The great turn around – case of a maharaja

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.

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.