1

Air India Financial Crisis

 2

Table of Contents
Introduction ..................................................................................................................... 3
Aviation History in India ................................................................................................... 4
Conclusion .................................................................................................................... 19
References .................................................................................................................... 21
 3

Introduction
The extended survey is based on the case of Air India which is the oldest and most

renowned airline in India. The company enjoys a good brand reputation and has access

to various resources. Despite business opportunities, the company underwent hue

financial crises and it had to take strategic actions to overcome it. In this regards the

following essay highlights the history of aviation in India which will highlight all the

events which led to the development of the airlines and how has the business

transformed since then. The next section of the essay is focused on Air India this will

highlight the market position, strength and weakness of the airline. The series of

activities which led to the development of financial crises have also been given in the

essay. This is followed by the financial crises section which describes the events along

with the details which makes it relatable to financial crises (Khan,, 2008). The way debt

and losses grew have been described well in this section. In order to overcome the

challenges, the airline adopted some strategies which is described in the essay. The

corrective measures that can indeed help the airline to come up strong in the sector are

given. Overall the essay will contribute I both academic and organizational purposes.

Hence the thesis question can be stated as “To what extent Air India has been able to

survive successfully from the financial crisis it is going through.”

 4

Aviation History in India

The past of the aviation industry began in the year 1912 between Karachi and de lech

in the month of December. It was initiated by collaborating with the UK based Imperial

Airways extending the London Karachi flight and was a part of Indian Air Services. A

few years later without the help from Indian Air Services Tata Sons Ltd started the usual

airmail service between Madras and Karachi. At the time of Independence, nine airline

companies started carrying both passengers and cargo in the Indian region. In order to

strengthen the aviation facility in India a joint venture was opened by the government

and Air India (previously known as the Tata Airline (Bagler, 2008). Till mid-1990’s the

aviation industry of India was dominated by the Government owners Airlines. Steadily

the airline was granted the permission to operate in the international flight services from

India and it was designated flag carrier representing India in the name of Air India

International.

On 8th June 1962 the airline name was officially changed to Air India and by

11th June it became the foremost of all the jet Airline. By the coming of Airbus A310, the

Air India airline became the largest operator in passenger services. In the year 1993,

the airline made history by starting the first direct flight from Delhi to New York. In the

year 1884, the airline was registered under the name of Air India Ltd. From 1990 to

2000 there were international flight options in Air India to Chicago, London, and

1
Khan, Nafees A. "Human resource development in tourism industry in India: a case study of
Air India Ltd., New Delhi." El Periplo Sustentable: revista de turismo, desarrollo y
competitividad 14 (2008): 89-116.
 5

Shanghai. In the year 2001, when the NDA governed was under power Air India was

put on Sale. Three groups namely Singapore Airlines collaborating with Tata Group, Air

France and Lufthansa along with Hinduja Bros participated (Bagler, 2008).

Distressed situation of Air India

In May 2004 a low-cost airline service was launched which was called the Air

India express but this was soon called off. The service started to Washington in the year

2009 was also terminated. Air India has received many awards for its excellent

contribution towards corporate social responsibility and customer service. Though the

airline received distinguished awards such as Best Airline Award, Excellence Award and

Trusted brand award it was under financial Crises. In the span of 5 years the airline

suffered a loss of 10 billion rupees and was under the debt of 38 billion rupees. The

brand has strength of 18000 employees along with 700 workers. There was an

availability of double staff in every flight. The captains had feared that there will be job

losses if the airline is sold. The privatization plan collapsed with the Tata Group when

Singapore Airlines decided to pull-off the joint bid. There was political opposition

regarding the privatization moreover the global shutdown made the participation in

bidding a thoughtful process (Scheraga, 2006). No company was ready to put the

investment has everybody was aware of the privatization process. The deal was

supposed to be done at a cost of $2.5 billion. The probable buyers were Air France,

Delta, and Lufthansa. Air India had rights to 90 routes but it could not explore it to fullest

as there was only the availability of 27 aircraft. Although the deal was attractive the

subsequent 6 years of losses and the debt burden of $70 million the deal could not be

closed (Bagler, 2008).

