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Corporate Strategy

Corporate Strategy

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Published by: Akshay P. Joshi on Feb 20, 2013
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02/20/2013

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CORPORATE STRATEGY Air India : In Troubled Skies The Indian national carrier is in a serious crisis and banking heavily

on government-sponsored revival packages. But it may not be an easy flight ahead for Air India, as it is in the midst of violent cross winds. Air India (AI), the only domestic carrier that had retained domestic monopoly for a long time, has lost its dominant position in recent years—its losses mounted and market share plummeted precipitously in the last two years. A string of problems starting from the botched merger with Indian Airlines, total management failure, lack of vision to develop responsive strategies, a change in the long-term strategic situation, current market pressures and, not the least, the high wage bill in the form of salary and incentives have placed the national carrier in a spot of bother. Now it is crashing down in almost all areas. All the vital signs— productivity of technical personnel (two-fifth of international standard), employeeto-plane ratio of about 210 employees, compared to an industry average of about 150, number of working hours per week of cabin crew (50-55 hours, compared with 70 in other airlines), to cite just a few—are indicating that the airline is suffering from chronic sickness. Now, AI is contributing around 10% of global airline losses, with just 0.35% of global traffic, and virtually is in abyss Air India (AI), the only national carrier in India, is now in the red. What has led to the crisis at AI? Craig Lawrence: The crisis at AI has been fueled by three factors: a change in the long-term strategic situation, a failure to develop a responsive strategy, and current market pressures. AI's privileged position in Indian aviation stands eroded in the new emerging strategic situation. It had operated as the national carrier in a highly restricted environment and thus, for a long time, retained its domestic monopoly. However, it has been too slow in responding to competitive pressure from domestic players such as Kingfisher and Jet. On international routes, it has struggled against more service-oriented foreign rivals, especially from the Gulf states. The absence of a responsive strategy is highlighted by a cost structure that has remained bloated. For example, it has an employee-to-plane ratio of about 210 employees, compared to an industry average of about 150. Also, the current overhang of a significant fleet purchasing / leasing program needs to be reviewed when there is a decline in passenger numbers. However, current market pressures associated with the wider crisis in India's aviation industry over the past year have pushed the carrier close to breaking point. Plunging passenger numbers and soaring fuel prices led to crushing accumulated losses in the past financial year. Hans Huber: There is nothing new about the chronic lack of competitiveness of AI or substandard value to the customer. What is new, indeed, is the financial abyss into which the carrier has been led by an apparent ineffectiveness in governance and total lack of accountability. I don't think that the term `national carrier' bears much meaning in today's Indian aviation: the behavior of all three major airlines in India has become pretty much the same, at the least as far as the strategic

