Air-India and Indian Airways are stagnating and must grow to survive. They lost a real opportunity for change when their proposed privatisation schemes faltered in 2001, but is it too late now to try again?
Air-India managing director JN Gogoi is worried about his airline. Years of bureaucracy have taken their toll on the state-owned carrier, the world's 57th largest by revenue, which has remained at essentially the same size since the mid-1990s. Gogoi, a veteran with the airline of more than 30-years standing, now believes the government-mandated status quo cannot remain. "We need to grow. If we remain static we will not survive," he warns.
Sadly, Gogoi's comments can be applied in general terms to many others within India's aviation sector. The years of bureaucratic wrangling, high taxes and a lack of investment in infrastructure and aircraft have badly hurt not only Air-India but also fellow state-owned carrier Indian Airlines and the country as a whole.
In addition to seeing its airlines concede market share to foreign carriers, India is losing out on a potentially big revenue source by having weak infrastructure that has meant other airports in the region, such as that of fast-growing Dubai - which has considerable traffic to the subcontinent - have stolen the country's hub chances.
It could have been a different story. India, with a population base of more than one billion and a growing, travel-hungry middle class, is geographically well placed between East Asia and Europe. But so far it has failed to become the aviation powerhouse that demographics suggest it should be.
Turning tide
The country's airline chiefs now believe their industry is at a crucial juncture. India, they say, must either invest or accept that its airlines will be insignificant players in the world aviation scene. But they believe that the tide may finally be turning, with the government at last taking a serious look at the industry and seeing the benefits for tourism and the wider economy that air transport can generate.
Air-India, with a fleet of just 30 aircraft, is small by global standards. Sister carrier Indian Airlines - the world's 63rd largest by revenue - has a fleet nearly double that size, but also has for years been held back from expansion.
Air-India focuses on medium- and long-haul international services while Indian Airlines concentrates on domestic and shorter-haul international routes to the Middle East and South-East Asia. The two carriers are considered by most in the industry to be overstaffed and inefficiently run, and in desperate need of restructuring.
The government said it would privatise both in 2001 but disqualified the last two bidders from the running for Indian Airlines, and saw Singapore Airlines and its local partner, conglomerate Tata Industries, walk away from a planned bid for Air-India. What was lost was a prime opportunity for genuine change - to say nothing of the foreign funds that could have brought efficiencies and real investment into the sector.
Air-India today claims around a 20% share of the international market to and from India, while Indian Airlines holds 10%. Both say they are in a position to grow but have been restricted from doing so. And, even though they do not receive direct financial assistance from the government, they are scrutinised in virtually everything they do.
"I don't know how many parliamentary committees we have to meet, but it's a big number," says Indian Airlines deputy managing director V Kashyap. "We spend nearly one-third of our time just providing information to the various government departments. That one-third time is worth a price - it's worth a lot of manpower. If accountability to the public for funds requires one-third more effort, then I think accountability is coming at a very hefty price."
Seeing a bleak future for the industry if the current situation continues, both carriers are now more vocal in highlighting concerns and pushing hard for change. They are each looking aggressively at fleet renewals that will not only help them operate more efficiently but help expand their operations at last.
For Gogoi, it is critical that Air-India manages to get a fleet expansion programme approved this time after several failed attempts. "It's a life and death question for Air-India. We have survived a couple of years purely by taking dry-leased aircraft. But that has its own limitations and its own constraints," he says. "If we don't go in for acquisitions, in my mind Air-India will be dead. The acquisition of new aircraft is very, very important for the survival of Air-India."
Air-India and Indian Airlines currently fly barely one-third of the international rights they are entitled to use under bilateral air services agreements with other countries, in part because of their failure to expand their fleets. Meanwhile, foreign carriers in recent years have substantially increased services into and out of the country as a result of a more liberal bilateral air services regime.
Although much of India's population is poor and will never be able to travel by air, the country has a fast-growing middle class, estimated at 100 - 150 million. Today more and more of these people have relatives abroad, building up an already large ethnic traffic base, particularly in the USA.
Ethnic traffic
"At one point of time, people used to think that the ethnic traffic was the low end of the market," says Gogoi. "If you wanted to talk about ethnic traffic people used to refer to it as if it was a derogatory term - that any airline depending on ethnic traffic cannot bring in people from the other side.
"But today the ethnic Indians living outside are no longer the bottom half of the spectrum. You have very well-to-do Indians living outside that do pay business-class and first-class fares. And this base is growing."
While this market is expanding, and while foreign governments continue to press the Indian government for more access for their airlines, Air-India has demanded compensation of sorts. Today when foreign carriers secure additional rights to serve India they are often forced to accept "commercial agreements" with the flag carrier, such as codeshare deals. Indian bureaucrats see these requirements as "interim" measures because Air-India has been handicapped for so long, but insist those sorts of demands will remain until their national airline is finally able to grow on its own.
"Air-India should be a 100-plus aircraft company," says secretary for civil aviation Roy Paul, who also acts as Air-India's chairman.
