Air India's last chance for a take-off

Promises of a turnaround have been made before to little effect, so it's natural to feel a flood of scepticism at such proclamations.


Air India has long been synonymous with waste, inefficiency and a metaphor for all that is wrong with government enterprise.

It has piled on loss after loss, amounting to Rs 20,000 crore (Rs 200 billion), and has also managed to rack up a mammoth Rs 43,000 crore (Rs 430 billion) in debt - both of which would probably get the board of directors in any other company in India or worldwide fired.

Yet, the airline has managed to keep aloft, thanks to the munificence of the state and has recently got another infusion, this time of Rs 30,231 crore (Rs 302.31 billion).

Now, the government has come up with yet another plan to not just keep its planes in the sky, but to finally turnaround the airline. "Reviving Air India would not be an easy task but is not impossible and that is why the government has offered all support," said Amrit Pandurangi, Senior Director at Deloitte Touche Tohmatsu.

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Promises of a turnaround have been made before to little effect, so it's natural to feel a flood of scepticism at such proclamations.

Yet, judging by the series of initiatives, the traction achieved on some of these, as well as the positive results the airline has managed to eke out in a relatively short space of time, industry observers are saying that perhaps this one time it may just manage to pull it off.

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Getting leaner

The first prong in Air India's three-pronged thrust towards operational stability is the way in which it has restructured itself - by forming two separate subsidiaries, one for ground-handling and the other for engineering.

"Unlike us, airlines globally have separate companies to do ground handling and major service and repair of the aircraft. First on our agenda is the creation of subsidiaries and the trimming of our workforce to service the airline needs," said a senior Air India official, who did not want to be identified.

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This involves shifting 15,000 employees from the main airline to the subsidiaries, which will bring down the employee per aircraft ratio from 285 employees today to a globally acceptable level of 172.

Air India has 28,000 permanent and 10,000 contract employees to service a fleet of 133 aircraft.

"The employees will have no reason to complain because they are shifted on the same terms and conditions," the official said.

The official further said the engineering subsidiary is projected to make nominal losses in the first two years but should start making profit from the third year.

The ground handling subsidiary is projected to start making a profit from day one.

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Enter Dreamliners

The second prong of Air India's turnaround lies with an aircraft that is going to become the lynchpin for Air India's future success, the Boeing 787 Dreamliner, the deliveries of which have been delayed by over three years.

The airline will get seven of them by January 2013 and three more will come in 2013-14.

"The operational cost of the aircraft is 20 per cent less than any aircraft type, which helps in making a sector cash-profitable in as early as 90 days," said the official.

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With its Dreamliners, Air India plans to start flights to Sydney and Melbourne from Delhi and also replace the aircraft in service on the Frankfurt, Paris and London routes.

The airline will also start new flights to Moscow, Rome and Paris in the next financial year. Apart from these routes, the airline plans to increase the utilisation of Delhi as its hub, by launching more flights to Dhaka, Kuala Lumpur and Colombo, amongst other destinations.

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Managing debt

Finally, the biggest relief the airline will arguably receive is from the restructuring of debt.

Banks are restructuring the airline's loans of Rs 18,000 crore (Rs 180 billion).

Of that, Rs 10,500 crore (Rs 105 billion) will be converted into long-term loans, with a repayment period of 15 years, and the rest - Rs 7,400 crore (approximately) - will be repaid to banks through a government-guaranteed bond issue.

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This restructuring will give it much needed breathing room. It comes with a moratorium of up to a year that is estimated to bring down the interest payment outlay by Rs 1,000 crore (Rs 10 billion) in the first year from the current Rs 1,700 crore (Rs 17 billion).

The airline also plans to take the benefit of converting up to Rs 1,400 crore (Rs 14 billion) of its working capital loans through dollar loans.

The government, in the Budget, has allowed airlines to raise $1 billion of loans for working capital needs through external commercial borrowings.

"The implementation of debt restructuring gives us money in hand to repay our vendors and also bring back four of our narrow-body aircraft back in line that are grounded because of the cash crunch," said the official.

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The debt restructuring and cash infusion is a huge weight lifted off the wings of the airline, which has yet to pay over Rs 4,500 crore (Rs 45 billion) to different vendors, including Rs 2,800 crore (Rs 28 billion) to oil companies and around Rs 700 crore (Rs 7 billion) to airport operators.

Many may say that bailing out Air India is a waste of public money and talk of the airline turning itself around is an old tune that has run its course.

Still, the figures for the first three months and 20 days (January to April) of this year tell a different story.

"Our revenue in the period starting January till the first 20 days of April have increased by 35 per cent and this will increase further, as we get the delivery of aircraft and normalise operations," said the official.

A growth of 35 per cent in revenues is no mean achievement when the fares during the same period have increased by 20 per cent.

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The path ahead

It's important to remember though, that the airline has a long way to go before it can break out the bubbly.

First off, the infusion in Air India is conditional and the airline has to earn it. It has to improve its on-time performance to 90 per cent in two years from 71 per cent now.

It also has to improve its passenger load factor to 73 per cent by 2015, and to further increase it to 75 per cent beyond 2015, from 69 per cent currently.

Based on the plan, the airline would get an operational profit by 2018.

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It is more confident now than ever of flying itself out of trouble.

"We made huge losses primarily because of two things - huge burden of working capital loans and high fuel prices. Debt restructuring will take care of the working capital loan burden and increase in revenues will help us offset high fuel costs," the official added.

Still, there are do's and don'ts to watch out for. "The government should not interfere in the day to day functioning of the airline. The key to revival lies in the strict implementation of the plan," said Pandurangi of Deloitte Touche Tohmatsu.

It's still a long way to go before any kind of verdict can be issued about the odds of Air India pulling off a comeback. But one thing seems certain. Air India will probably not get a chance like this again.