%. Still, the merger didnt involve any retrenchment. Nor do any of the current recovery measures being discussed. Thats because Air India has 14 recognized worker unions and several unrecognized ones for its 31,000 employees. While the unions say they are open to doing what needs to be done to revive the airlines fortunes, they do not support privatization of the airline or retrenchment. The chairman and managing director (of Air India) has told us that the Prime Ministers Office has given the assurance that there will be no privatization and there will be no retrenchment, said J.B. Kadiyan, the general secretary of the Air Corporation Employees Union, one of the airlines largest unions. Retrenchment apart, employees are also worried that the new structure adopted by the airline will work against their interests. This structure is the so-called strategic business unit, one where a large organization is broken up into smaller units, each of which is run almost like an independent company. In Air Indias case, the problem is that the strategic business unit structure isnt perfect, says an Air India official who retired earlier this year and does not want to be identified. According to this person, under this structure, a Delhi airport manager reports to his strategic business unit head, while his performance will actually be reviewed by the executive director of the northern region. Worse, adds this official, the decision on rewarding this airport manager with a foreign posting is in the hands of the commercial director, who is based in Mumbai. His recommendation is that this entire structure be done away with. Accenture says it only gave a set of options on how to go about staff integration and it is up to Air India to choose from them and implement. The future Not everyone is convinced there is a future for Air India in its present form. One employee who does not want to be identified said it might be a good idea to separate Air India and Indian Airlines. At least one company will survive. For a lot of people on both sides, suddenly the woes will come to an end.

That isnt an option before the government, which has set up a committee of secretaries headed by cabinet secretary K. M. Chandrasekhar, with members including finance secretary Ashok Chawla, civil aviation secretary Madhavan Nambiar, and T.K.A. Nair, principal secretary to the Prime Minister, to revive the airline. Instead, the government wants to appoint a new consultant to help turn around the carrier in the next nine months. Accenture, blamed by some people such as Kadiyan, has bid for this, as have eight other firms. Accenture, whose initial mandate was for a year, will only say that it has been asked to advise Nacil chairman and managing director Arvind Jadhav for some more time for continuity reasons. Despite all the ills that plague it, there are a few things going for Air India. In the next two years, Air India will emerge as an airline with one of the youngest fleets in the world. The scrapping of old planes will reduce maintenance costs. And the airline has already created a European hub in Frankfurt. It will also need money and has asked the government for a lifeline of Rs10,000-15,000 crore. A final decision on the amount has not been made, but the money will have to come from the state, says Patel. There is no point in going to the market, he adds, because people invest (only) in good companies. There is another thing that works in Air Indias favour, says the board member quoted earlierits new chairman Jadhav, who took over on 4 May. Every department has been told to cut costs by 20% and increase revenues by 20%. Every Tuesday, there is a meeting and to prevent people from travelling, this is done through video conferencing... The new chairman says he does not know what has happened in the past. He will start on a clean slate, the board member says. Jadhav has written to the civil aviation ministry saying that apart from money, the airline needs policy support from the government, including an immediate freeze on the capacity being given to foreign carriers and prohibiting access to foreign carriers into multiple domestic points. Patel said on Wednesday there was no question of rolling back such permissions. Jadhav will also do well to start with some math. According to Robey Lal, Air Indias share of the $9 billion (Rs43,650 crore) loss airlines will incur this year, by Iata estimates, is around 9%. Its share of world traffic, he adds, is a mere 0.4%.