Orion 2015 Case

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Consulting and Research Undertaking at XLRI | ORION 2015

Sinking more money or turning around a national carrier: The case of Air India

What s in a name? A lot if you are a national Airlines carrier. However there have beentwo changes in the name of the Indian National carrier- first from Air India and Indian

Airlines to National Aviation Company of India Ltd (NACIL), and later on, back to Air India

Ltd. The uncertainty in name probably captures the confusion that besets the National Airlines. The current structure of the company is as follows. The current top managementorganizational structure of Air India Ltd consists of bureaucrats from the IAS (CEO) andthe central services (JMD) and also a few officers who have growth within the airline.

Air India Limited operates a mixed fleet of Airbus, ATR, Boeing and Bombardier aircraft. As of February 2013, Air India Limited has 127 aircraft in its fleet with an order for 24more. The organization structure at the top is several Executive Directors (withresponsibility for key outcomes) reporting to the ED, and a Joint MD and Director ofPersonnel also reporting to the MD.

Air India serves 49 domestic destinations and 26 international destinations in 19 countriesacross Asia, Europe and North America. It was incorporated under the Companies Act1956 on 30 March 2007 and is owned by the Government of India. Air India's short-haulroutes mainly include domestic cities and cities in South East Asia and South West Asia.For short-haul routes Airbus A320 family are used. The Boeing 787 aircraft wasintroduced on selected domestic routes on 19 September 2012.

The airline has long-haul destinations in East Asia, North America, and Europe which areserved using Boeing 777-200LR and -300ERaircraft. The Boeing 787 aircraft wasintroduced on long-haul routes on 15 October 2012. However, Toronto was terminatedas a destination in 2012, utilizing Newark Liberty International Airport and JFKInternational Airport, both in the New York City Metropolitan Area, as viable gatewaysboth to the eastern United States as well as Canada.

While the annual average revenue stands at about Rs 16,000 crore, the passenger loadfactor of Air India ranges between 60-65 per cent. It is estimated that almost half of thedaily losses of the airline goes towards payment of interests, primarily on its borrowingsof Rs 16,000 crore from 15 banks as overdraft. This was mainly to pay off debt for its fleetacquisition.

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the State Bank of India, will negatively impact the credit ratings of those banks. A reportby the Comptroller and Auditor General (CAG) blamed the decision to buy 111 new planesas one of the major causes of the debt troubles in Air India; in addition it blamed it on theill-timed merger with Indian Airlines as well. On 1 March 2009, Air India had madeFrankfurt Airport as its international hub for onward connections to United States from

India; however, the airline shut down the Frankfurt hub on 30 October 2010. However on14 July 2010, Air India chief, Arvind Jadhav announced their intention to make the newterminal 3 at Delhi's Indira Gandhi International Airport the hub for international anddomestic operations with the plans of starting new direct flights to Chicago (USA) andToronto (Canada) and also taking almost all international long haul flights away from itsformer Primary hub at Mumbai's Chhatrapati Shivaji International Airport due to lack ofspace. This would streamline passenger movements and reduce operating costs.However, service to Toronto was terminated in 2012. The airline also plans to open a newhub for its international flights at UAE's Dubai International Airport. The new Chairmanand Managing director changed the order of some of the 111 planes ordered in 2006 toget narrow-body aircraft instead of the wide-body aircraft.

In January 2013, Air India paid GMR Group a sum of 415 crore (US$76 million) towardsoutstanding dues on account of charges related to the airports at Hyderabad and Delhi.Of the amount paid, 340 crore (US$63 million) was paid to clear the user developmentfee (UDF), airport development fee (ADF) and landing and parking charges at the IndiraGandhi International Airport in Delhi. The remaining 75 crore (US$14 million) was paid toclear similar fees at the Rajiv Gandhi International Airport in Hyderabad. Air India hadalso shown improvement in its performance as its market share had grown to 20.8% from14% in 2011. 71.7% of all Air India flights were performing on time according to the thenCentral Minister of State for Civil Aviation, K.C. Venugopal.

On December 2007, Star Alliance invited Air India in an effort to expand its presence inthe Indian subcontinent. However, issues with technology and software upgrades and theaftermath of its merger with Indian Airlines delayed its entry into the alliance for four years.When the final deadline for joining came in July 2011, Air India's application wassuspended, and was told it failed to meet the minimum criteria to join. In response, manyof Air India's officials complained to Star Alliance about the suspension of its application,claiming that they already met all of the requirements. Later, Air India did become amember of the star alliance on 11th July 2014. Due to high fuel and loan costs, Indiangovernment pumped Rs 0.32 billion into Air India since April 2009 and in March 2012government bailed out Air India Ltd. with a Rs 67.5 billion ($1.4 billion) which the amountalmost double of the federal government spent on new hospitals over the three years. Asof May 2012 the carrier invited offers from banks to raise up $800 million via externalcommercial borrowing and bridge financing. In 2013, the Indian government planned todelay equity infusion of 30000 crore (US $5.5 billion) that was slated to be infused intothe airline slowly over a period of eight years. Plans were changed as the governmentthen planned to spread it over a longer period of time as part of measures to bring downthe economy's financial deficit. The original plan was to pump in some 8500 crore (US$1.6billion) into the airline in 2013, while less than half of that amount was mentioned in theannual budget.

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In May 2012, the airline was fined $80,000 by the U.S Transportation Department forfailing to post customer service and tarmac delay contingency plans on its website andadequately inform passengers about its optional fees. On 15 May, the Union Civil AviationMinister Ajit Singh stated that the Government was giving Air India one last chance andthat it must perform in order to qualify for a bailout. The financial restructuring plans were

hit hard when Air India pilots decided to go on a strike on 8 May 2012 in order to protestmanagement decisions to train Air India and former Indian Airlines pilots for the newlyinducted Boeing 787 Dreamliner fleets. In spite of the Delhi High Court ruling the strikeillegal, the strike continued for 58 days. The already reeling airline lost an additional 600crore because of the pilot strike. In January 2013, a surprise check by a team of senior

Air India officials at the Terminal 3 of the Delhi airport where the airline operates, revealedthat only 16 of the 25 check-in counters were operational and not even a single floor-walker was present to guide passengers to the aircraft or lounge. The check revealed thatthe check-in process was taking as long as eight minutes each while it should take lessthan three minutes. The employees also had several grouses especially related todisparities following the AI- IA merger, and the level of compensation as compared to

other airlines. A committee looking into this had suggested some measures. However,there have also been allegations of mismanagement and corruption. Allegations includedeliberate delaying of repair to allow the warranty periods to expire, and disruptingoperations on profitable routes so that these could be turned over to private airlines. Therehas been some positive news since.

In March 2013, the firm posted its first positive EBIDTA after almost six years. Theindustry meanwhile has shown a mixed performance, with some airlines like Indigocontinuing to be profitable, while Kingfisher and Spicejet have seen their poor financialperformance impeding their operations. In late 2014 and 2015, the historic lows inpetroleum prices, and associated reduction in aircraft fuel prices have helped airlines.The Indian government continues to help create demand through provisions forgovernment officials to travel on the national carrier. While it is expected that the growthof the economy will directly result in increase in demand for the sector, the immediateprojections are stable, and predict a gradual growth in demand.

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Orion 2015 Case