Life can be so unfair, especially on the Indian subcontinent. Just when the decision over financial compensation and a capital injection looked likely to go in Indian Airlines' favour, the government collapsed and the prospect of new elections delayed any further action until March.
When India's group of wise aviation men, the Kelkar Committee, came up with a plan designed to revive ailing state-owned domestic Indian Airlines, it warned that, with its market share continuing to dive, the carrier could go out of business if the recommendations were ignored.
The breath of life, according to the committee, should be a US$263 million rescue package involving a capital injection and 'compensation' for the disastrous effects of some of the government's aviation policies.
The committee, led by petroleum minister Dr Vijay Kelkar, was adamant that Indian Airlines itself wasn't at fault. Decisions forced on it by the government, including lopsided and unfair domestic deregulation, had wiped out its cash reserves.
Battered by seven years of losses and unable to modernise without the necessary cash, Indian Airlines desperately wanted New Delhi to pass judgement before the end of the year. The carrier was confident it would get at least some of the money required, despite opposition from the Ministry of Finance to parts of the proposal.
Now, in the wake of the demise of the government of I K Gujral and with an election due in March, the lifeline could be months away.
There is no question that the carrier, which operates flights to 56 domestic and 17 Asian regional destinations, is urgently in need of a cash infusion. There is hope for the future, however: after accumulating net losses of $340 million since 1990, Indian Airlines aims to achieve a profit of $26 million in the current financial year to 31 March.
Life hasn't been easy for Indian Airlines since it lost its monopoly position in India's domestic skies when the government cleared the way for the launch of startup rivals in 1992. It lost more than one third of its 450 pilots in 15 months, as cockpit crew deserted the ship, lured away by bigger salaries from newcomers.
Dogged by accidents and incidents, its safety reputation plummeted. So did its market share, cut in half by the new competition offering higher service standards on the lucrative trunk routes, while Indian Airlines was forced to continue uneconomic flights on 'social' routes to remote areas.
As the money ran out, so did any hope of fleet modernisation. Of 52 aircraft - 10 Airbus A300s, 30 A320s and 12 Boeing 737s - at least 22 are due for replacement. Indian Airlines will need 50 aircraft costing around $833 million to allow it to compete properly in the Asian market and meet growth demands, say analysts.
'Basically, Indian Airlines was a profit-making company until 1990 and it got into a loss-making situation for reasons beyond its control,' says managing director Probir Sen, who is also joint chairman of Air-India and Indian Airlines. Not surprisingly - since he was a member of the Kelkar Committee - Sen wants the entire rescue package implemented.
Kelkar and his review panel found Indian Airlines' reserves were wiped out as a result of three factors:
1 The grounding of all the carrier's A320s in 1990 for nine months following an accident - Sen says this was purely for political reasons - at a cost of $56.3 million.
2 A government decision, three years ago, to force Indian Airlines to merge with Vayudoot, the troubled state-owned regional airline, and take on its staff and outstanding liabilities of $52.8 million, with an annual burden of $5.7 million.
3 A domestic open skies policy with a non-level playing field which forced Indian Airlines to operate uneconomic sectors, costing the airline some $92.8 million.
Kelkar wants the government to give Indian Airlines $57 million in compensation for the A320 grounding, a subordinated loan of $43 million, to be repaid within three years, and a capital injection of $36 million - a total of $136 million.
An employee stock option would raise another $15 million, with the airline itself contributing $104 million.
'If all these things are done the return to government, whatever government spends, would be 48 per cent by the turn of the century. If they are not done Indian Airlines would be unable to increase its fleet and marginalised, ending up with only about 11 per cent market share. Today it is about 65 per cent,' says Sen.
'After the injection of this money Indian Airlines would be able to go in for some financial restructuring of its own, like the sale and leaseback of aircraft, getting some employee stock options and so on,' he adds. The last stage would see Indian Airlines go to the markets with a public offering.'The committee feels we will get about 760 crores ($217 million) from the public. That is how you get the 48 per cent return.'
Eventual merger
Also critical to revival, according to Sen, are moves towards a serious alliance with flag carrier Air-India, a step towards eventual merger and privatisation.
'I am very clear on that issue. It is the unanimous opinion of the Board, as well as myself, that merger is a must because Air-India, with a fleet of only 26 aircraft in a region that is growing very fast, would benefit greatly by a merger with Indian Airlines - because of the aircraft and the domestic traffic that could be pulled in.'
But Sen rules out an immediate merger, saying it would be 'an absolute disaster.' The problems caused by the merger of Indian Airlines' 22,000 employees with Vayudoot's 1,000 still exist today, explains Sen.
On the other hand, he believes a formal structure is a must and plans to propose a holding company structure where the three airlines - Indian Airlines, Air India and Alliance Air, a subsidiary of Indian Airlines - retain their independent identities, chief executives and functioning. 'But you have an apex board which takes decisions concerning all three, on all strategic matters. This would last for about two or three years,' he adds.
Simultaneously, units such as ground support, engineering, training and ticketing could be merged into separate profit centres, jointly owned by the two carriers. 'In Indian Airlines we have already hived off training, ground support and the jet engine workshop into separate profit centres and they are doing extremely well. If we join these with Air-India facilities, and have jointly owned subsidiaries, that would be to the benefit of all.' This approach would also avoid the immediate problems of outright merger between the two large enterprises which, he says, should take five or six years.
Air-India managing director Michael Mascarenhas fully supports the concept, saying synergising and integrating operations is 'a very logical thing to do.'