This happened in an industry that usually acknowledges its cyclicality through dealings in options prior to passing final orders. but never materialized. All these mergers were not done independently from each other. sooner or later the question of accountability will be raised. but. many of them with links to trade associations or the industry/political nexus itself. Any student of Econ 101 understands the advantages of buying flexible tickets rather than betting the farm on a purchase worth thousands of tickets that would cover all your air travel for the . by comparison. everincreasing infusions of money do not seem to present any problem. and the same `experts' remain silent. it might have been better for AI to be taken over by a very commercially-oriented carrier to allow that commercial focus to be rolled into the DNA of the nation's flag carrier. but needed important backing from the MoCA to go through. Why should an IPO of AI in the coming years be any more realistic. Hans Huber: As my grandmother said.000 cr." The same reasoning may be applied to the ill-fated merger of Kingfisher/Air Deccan and. In the case of MoCA. it repeatedly has received significant cash infusions. etc. the consultants were gone.000 from a private investor and stand a chance of obtaining it! How do you see the merger of AI and Indian Airlines? Craig Lawrence: The merger between AI and Indian Airlines has not been immediately successful. with no learning consequences for MoCA. private airlines such as Jet Airways or Kingfisher burn their (or their shareholders') money. What is different with AI is the fact that it never returned any dividends to its owner. The marriage of an internationally-oriented carrier with a domestically-oriented one poses significant challenges. Synergies worth hundreds of crore rupees per year had been promised for the merged AI/Indian entity. This fact alone speaks volumes about the attitude of MoCA towards competition and equitable market access to Indian aviation. the MoCA (Ministry of Civil Aviation). Management consultants and `industry experts'. These practices have been criticized by the Auditor General/ Chief Comptroller of India before. etc.) What the involved stakeholders (including unions) did agree on very quickly was to buy brand new aircraft through apparently inflexible contracts to the tune of Rs 44. given that the situation both in AI and the financial markets has worsened significantly since then? If. IPOs of AI had been promised by MoCA back in 2000. We can already see how previously flamboyant owners of airlines now are downscaling their public profile. wholeheartedly endorsed these mergers. Barely a year thereafter. credit guarantees. The key thing will be whether the successful aspects of each carrier can be reflected in the other one. MoCA gave the green signal to all these mergers within a couple of weeks (spring/early summer 2008). including the layoffs of unproductive staff. while applicants for new operating licenses had been kept at bay for years.directions of the firms are concerned. in spite of reduced demand for their respective services (which should make the integration exercise easier. In hindsight. with renewed promises for autumn 2008. I don't know any private airline (particularly if it is as poorly run as AI) that could ask for Rs 8. Also. to a lesser extent. "Putting two sick people into the same bed doesn't make them healthy. Integration of operations of both airlines has barely started. as we see today. On the other hand. Jet Airways/Air Sahara.

use the financial assistance to leverage change. AI's market share. It may be worthwhile to compare the situation with that of Indian Railways. which I doubt. on the other. This will involve several things: more independent directors with real. a unionized workforce that seeks to take more commercial responsibility for the operation of the airline. but without being able to exchange them! The easy part of the merger.e. a clear and distinctive value proposition to offer to the international and domestic markets. It is not clear whether the government's actions will actually drive all of these. On the one side. commercial expertise. these measures did not provide any cost savings to the company and were not effective in making the passenger forget the higher prices he/she had to pay after the merger. etc. government aid to AI (be it direct or indirect) has been around for a long time. an improved fleet that reaps efficiencies from improved plane type commonality. but rarely by consumers or those without access to air traffic in the first place. i.. In particular. let's agree that floating the airline through an IPO type of procedure seems a very remote option. No need to keep fooling the public with this fairy tale. Hans Huber: As said before. which had already dropped to an all-time low of 15. How do you foresee the future of AI? Craig Lawrence: In the short-term. The government has gone all out to revive this ailing airline. AI will retain a privileged position as long as . most importantly. and new menus and cutlery can to a large extent be considered as window dressing. Foreign scholars and consultants are trying to learn about the remarkable transformation that has been achieved from within Indian Railways. which takes pride in hiring foreign consultancies to rehash old recipes from the US and elsewhere that have not worked in their country of origin either.1% by April-June 2008. some rebranding. Since `merger mania' in aviation is still considered a panacea by vested interests. How do you see the government's efforts to reinvigorate AI? Craig Lawrence: The government appears to have a twofold strategy. is reckoned to have decreased even further since then. and. foreign ownership of AI does not seem likely. I think this will only be successful if there is a root and branch change at the airline. What a revolution! What a courageous and ingenious move! If MoCA indeed had a plan for the future of AI. This is unlikely to happen with AI under the tutelage of MoCA. All we know is that AI will soon be hiring a new CEO (this time from the private sector) and recompose its Board of Directors with highly distinguished personalities.next 25 years. Also. some new marketing (including a code-share agreement with Lufthansa). provide financial assistance to sustain operations. a management team that is financially-savvy and recognizes that it is competing in an open marketplace rather than seeking government assistance. the potential for cost savings among these carriers would be truly phenomenal: all three airlines have in the past been remarkably unimaginative by mimicking each other's moves and present huge overlaps in their respective route structures. more effective planning of route structures. given the current regulation on FDI. Anyone serious about improving both the competitiveness and welfare gains of India's air traffic system should give this potentiality some thought. why not go all the way? How about merging Jet Airways with Kingfisher and AI? If the previously identified synergies had existed. There are no plans from within AI or MoCA that could provide a blueprint for a fundamental transformation.

