If anyone had doubts that Mumbai-based flag carrier Air-India was under severe financial pressure, they would have been banished late last year during the so-called Diwali period, when most of the nation's industrial companies distribute bonuses to their employees.
Instead of good tidings, the carrier's 18,200 staff received a letter from managing director Michael Mascarenhas, asking them to take voluntary wage cuts 'to assist in reducing the expenditure outlays in the present very serious financial crisis'.
Mascarenhas, a 35-year Air-India veteran and graduate of the Universities of Mumbai and Cambridge, wasn't asking his workers to bear the burden alone; he has also trimmed 10 per cent from his own earnings. The message to the rank and file was that the government was no longer prepared to ease the airline's woes.
Air-India has to be revived and placed on a sound financial footing in preparation for an eventual merger with sister domestic Indian Airlines and at least partial privatisation. Since taking the helm last July, Mascarenhas has put his foot on the recovery accelerator and is pruning every aspect of the business.
So far a freeze has been slapped on new recruitment, except for cockpit crew, and a voluntary retirement scheme is being studied. Routes have been dropped and overseas staff cut back.
Overtime has also been curtailed, meal allowances and travel claims reduced, and the handing out of gifts to First and Business Class passengers dropped.
The medicine seems to be working. After reporting a US$17 million loss in the first half of 1997/98, Air-India had a small surplus in October and November and expected only a nominal loss for the full year to 31 March.
The mood at Air-India is currently upbeat because of the success over the last three months in terms of higher revenue, higher load factors and the absence of losses, say managers.
But while the cost cutting action would amount to a sound business strategy for any troubled firm, in Air-India's case the situation is more complex.
As Mascarenhas shoots for revival, his task is complicated by developments outside the airline's control, including the collapse of the government and the prospect of yet another round of national elections in March.
Parliamentary downfall in New Delhi came just as the cabinet was preparing to make critical decisions on a future strategy for the airline, creating a hiatus which will again delay recovery.
Air-India's troubles stem from a plethora of factors, including state ownership, which have affected its operations over recent years and led to political interference and slow decision-making.
Worse, the carrier committed to $1 billion in new aircraft in 1993 but its six new Boeing 747-400s arrived just when a fare war exploded on India-Europe routes. Yields plummeted on sectors where Air-India faces the toughest competition from overseas rivals that thrive on Indian sixth freedom traffic.
Ironically many Air-India managers are convinced this commitment to change sparked the problems.
'If you make such heavy investment there's naturally increased interest [payments]. But very unfortunately for us, the market came under a heavy squeeze precisely at that time, with fares crashing and margins down. In 1996 it hit rock bottom. Passengers were paying a price to Europe lower than in 1992, four years earlier, and the cost of everything else had gone up.
'Everybody cut fares and by the time they realised they had got into a fight, every type of margin and gimmickry had come into it, with the result that everybody lost money. Considering we fly out of India more than anybody else, that is one reason we got into those heavy losses. That was the reality and there was no question of Air-India making money,' explains one senior manager.
The discounting came to an end during 1997, bringing a return to fare stability and better yield prospects.
Frequent changes of chief executive during this period didn't help, says Probir Sen, joint chairman of Air-India and Indian Airlines and managing director of the domestic operator.
The carrier has been criticised by civil aviation minister C M Ibrahim, who says it must cut staff to come out of the red and post profits. 'We are faced with a situation where it has more than 500 employees working on each aircraft. It is too much,' he complained.
Mascarenhas agrees the carrier is overstaffed but argues sackings are not the answer. The slack in human resources has to be absorbed by expansion, thereby raising the level of ATKs per employee, he says.
'In 1995/96 the ATKs per employee engendered in Air-India were something like 118,000. That is around half the median productivity of the industry, one quarter that of leaders such as British Airways and Lufthansa, and close to one-eighth of industry front runners like Singapore and Cathay, who generate something like 850,000 to 1 million ATKs per employee, per annum.
'You can see there is a vast disparity but it doesn't necessarily mean we are all inefficient . . . what it says is that historically we haven't changed our methods of working and our procedures.
'We have never outsourced. We have believed in doing everything in-house. So you can't blame the people of Air-India. Maybe you can blame the management of Air-India historically over the years for what has happened but it doesn't necessarily mean you have to sack people,' he argues.
Instead the recruitment freeze will cut the workforce by 3 per cent a year through natural attrition. 'So in five years' time we will be shaking off 15 per cent of our staff without having done anything at all,' he adds.
Financial trauma has been a constant companion to Mascarenhas. In profit until 1994/95, Air-India's income has declined sharply, with accumulated losses of $177 million in 1995/96, 1996/97 and the first quarter of the 1997/98 year. Red ink has continued to flow, with losses of $17 million in the six months to 30 September.
That comes despite strong improvements in revenue, from $818.8 million in 1994 to $951.9 million in 1995, $1 billion in 1996 and $1.1 billion in 1997. The carrier expects revenue growth of 7-8 per cent a year.
Despite the traumatic experience of the airline's last large aircraft order, Air-India's previous management had plans for a total fleet revamp with the purchase of up to 23 jets - either Boeing 777s, Boeing MD-11s or Airbus A340s - for delivery to 2013. But the decision was repeatedly delayed even though medium capacity long range (MCLR) aircraft are considered a central plank in the carrier's expansion strategy.