The outgoing government appeared to be in tune with Sen's thinking. C M Ibrahim, civil aviation minister at presstime, said New Delhi planned to merge the two airlines to improve their ailing corporate health. 'The government is marching towards that direction,' he said, but gave no timetable for the move.
A gradual move towards merger also meets with the approval of analysts. Associate professor Paul Hooper, head of the Institute of Transport Studies at Sydney University, warns immediate merger could lead to more problems than it solves. 'Look at the history of merging airlines. Look at British Airways and how long it took to merge the cultures. It's not something you do lightly.' Both Air-India and Indian Airlines are old airlines with lots of tradition and culture, he adds. 'So because of India's geography, where it sits in the world, the size of its cities and the distance between them, it makes sense to do things that way,' says Hooper.
Hooper believes the strategy should be for the carriers to work closely, with Indian Airlines developing strongly on an Asian regional basis and Air-India operating as a smaller, long-haul player.
What is clear is that decisions are required not only on the Kelkar Committee recommendations but also on several regulatory issues which have bitten deeply into Indian Airlines' ability to operate effectively.
One onerous financial burden is a 117 per cent surcharge on fuel purchased domestically, introduced during the Gulf War and still in place. This increased the price from 60-70 US cents a litre to around $1.60 a litre. Indian Airlines pays 42 per cent more for fuel than Air-India and foreign operators.
Airport charges are also high and airlines have to collect a 15 per cent tax - the Inland Air Travel Tax - levied on fares. Heavy lobbying by carriers has failed to bring any relief.
Perhaps toughest of all for Indian Airlines is the way in which it is virtually forced to operate unprofitable flights to remote regions of India's northeast such as Jammu, Kashmir and the Andaman islands, a result of its position as the state-owned domestic.
All airlines are required to put 10 per cent of their capacity onto such routes and privately owned carriers do only the minimum required to meet the rules. Indian Airlines has long operated up to 18 per cent of its capacity to these areas and has not been permitted to cut this back.
It also has to do it with unsuitable equipment, often jets, which can't be made to pay their way. What Indian Airlines wants, says Sen, is a level playing field which will allow it to compete fairly with privately owned rivals.
Fares too have been heavily regulated, limiting Indian Airlines' ability to recover rising costs. However last October fare rises of between 10.5 and 14 per cent were approved for domestic flights to offset a substantial rise in operating costs of nearly $75 million in 1997. The fare revision will allow Indian Airlines to recoup around $56 million, but the remainder will have to wait until prices can also be lifted on international sectors.
To some extent domestic competition has stabilised, with many of Indian Airlines' private rivals collapsing through financial difficulties. The strongest remaining competitor remaining is ambitious Jet Airways.
The threat of a big new rival - a proposed joint venture carrier owned by Indian conglomerate Tata Industries and powerful Singapore Airlines - is on hold for the moment as a result of a controversial government policy which bans foreign airline holdings in local carriers.
While a new government may reverse this stance, Sen claims Indian Airlines is not afraid of competition. 'I think there is enough space for two or three large airlines on the domestic scene, provided the government compensates us in the areas where we were bled to death for reasons totally beyond our control.'
His concerns about the Tata-SIA venture have nothing to do with levels of competition but centre on questions of Indian strategic interests, bilateral agreements and fair competition.
Indian Airlines has to transport troops, para-military forces and police personnel during emergencies - not infrequent in India - and maintains unprofitable services to Yangon, Karachi, Chittagong and Dhaka because the government says flights to Myanmar, Pakistan and Bangladesh are required by the national interest. This would raise questions of fair competition if Indian Airlines were asked to compete against a large, partially foreign-owned domestic competitor, points out Sen.
As it awaits government decisions on financial assistance and aviation policy matters, Indian Airlines is trying its best to overcome its problems.
Sen expects the carrier to sneak back into the black in the current year as restructuring and rationalisation begin to bite. Net losses are on a downward spiral. After reaching $82.0 million in 1994 they declined to $60.0 million in 1995, $32.9 million in 1996 and $4.2 million in 1997. 'Managerial initiatives taken by Indian Airlines have moved it to a position where we are poised to make a net profit of 95 crores ($27.2 million) in 1998,' says Sen.
He adds that pilot shortages are slowly being overcome while the creation of profit centres is boosting income and historically poor aircraft utilisation has been dramatically improved. Utilisation of the carrier's B737s has risen from 1,629 hours annually in 1995 to 2,719 hours. Annual hours have also increased from 2,148 to 2,772 on A320s and from 2,182 to 2,616 on A300s. Safety is also being addressed. In 1995/96 Indian Airlines suffered 0.26 incidents per 1,000 take offs. This has dropped to 0.18.
Another area of concern, relations with unions, has eased considerably in the wake of a series of productivity linked agreements and in 1996/97 not a single man hour was lost through as a result of disputes.
The launch of a new low-cost subsidiary in 1996 has helped. Alliance Air uses 12 of Indian Airlines' older B737s and keeps overheads to a minimum. Alliance's former Indian Airlines pilots fly 84 hours a month, compared with 73 with their former employer. Annual utilisation of the B737s with Alliance is even higher than with its parent, at 3,296 hours, and the subsidiary is now contributing profits to Indian Airlines' balance sheet. The carrier is now considering a second low-cost subsidiary to service unprofitable 'social' routes.
There are undoubtedly clear signs that Indian Airlines' fortunes may be on the rebound. But, like Air-India, its success or failure largely hinges on the decisions made in the schism-ridden halls of power of New Delhi's Parliament House and government ministries.
Without the capital to modernise its fleet and face tough market conditions, its resurgence is unlikely.
Source: Airline Business