"In the last five to six years there has been no growth. The acquisition of aircraft was delayed for one reason or another - frequent elections coming, major purchase decisions always getting involved as a political issue, nobody wanting to take a decision with an election around the corner," he says. "And then out of the present government came stability, but also the decision to disinvest, so we went through the whole process of trying to find a buyer and in that process a decision was taken not to make further investments. We are hoping that now we will be able to correct some of that."
Privatisation postponed
Paul says the government will hold off from reviving attempts to privatise Air-India and Indian Airlines until both are financially stronger and their long-delayed fleet modernisations are finalised. Air-India reported a small net profit in the 2001/2 financial year after six straight years of losses and says another net gain will be reported for 2002/3. Indian Airlines, however, remains in the red.
"At the moment we are putting it on the back burner," Paul says of privatisation plans. "We will try to concentrate on building up and consolidating the airlines' health. At another stage disinvestment could be considered, because it is not government policy to remain in this business beyond what is necessary."
Air-India's privatisation would have seen 40% sold to a strategic investor, of which 26% would have been available to a foreign entity. Domestic institutions and employees were each to have been offered 10%, leaving the state with 40%.
At Indian Airlines a 26% stake was to have been sold to a local strategic investor and another 25% to employees, the public and financial institutions, leaving the government with 49%.
Paul says that while the disinvestment plans were well intentioned, "we have been basically losing out between the two options of disinvestment and investment, by not being able to take a decision either way".
"The airlines have languished, and so we have now more or less decided that we can't spend more time," he adds. "In this business if you don't grow, don't renew yourself, you ultimately shrink and then disappear. One has to keep running even to remain where you are."
Another long-discussed idea is a merger of the two airlines to make them one strong force, but the simple mention of this sparks enormous controversy and is dismissed outright today. Gogoi flatly rejects suggestions that his carrier will eventually need to merge with Indian Airlines but he believes the two can co-operate more.
"Merging is a physical impossibility. Both airlines have grown in such a manner where the physical merging is not possible," he says, "But what is probably possible is synergising both companies, where you rationalise your routes so you don't compete with each other."
Outsourcing operations
The government appears to recognise that this is necessary. Late last year, management consultancy AT Kearney won a contract to draw up a long-term business plan for the two airlines and make proposals on the outsourcing of non-core activities, possible manpower reductions and "operational integration". An initial report is due late in March and a final report in June, says Paul.
Ahead of the completion of the consultancy's report, Air-India is trying to trim some fat on its own. In February, it launched the first voluntary retirement scheme in its history aimed at reducing its workforce by up to 9%.
The carrier currently employs around 16,000, having cut 2,000 jobs over the past few years through natural retirement, including lowering the pensionable age by two years to 58, giving staff up to two years unpaid leave and closing some overseas offices. Gogoi expects the early retirement scheme to lead to staff numbers being cut by between 1,000 and 1,500. Government rules bar the airline from forcibly cutting jobs.
While Air-India is often described as inefficiently run and having a bloated staff base, Gogoi insists personnel numbers need to be higher than at other carriers because it cannot outsource non-core operations due to government restrictions.
"People don't really understand when they talk about that," he says. "When they talk about staff in terms of the number of staff per aircraft, there are a lot of variables. For many of the airlines we are compared with, they don't take into account the type of non-core activities that Air-India does, out of historical requirements and out of government requirements."
He adds: "The percentage of staff to total costs is still less than the rest of the industry in any case. Who are the highly paid staff in Air-India? Pilots and engineers, and there the staff force is not very high. So staff costs as a percentage of total costs is not so high."
Airlines face high costs in many other areas, however, and this keeps ticket prices high and prevents many Indians from travelling by air. The government imposes tariffs on just about everything in the country, from aviation fuel to foreign loans for purchased aircraft.
"This industry has always had a very 'step-motherly' treatment from the government," complains Indian Airlines' Kashyap, who adds that politicians still regard the sector as one that caters only for the rich.
But he believes there is some light at the end of the tunnel, as the ministry of finance "now seems to be willing to listen to us at least". Only last year the ministry eliminated customs duties on the import of aircraft and spare parts, and now it has given assurances to both airlines that they will pay the same prices for fuel for outbound international flights as foreign carriers, says Kashyap. They currently pay much more because of local taxes.
The government is also finallylooking at improving infrastructure. Paul acknowledges that the country has lost out to Dubai as a transit point bynot having world-class airports at Delhi and Mumbai (formerly Bombay). But now money is being pumped intothose facilities.
Improving infrastructure
"Infrastructure could be one of the reasons why [India] did not become the international hub that it could have been. Bombay for example could have been a very good international hub instead of Dubai. We didn't develop it in that way. We should have," says Paul.
"But now we are having plans to develop infrastructure at these airports, especially Delhi and Bombay. I don't know whether anything is ever too late in these matters."
Kashyap adds: "I'm not saying give us everything free, but treat us rationally. That's all we want. I'm sure we can give the finance minister more money if he gave us less taxation. We'll fly more often, we'll fly more people."
Source: Airline Business