 6

Civil Aviation before and after liberalization

• Before Liberalization

The market was dominated by two companies for both domestic and

International facility namely Air India and Indian Airlines. Their market position was

strong and they had put pressure on the state machinery to monitor the entrance of

foreign airlines which would promote India business and also restarting the growth of

the private sector. Due to the pressure, the entry of foreign companies the growth of

private sector was restored and the government did not process any deal with the

international flight carriers. In the early 1990s, steps were thus

taken to liberalize the aviation sector (Bilotkach Gorodnichenkon and Talavera, 2010).

• After Liberalization

The consumers had benefited with the liberalization of the airline as the options

availability increased and there were new routes to operate. From the perspective of

Airlines, commercial freedom was one of the biggest perks which increased due to

foreign direct investment. The liberalization of the aviation industry also contributed to

the economy in many direct and indirect ways such as employment opportunities, tax

revenues, increased tourism and promoting direct investment (Bilotkach

Gorodnichenkon and Talavera, 2010).

Air India 2

2
Raguraman, K. "Troubled passage to India." Tourism Management 19.6 (1998): 533-543.
Bilotkach, Volodymyr, Yuriy Gorodnichenko, and Oleksandr Talavera. "Are airlines' price-
setting strategies different?." Journal of Air Transport Management 16.1 (2010): 1-6.
 7

Air India operates in Asia, Australia, North America, and Europe with the help of

Boeing aircraft and Airbus. The corporate head office of the company is located in Air

India building South Mumbai at Nariman Point. Currently, it stands at the position of the

16th largest airline in Asia. There are two major hubs for Air India flights that is

Chhatrapati Shivaji International Airport and Indira Gandhi International Airport. The

airline is also planning to come up with an international hub at the Dubai International

Airport. In August 1953, the aviation industry which was operated by Air India was

nationalized for providing safe, smooth and economical travel options to the

passengers. It consisted of eight warring airlines with different safety records, work

culture, adverse conditions due to bottlenecked completion and lack of management

skills (Raguraman, 1998). This led to the rising of Air India Ltd, and Airlines Corp which

was expected to flourish, gain economic advantage, emergency facility in case of

national calamity such as famine, earthquake in floods, foster national integration and,

above all, serve as the second line of defense in the event of war with another country

(Windle, 2001). It was a nationalized airline serving to the expectations of the nations

and helping in tough times particularly during the wards with Pakistan and China,

national calamity.

The airline also served a great benefit in establishing a mainstream connection to

many countries by proving air services. On the other had the other private companies

operating in the same sector are concentrated on generating profit and making business

hence their contribution towards the nation’s emergencies and help is very less. Earlier

since there were very fewer options in flight carrier their airline was created to a social

status. The customer services of the airlines are widely raised (Hanlon, 2006). The
 8

3innovation and creativity of the airline have served its great advantages. Though the

airline was burdened with losses and debt its quality was never compromised and this is

what sets it apart from other airlines which either compromise on quality or customer

loyalty. Air India has gone through a lot of tough times and highly unstable environment

but it is amongst the first to launch direct connections to a lot of places. Nevertheless,

how the airline shapes its future and what impact does the entry of new players lay on

its position will be interesting to know. Due to all the transformations, it is the customer

who has benefited the most (Windle, 2001).

Financial Crises

Between the years of 2006-2007 the total losses of Indian Airlines and Air India

war 7.7 billion which raised to 72 billion after the merger. Rising oil prices, Slow growth

in the economy were some of the reasons. It is different from privately owned and it is

state-owned. In just 2 years the losses grew by 800%. After the merger, the aircraft

were either purchased or leased to foreign airlines under bilateral agreement. Ground

handling in Hyderabad and Banglore were surrounded and a joint venture was

proposed (Hanlon, 2006). However, the actual losses began in the year 2006 when the

airline decided to lease its aircraft in order to increase the market share. There were no

marketing policies and the proper route. The heavy losses began to till the market was

built up. In the year 2006, 4 Boeing 777 were leased and it started delivering its own

aircraft from July 2007. Some of the operations were spent as the lease was expired.

India airlines and Air Indian express competed with each other even after the merger. At

3
Bagler, Ganesh. "Analysis of the airport network of India as a complex weighted network."
 9

theairports of Bangalore and Hyderabad, Air India has to share its revenue from ground

handling with Singapore airport terminal services (Hanlon, 2006). The industry average

for a first officer to become a commander is 4 years. In the air, India pilots spend close

to 10-11 years to be the first officer.

