The king in exile
India is the third largest aviation market in terms of domestic traffic, which touched 100 million in 2016. Domestic air traffic has shown a consistent growth of 20 per cent to 25 per cent throughout 2015 and 2016 and a number of the domestic airlines have made profits during this period. However, the grand old “Maharaja”, Air India, the national carrier, has not been able to “lift with the rising tide”: a CAG report has stated that it has been understating losses over the past three years and we once again hear calls for government to divest its stake in the company. Let us look at the merits and demerits of divestment and its feasibility to get a reality check.
Air India operates an ageing fleet of 140 planes, has more than 21,000 employees, flies to nearly 41 international and 72 domestic destinations and is the largest international carrier from India. Till the 1990s, the “Maharaja” dominated the market. With the entry of private players, Air India has been continuously battling tough market conditions and stiff competition. Its domestic market share has steadily reduced to 14 per cent. In 2012, the government approved an eight year Rs 30,000 crore turn-around plan to infuse equity into the company that had outstanding loans exceeding Rs 47,000 crore (working capital, long term for fleet acquisition and vendor dues) and accumulated losses exceeding Rs 20,000 crore. Despite receipt of almost Rs 24,000 crore equity, its debt stands at Rs 52,000 crore and it continues to bleed, though operating losses have marginally reduced to Rs 3,587 crore in 2015-16, against Rs 5,859 crore in the previous year. So the reality is a bloated, ageing airline with past burdens weighing it down and preventing turn around under the status quo.
A blame game is both unseemly and unproductive at this juncture though poor management, political interference and low employee discipline and productivity cannot be swept under the carpet. However, what is germane is that Air India is a government owned company and will never be able to compete with private airlines in this highly competitive service industry, where margins are razor thin and survival depends on being nimble and agile. The reason for this lies in the nature of its owners, the government.

Air India has to comply with the corporate governance principles of the government. These include following elaborate rules and regulations that slow down decision making and the diktats of the government that include flying on uneconomical routes to fulfill social objectives at the cost of commercial viability. Government has no business to be in a service industry, which calls for a level of responsiveness that it is completely incapable of.
There are a number of global examples of privatisation of national carriers: British Airways was privatised in 1987 and is now the largest airline in the United Kingdom based on fleet size, or the second largest, in terms of passengers carried. Kenya Airways was privatised in 1995. KLM Royal Dutch airlines bought 26 per cent of the airline share, thus resulting in an increase in the frequency of the airline’s flights by 61per cent and the airline has been profitable ever since.
The government cannot continue indefinitely to fund an perpetual loss making entity that has almost no chance of turn-around, at the expense of much needed social and infrastructure spending. Clearly, there is no option before the government but to exit. However, we need to be realistic. Who in their right mind would buy a bloated, debt ridden and loss making company with negative net worth? So before putting the Maharaja on the block, the government will have to trim much of its excess baggage. This could be in the form of paying off its dues or restructuring them under Government guarantee, or, assuming their liability.
(The writer is partner, PwC)
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