The Descent of Air India (34 page)

A RECIPE FOR DISASTER?

COPU has noted in its report, ‘In the pre-merged scenario, Indian Airlines had registered profits between 2003 and 2006 and so had Air India between 2001 and 2006. In 2006–07, the losses incurred by both companies totalled
688.22 crore (Air India,
447.93 crore and Indian Airlines,
240.29 crore)… in 2007–08, the merged airline recorded losses worth
2226 crore which went up to
5548 crore in 2008–09.’ Clearly, the merger accelerated the fall in the fortunes of both the airlines. What went wrong with the plan—was it flawed at the planning stage or was it poorly implemented? More importantly, why has no one been held accountable for the decision even though Air India has already paid a huge price for this misadventure?

Let us look at the sequence of events leading to the merger to gain a better perspective. The potential for value creation through collaboration on fleet and network between Air India and Indian Airlines had been discussed for several years, and a few unsuccessful attempts at Indian Airlines providing an efficient feeder arrangement for Air India’s international flights had also been made. A concept note to this effect was first prepared by consultants A.T.Kearney in 2003–04. The plan was that Indian Airlines would bring in passengers from various Indian cities to Mumbai or Delhi and feed them to Air India’s international flights. On short routes, Indian Airlines aircraft would be deployed instead of Air India deploying its own large aircraft. This was undertaken on an experimental basis, but frequent squabbles on various operational and financial aspects meant that the alliance was beset with problems right from the start. At this stage, it was just a partnership between the two, and even that was proving to be a non-starter which should have been a sign of things to come.

The first time that a public pronouncement of the intent to merge the two airlines was made by a person in authority was at the Kolkata convention of the Travel Agents Association of India in September 2004. V. Thulasidas, while addressing the gathering, said that the national carrier should merge with Indian Airlines and create a strong domestic hub to boost the aviation sector in India. What prompted him to make such a statement, and that too, at a public forum? Should he not have first discussed it with his team internally? With less than a year at the helm in Air India and no aviation background, it was unlikely that Mr Thulasidas was voicing his own opinion on such an important matter.

The report of the CAG found the first reference to the merger of Air India and Indian Airlines in the records of the Ministry of Civil Aviation in a noting dated 16 March 2006, which stated that the Minister of Civil Aviation desired a concept paper on the integration or merger of Air India and Indian Airlines. The notation was made on a concept paper drawn up by A. T. Kearney, 18 months after Mr Thulasidas’s statement. Why was there such a time lag between the chairman’s words and the request for a report? Ideally, the concept note should have preceded the announcement. Even more surprising is that within six days of this noting, a presentation was readied for the prime minister on the subject. Such haste was completely out of character with respect to Air India, where proposals usually languished for years. Stranger still was the fact that the presentation vanished without any trace. It could not be retrieved from the ministry’s records, according to the CAG’s report. The CAG’s report quoting the notations that had been made said, ‘In the presentation, it was highlighted that in the light of the global trend towards consolidation in the airlines industry, it had become incumbent for the two national carriers to work towards merger, as the merged entity would not only be able to compete effectively in the market but would also find greater acceptability amongst the global alliances. It was emphasised that given the overall developments in the civil aviation sector internationally as well as in the domestic sector, nothing short of merger would be an effective way to compete effectively in the market.’

There can be no quibble with the objective: competition was getting more and more intense, and the market had been snatched from under Air India’s wings. But what was mystifying was that although the solution being suggested was fraught with problems, the people involved paid no heed to the history of trouble between the airlines. The HR department should have been particularly alert to the problems, as should have been the board, the chairman and the ministry. The CAG has also observed that A. T. Kearney, had emphasised the need for synergy between the two airlines in 2004 when it had been appointed as a consultant by Air India. But the ministry had not moved to merge the airlines at that time. CAG also hinted that the ministry had been aware of a concept paper drawn up in 2004 on the potential synergies between the airlines but had not referred to it at the appropriate time. It took two more years for the ministry to initiate action on a merger, and then the matter moved with uncharacteristic haste. What makes the timing suspect is that this was done barely months after both airlines had placed their orders for a large number of aircraft. Indian Airlines purchased 43 aircraft comprising 19 A319s, 4 A320s and 20 A321s from Airbus Industrie, and Air India purchased 68 aircraft, comprising 23 B777s, 27 B787s and 18 B737-800s from Boeing. If the two were to be merged, the orders could have been placed together and NACIL could have gotten a far better deal.

The CAG’s report said, ‘Had the possibility of merger (with attendant route rationalisation, network integration, common maintenance/overhauling facilities and other synergies) been considered—even at a late stage—in the process of fleet acquisition, the underlying economics, including frequencies, routes, seating, and other operational aspects, could have been significantly altered; perhaps, even a common acquisition process for AI/IA could well have been considered. In the CAG’s view, the potential benefits for the merger would have been far higher, had this been undertaken before the finalisation of the massive and separate fleet acquisition exercises undertaken by AI and IA.’ Why is it that the minister and chairman did not consider these options? If they had decided to merge the airlines, why did they push through the acquisition of 68 new aircraft for Air India?

The ministry officials, in their reply to the CAG in August 2011, while elaborating the background and rationale for the merger and acquisition of the aircraft, stated that the merger would not have altered the aircraft acquisition programme significantly, and that no losses could be attributable to the merger. The ministry could not have said anything else since it was in charge of the aircraft order and the merger. But the facts belie the ministry’s contention. The point is that Air India was bleeding. Its finances were in a state of disarray and revenues were being squeezed dry. It could ill afford the purchase of 68 aircraft, but since there was no going back on that decision, the authorities should have considered the burden that the merger would impose on the airline.

COPU observed with bafflement that ‘…while the merger of these two airlines had extensively been deliberated upon since the early 1970s, and the refrain all through had been to tread cautiously, it was abruptly done in 2006–07, throwing all caution to the wind…and millions have been spent to appoint consultants to advise on various matters starting with the revival roadmaps, followed by merger and turn around plans, which have gone in vain due to non-implementation of the expert inputs in their entirety.’ The COPU report and, in a way, all the reports that have come out since the time of the merger seem to emphasise the fact that there was a large gap between what was promised and what has been delivered. For instance, the champions of the merger had said that NACIL would offer stiff competition to the private airlines with respect to fleet size, route efficiencies and economies of scale. But once the merger was approved, no efforts were made to realise the promised potential. The Parliamentary Standing Committee on Transport, Tourism and Culture report also says, ‘The Committee fails to understand how the two major avowed objectives of merger—“economies of scale” and “increased leverage”—could be accrued without achieving proper synergies. The Committee also notes that the technical infrastructure for aircraft maintenance including various workshops created by each company over the year is specialized and unique to each fleet type owned by both these airlines. As such, cross-utilization of the maintenance services is also not feasible. The Committee feels that in such a situation these inherent contradictions existing within NACIL have become major stumbling block in achieving the required economies of scale and increased leverage.’

According to Accenture, the consultants appointed to conceptualise the merger and evolve a road map for implementation; the main intentions of the merger were to:

•  Provide an integrated international/domestic footprint, which would significantly enhance customer proposition and allow easy entry into one of the three global airline alliances.

•  Achieve synergies on two counts—revenue synergies (primarily on account of network integration) and cost and capital productivity synergies (leveraging economies of scale for rates for catering, crew boarding and lodging, etc.; opportunities for rationalising overlapping facilities and infrastructure, e.g., international locations serviced by both airlines).