Not large by international standards, Air-India currently has a fleet of 26 Boeing and Airbus jets:six 747-400s, two 747-300s, nine 747-200s, six A310s and three A300B4s.
Chairman Sen says contrary to public perceptions, the delay is not the government's fault, although New Delhi does have to approve new aircraft types and purchases above 60 crores of rupees ($15.5 million).
However in December it emerged that, due to the difficulties of financing a larger order, a new proposal was to be put before the board by year end for fewer aircraft and smaller types such as the A330 and B767. A final decision is not expected until March or April.
The new fleet proposal is the result of a new assessment by Mascarenhas, who is not convinced the introduction of new aircraft types alone will provide the cutting edge to meet competition. He says there is nothing wrong with A310s for medium-haul regional routes or B747-400s for high density long haul routes. But he does believe the number of types has to be reduced by divesting the A300B4s to Indian Airlines, which has an urgent need for such aircraft.
Air-India believes it holds a trump card in strong growth projections, with estimates of an emerging middle class of up to 300 million. With current Indian originating traffic of around 8 million, that bodes well for the future.
'It's absolutely phenomenal. Now whether that can be translated into faster rates of growth for the originating air traffic market out of India is a separate issue, but the potential is definitely there,' says Mascarenhas, who concedes that Air-India, which carried only 2.6 million passengers in 1996, should be a much larger airline.
Government policy has been part of the problem but fortunately aviation is now seen as a higher priority. Mascarenhas also says public sector enterprises now have much greater autonomy. 'There has been more progress in the last year than in the last 45 in terms of granting autonomy in the decision making process.' While growing the airline, he intends to reduce the bureaucracy and speed up the decision-making process.
Air-India is also looking at outsourcing. 'We want to offer our services to other people because of the relatively low costs we have in this country. We want other people to outsource their business to us,' he says.
Joint venture opportunities are also under investigation. Air-India is in talks with Singapore Airport Terminal Services (Sats) with a view to setting up a combined operation for ground handling services at Indian airports. It would also look for business elsewhere in Asia.
The carrier's network adjustment is under way, following a study separating the routes into four categories: profitable, marginally profitable, unprofitable and extremely unprofitable.
Losses have been incurred from flights to and from Europe, Canada, the UK, the US, Israel, East Africa, Hong Kong, Japan and Singapore. 'The core routes will be those on which we make profits or on which we make marginal losses which can be converted to profits. This is a core structure of our routes,' explains Mascarenhas.
The others will be abandoned or operated under alliances or commercial accords with other carriers. South Africa, Australia and Canada have already been dropped, although Canadian services are expected to resume later this year.
Operations into Europe have been drastically curtailed, with the abandonment of services terminating in London. 'We believe to make that route profitable you have to go beyond into the US,' says Mascarenhas.
European carriers continue operating between Europe and India to carry sixth freedom traffic to the US and Canada, says Mascarenhas. 'In fact one of them was here the other day and actually admitted 65 per cent of his traffic was from North America. We know the figure is actually 80 per cent. If we were large enough and we had that capacity we would go beyond, and one day we will have to do that.'
In the meantime, Air-India has linked up with Continental Airlines through Frankfurt, hoping to tap into similar feed. It believes when Air-India and Indian Airlines finally join hands, market conditions will swing in its favour as a result of the hub-and-spoke system from India's gateways to domestic destinations. Air-India also has an agreement with Air France under which it can codeshare on the latter's services beyond Paris to Amsterdam, Frankfurt and Zurich, and is actively studying other opportunities.
Coupled with better yields from higher fares, Air-India is working to increase aircraft utilisation. From December, two leased A310s were taken out of service, with the number of flights unchanged, effectively lifting utilisation from 8.9 to 10 hours a day.
Mascarenhas wants Air-India's passenger numbers to grow at 10-11 per cent, ahead of overall market growth of 6-7 per cent. This would lift its current 21.9 per cent overall share of the Indian international market. Passenger numbers are expected to reach 4.16 million by the end of its 2001/02 financial year.
Mascarenhas is surprisingly confident about the future. Losses in 1997/98 are declining and he projects the first-half deficit can be reversed in the second six months. A profit of $25.33 million was targeted for the full year, but this may now be curtailed by the downturn.
The carrier will keep a close watch on yields and has increased fares 'based on what the market can bear'. Mascarenhas estimates it will take one or two years before the combined benefits of improved yields and route restructuring take effect. 'We will really get down to business in 1998/99.'
Air-India's debt level of around $1.2 billion is not 'significantly high', he claims, and breaks down into two components. Around 2,500 crores ($714.3 million) is long-term extended debt for financing aircraft, says Mascarenhas. The rest is money raised to meet deficits on current account in 1995/96 and 1996/97. The debt:equity ratio is something like 3.9:1, he adds.
'We are halting the financial haemorrhage and aiming to break even over the next two to three years. One still likes to look at coming as close as possible to the industry norm, which is approximately 2.1 or 2.2:1, which is what we did have for a long time.'
Mascarenhas has a tough job ahead but more than three decades in the business have made him philosophical. 'In the airline industry nothing is a disaster. The airline industry never looks back; we always look forward with hope and some quiet confidence.'
Restructuring and building sound management skills may not be his biggest problem. Stable government, a balanced aviation policy, and some speedy decision-making by the airline's political masters will be critical to recovery.
Unfortunately, in India's often chaotic political arena, history has shown these to be extremely elusive.
Source: Airline Business
