During the British rule India used to be a
land of maharajas, one every few hundred kilometres. Operating their own small
princely state, they were a happy lot. With the demise of the Raj in 1947 the
princely states were gobbled up by the dominion of India. The maharajas were
now living on state pensions. Three decades later the iron fisted Mrs Gandhi
put a stop to the state pensions and left the maharajas to fend for themselves.
Many of them were lost in the oblivion, while many managed to adapt. The many
heritage hotels (modified castles and forts) dotting northern India today is
testimony to the turnaround. The case of Air India is a similar one. Once a
true maharaja under the TATAs, it was made a state owned enterprise in 1953. In
the last six decades Air India saw many changes including many years of
perpetual losses. The current loans and outstanding for Air India is Rs 67,520
crore (USD 13.1 billion). The ministry of civil aviation has cleared a proposal
to bail out Air India by infusing a total of Rs 30,000 crore (USD 5.8 billion) over
the next nine years. However the airline has to follow a turnaround plan and
achieve milestones to get the money. The question is will the maharaja of skies
turnaround like the ones who own heritage hotels?
Little is known
of the turnaround plan of Air India; with the information available in public
domain it seems that the plan is more about financial restructuring than
operational restructuring. The airline will issue non convertible debentures
worth Rs 7,400 crore (USD 1.4 billion) to its lenders to pay for its working
capital loans. A short term working capital loan of Rs 11,000 crore (USD 2.1
billion) will be converted into a long term loan. Information on operational
issues is available in bits and pieces. The ministry has now agreed to pay for
the induction of 27 dreamliner Boeing 787 aircraft on sell and lease back
option (Air India will sell the aircraft to a leasing company, which will lease
them back to Air India). This will take the assets and related depreciation off
the books while still utilising the benefits. Another bit of information is on “On
Time Performance” (OTP) of 90% and a seat load factor of 73% to get the money. The
ministry also decided to hive off the engineering and ground handling units of
Air India into wholly owned subsidiaries. A total of 19,000 staff will be moved
from Air India to these subsidiaries. This will leave Air India with around
9,000 staff, bringing down aircraft to employee ratio to 101 per aircraft from
the current 315. The subsidiaries are also expected to run as independent
profit centres, competing for business form not just Air India but other airlines
as well. A leaner Air India might be more attractive for investors in a future
divestment plan.
With this
infusion of money, Air India seems to be able to pay for its costs for some
time, but much more needs to be done on the apron to keep it flying. At present
Air India has a total fleet of 121 aircraft, out of which only 27 (22%) are
long haul. It operates a total of 34 international destinations, out of which
12 (35%) are highly price sensitive and fiercely competed destinations in the Middle
East and South East Asia (Bangkok & Singapore). In the year 2009-10 Air India
flew a total of 11.7 million passengers out of which 41% were international. Of
the total passengers flown only a fraction was transfer traffic (passengers
connecting at an airport for their onward journey). For the sake of comparison
let’s look at Qatar Airways. The airline with a fleet of 96 aircraft carried 12
million passengers in 2011 across 115 destinations worldwide. Nearly 45% of
traffic on Qatar Airways is transfer traffic. Air India has a lot to achieve
even with its current fleet and network.
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| Keep them flying |
How can Air India
make use of this turnaround plan? First of all Air India should see the current
situation as an opportunity. With 19,000 employees off its shoulders there are
huge savings to be made in the years to come. Another blessing is the induction
of ultra long haul 787 aircraft. These are highly fuel efficient and can seat
up to 290 passengers (depending on seat configuration). The 27 aircraft to be
inducted over the next few years can be used to realign its network in a smart
way. Hiving off of the engineering and ground services unit will also give Air India
the much needed freedom to shop for the best offer in market, again helping it
to save money.
The next step is
to come up with a well planned hub strategy. At present Air India is more of an
O & D carrier than a hub carrier. It needs to evolve as a mature network
carrier to improve its efficiency and seat load factor. While O & D traffic
has its own premium, transfer traffic gives the much needed support to fill up
seats. The two logical options for a hub in India are Delhi and Mumbai. While
Mumbai will take a while to get ready with the infrastructure required to have
hub operations, Delhi is ready since 2010. Integrated terminal with seamless
transfers will reduce turnaround time at the tarmac and provide convenient
connections for the passengers. Large volume of traffic moves between South
East Asia and the Middle East, East Asia and Europe. Air India can tap into
these markets utilising its position as a hub carrier at Delhi/Mumbai. Majority
of the traffic is being hubbed through the Middle East at the moment. Competing
with the established carriers like Emirates, Etihad and Qatar Airways is not
easy but on the other side there is the advantage of a mature market which can
be tapped.
A hub is no good
if the network is not diversified enough. As mentioned earlier, one third of
the international destination of Air India are in the highly competitive market
of Middle East. Between India and three large airports in the Middle East
(Dubai, Doha and Abu Dhabi) there are 550 weekly flights (this figure will be
higher if other airports like Muscat, Kuwait, Bahrain and Jeddah are included).
The traffic consists of mostly guest workers from India and is extremely price sensitive.
While seat load factors might be high, yields are low due to competition. To
diversify its network Air India needs to use its 787s on starting new routes.
Europe is under served with only three cities on its network. South East Asia
is another underutilised market, Malaysia and Indonesia are completely absent
from its network. These two countries offer a huge potential of carrying
transfer traffic through India to the Middle East (mostly on pilgrimage to
Saudi Arabia).
A hub strategy
and a diversified network will give Air India the much needed opportunity to
perform well. However, this will not happen without investing in human
resources. Extensive training and consistency in service quality is the key to
successful operations. Air India might have to renegotiate the current employment
contracts to introduce performance based pay. This might prove a difficult
task, but to turnaround Air India a lot of difficult decisions have to be
taken.