The rising aviation fuel prices.. Rather than facilitating market entry for the much-needed low-cost and regional operators. according to some estimates. burdensome taxes and overcapacity should be blamed for why India's private airlines are suffering heavily. indistinguishable from the other airlines. Last year. as competition on international and domestic routes increases. Kingfisher Airlines. In order to raise the market share at any cost. Hans Huber: We have arrived at a point where market mechanisms in aviation have become disabled. in much the same way as in the US market where there is no apparent `national carrier'. India has privileged market concentration among a few high cost carriers and stressed the development of a few Taj Mahal style. It is clear to any observer that transforming a full-service airline into a true low-cost carrier is extremely difficult. Over time. in India. AI will simply be an Indian airline.fourth of total global airline losses— despite accounting for merely 2% of the global traffic. India's largest airline in terms of market share. I just returned from a conference in Hong Kong where the Commissioner of Transport was very explicit when she said: "Competition brings improvement. given its history and productivity track record. starting from rising oil prices to a slowing world economy. prestige airports through consortia. New entry from innovative and agile firms seems to stand a much better chance to face this challenge. highly expensive. probably impossible. as competing airlines poached pilots and mechanics. In the end. airline business in the entire world is now bleeding profusely due to a variety of reasons. In addition. the airlines priced tickets well below cost.5 bn—almost one. the problem is more acute. But in India. they purchased twice as many aeroplanes as the market could support. owes more than $199 mn in unpaid fuel bills and is surviving on bank loans. post-merger) have become inadequate. Moreover.e. old incumbents would need to give way and MoCA would need to revise its industrial policy A problem peculiar to AI In fact. the basis for government favoring one carrier over another will diminish. the aviation industry lost more than $2. which reported a net loss of Rs 2. largely due to their cost-structures which remain too high. staff costs escalated. adding to the industry's woes . Jet Airways recorded a net loss of $47 mn in the same period. maybe in part through the negligence of MoCA.43 bn ($51 mn) in the quarter to June.the national pride in seeing it as the nation's flag carrier remains. Even the more acute among the remaining oligopoly airlines concede that their business models (i. AI is certainly the least well prepared to accomplish such a task. But for this to happen. Their pace of growth would be organic and much more decentralized. But the government has to provide a level playing field." There are some 100 scheduled airlines operating in China today.

capacity was allocated to foreign carriers under bilateral agreements. 2007 to March 31. the losses rocketed to a mind-boggling Rs 7. Now. and plans are on the anvil to infuse equity and soft loan into the airline.200 cr. In royal mess AI. AI made a loss of Rs 541 cr and Indian Airline's loss was Rs 230 cr. the government has decided that it would do whatever it could to turn AI around. Nevertheless. when AI and Indian Airlines merged. In 2006-07. 2009. Aviation experts opine that the staggering eightfold increase in its losses in two years can be attributed to the manner in which aircrafts were leased. things began to deteriorate for AI since the mid2000s. . AI was touted as the biggest and the brightest aviation prospect in Asia. Though. In about two years. But it may not be an easy task. which is the offshoot of Tata Airlines founded by legendary JRD Tata in 1932. flights were withdrawn from profitable routes and pilots weren't sent for proper training. its crisis is largely its own making and management-related. Even in the 1980s. and not the least how AI and Indian Airlines were merged. and in 2006-07. it reached serious proportions. has for long adorned the number one position among the Indian carriers. AI has been battered by ballooning fuel bills and falling demand.But the problems faced by government-sponsored AI are different from the problems faced by the other players in the industry. groundhandling in important airports was given to a proposed joint venture. from March 31.

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