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Scrutiny
  
Strategy’s dead. Long live...
The king of good times is the favourite whipping boy for PSUs and political parties alike. But shouldn’t the entire focus be on the illogical oxygen support being relentlessly provided to Air India instead?
02/02/2012

All through last year, the Kingfisher bashing tale was hot! From oil companies to PSBs, everyone found their fair share of media attention at the cost of a private carrier struggling to make a mark in sector that has in recent years been nothing more than a black hole in the universe of aviation. What was amusing though was that Kingfisher was invited to the flogging party every time a crack was discovered in the state-run Air India’s armour. It still is. For instance, shortly after Air India begged the government for an additional capital infusion of Rs.12 billion, and Arvind Jadhav’s name was thrown in the air as an incompetent and undeserving seat-warmer at Air India in July last, the Mallya-led airline was exposed as a “private” airline, which defaulted on its fuel and airport duty bills, and was destined to tumble downhill. [Can you ever imagine the possibility of 10 Air India aircraft being grounded for over 8 hours at New Delhi’s airport because an oil PSU refuses it a refill? This happened to Kingfisher on July 18 last year! But of course, AI is government-owned!]

Recently, Air India’s board approved an issuance of preferential shares to the tune of Rs.75 billion to a consortium of 26 banks. This was naturally a step towards reducing the current debt load of Rs.437.77 billion (including a working capital loan of Rs.215.11 billion and an aircraft-purchase loan of Rs.214.12 billion) and improving the woeful operational and financial state of Air India – the world’s largest loss making airline in the past four years (total loss of Rs.2.23 trillion since FY2007-08). But the party wasn’t to be complete without dragging in the king of good times again. Just days later, (on January 5, 2011) India woke up to two facts: One, that a DGCA audit report had indicated “finance-related safety concerns” at Kingfisher and two, that 13 PSB lenders to Kingfisher (owning a 23.37% of the airline, led by SBI) had either converted or were planning to convert the airline’s account into a non-performing asset (NPA)! Given such a situation, one is forced to not only believe that the aviation ministry has always tried to divert focus away from the beleaguered Air India every time a flaw in its operations surfaced, but also to read more into the kind words of our newly crowned civil aviation minister (he said that he would not want “any” airline to shut down for financial reasons)! Really, Ajit Singh is being just as impractical as can be – how do you, or why should you not allow any airline to shut down for financial reasons? But of course – we can’t forget that the state-owned Air India is also the biggest loss making Indian carrier.

Thus far, this whole discussion has been about anything but strategy. And that is how the construct of the tale will remain if AI’s proposal is approved by the cabinet. Why? Because the strategy there is none! If Indian PSBs are to be run with the same logic that drives Global Fortune 500 companies (SBI, which was ranked at no. 291 on that list in 2011, will naturally also become the lead banker in the group of 26 PSBs which will further lend to AI – so this argument), what sense does it make to increase their exposure in a bleeding carrier (which is losing Rs.39 million a day), when the recent year for most Indian PSBs – including SBI – has been one marked with a steep fall in quarterly profits and a rise in bad loans? Given the rate at which AI is losing money, it is scheduled to lose Rs.142.5 billion in FY2011-12, and that makes no sense for bankers and taxpayers in India. But then again, SBI is state-run and so is AI.
Also, if AI is issuing preferential shares worth Rs.75 billion to the banks (and assuming it already owes Rs.228.3 billion to PSBs), the company management at least values at Rs.303.3 billion – enough to give it a #25 rank on the current BSE Sensex list (above Maruti Suzuki, JaiPrakash Associates, Hindalco, Tata Power & Cipla). Surely, you’d think any trader has misplaced his normal state of mind if he suggests you thus. Here is the truth: AI’s net worth, despite huge capital infusions from time to time, was minus Rs.44.81 billion at the end of FY 2009-10. Definitely, the huge losses in the past couple of years wouldn’t have helped!

In the name of strategy, AI would do well to first draw up and table a plan for reducing the manpower count per aircraft from the current 241 to anywhere between 140-160. That would mean a 25-40% reduction in manpower. If Southwest, US’ most successful airline can operate 692 aircraft with a base of 35,000 employees, AI does not need to afford paychecks of 32,000 employees for a much smaller base of 100 aircrafts! Common sense. AI should recast its routes to increase load factor which at present is the lowest in the country amongst all domestic carriers (23.7% as compared to Jet’s 82.6% & Kingfisher’s 81%), and should also optimise (reduce) fleet count by at least 66.67%; increasing the utilisation of each aircraft by at least two-thirds (as compared to airlines like Delta, Continental, Southwest, Lufthansa & China Southern Airlines, whose passenger count per aircraft range between 168,531 and 218,569, that of AI is extremely low at 64,817). Finally, the AI management and the ministry of civil aviation must create two SBUs – one for ground-handling and another for airline operations – and efficiencies will start looking up.

It’s the taxpayer who is bearing the brunt of this totally inefficient airline. A fairer treatment for the ordinary Indian’s hard-earned money would be to give away such funds to charity. What the government is doing by keeping AI on artificial respiration is that it is making competition unfair for other private airlines. Dragging Mallya into the scene won’t earn AI any creditworthiness, and neither will it make living easier for the airline; unless of course, PSBs have thought of creating a separate division called the “Air India department” to serve the Ministry of Civil Aviation’s management plans that come sans a strategy. In an interaction with the media on the first day of the Auto Expo 2012, Ratan Tata had said that his group no longer considers the airline business as an area of choice to be in. He probably meant that the Tata group is not a PSU!

By:- Steven Philip Warner
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