Airline's inadequate planning for command training from 2003 onwards meant

hiring over 160 expatriatepilots and paying them to double the salary paid to Indian

counterparts.Air India cost Rs 390 crore from 2007 to 2009. AirIndia faces tough

competition from foreign airlines due to liberal bilateral agreements. On the other hand,

SBI still believed that the company could recover from the losses hence in July 2009,

SBI capital market ltd deployed a plan for recovering the losses. During the launch

ceremony of Air India aviation in the year 2010, Praful Patel who was then the aviation

minister stated that the organization will undergo through a restructuring plan and would

undergo transformations in management styles. It will involve the decisions from the

eminent people of the Air India board. The organization created a turn around a plan

which aimed to generate Rs 3000 crore through internal accruals in the next 6 months

(Raguraman, 1998).

It also plans to mobilize additional revenue through cost-cutting and saving.

Being a government airline Air India also had obligations to fulfill the demands of

politicians, bureaucrats that the company could not refuse. There were economic favors

that the political parties were doing for the airline hence they could not call of their duty.

When Arvind Jhadav took the charge he started charging an amount of goodwill. He

served as a great leader and made sensible decisions for a proactive bureaucrat. He
 10

4openly stated the problems that the airline was facing and took corrective measures to

come out of it (Bieger and Wittmer, 2006). The most important argument of how the

airline would repay the debts was unfortunately managed by the chief in a different

manner and he alienated the complete staff after taking the charge.

In an interview, Jhadav clearly stated that the management of the airline was not

active and it lacked innovation and creativity to make valuable decisions. He also felt

that the staff was very pampered and were given extra wages He also highlighted that

the company has appointed 32000 staff members whereas there is not a requirement of

more than 12,000 members. His motion was supported by many aviation industry

experts. His words were harsh but they were the truth. He also quoted that if any

organization has to overcome its limitations then it must accept its weakness and work

upon it (Bieger and Wittmer, 2006). Strategic practices could only make the survival of

the company practical. In all the financial crises the company's survival was the

question and it needed a smart leadership under whose influence the airline could

flourish.

In the short term, the focus of the airline was on launching new routes and

providing exceptional services however in the long term the airline would have

recovered from the losses. The Air India airline sold 4 of its aircraft in March 2009 for

the value for $ 18.57 million that included Airbus A300, one Boing 747-300 (Saraswati,

2001). Fleet optimization is the approach for the airline to save the cost. 4 aircraft were

sold on the basis of “as is where is” basis. In the year 2008 Air India sold 13 aircraft on

the basis of "sale and leaseback". The valuation of 12 aircraft was $ 451.88 million.

4
Raguraman, K. "Troubled passage to India." Tourism Management 19.6 (1998): 533-543.
 11

Another 16 aircraft were pleased that included Boing and Airbus cost $110 million

(Graham and Vowles, 2001).

A Total of 12 aircraft were sold for $ 451.88 million. It leased 46 $18.945 million

for a month.Air India made strategies to compensate the leases of its air craft. The man

power was rationalized and the contractual employment rate was reduced when the

international board came into existence. On August, 2011 Air India was falling short of

funds and said that it was still recovering from its credit negative to PNB and SBI. To

ensure that the interest was payed timely and salary payments were played on timely

basis Air India acquired 111 planes which is risky by Comptroller and Auditor General

(CAG) (Saraswati, 2001). They blamed that decision as a major reason of increasing

devt. The total debt with less equity infusion was one of the major reasons of the crises.

The CAG report dealt with several aspects of Air India losses like fleet acquisition,

merger, huge debt burden, and delay in joining (Graham and Vowles, 2001).

Fish Bone Analysis

 12

Source - https://www.mindtools.com/pages/article/newTMC_03.htm

As demonstrate in the fishbone analysis the diagram helps in representing the

competitiveness faced by the airline with a description of internal factors. These are

summarized below:

 The external factors are Lobbying polices and presence of many airline

companies which led to low profitability (Singh, Garg and Deshmukh, 2016).

 The government policies have changed and the Air India has to keep pace with

the growing fuel prices (Singh, Garg and Deshmukh, 2016).

 As discussed earlier the lack of management skills was one of the main reasons

leading to financial crunch (Singh, Garg and Deshmukh, 2016).

 13

 There were no employee motivating programs because of which there was no

spirit of innovation.

Ratio Analysis
 14

PEESTEL Analysis Air India

SWOT

PESTEL

POLITICAL FACTORS

1) The government has liberalized the airline business by adopting open sky policy.

2) The government has focused on increasing the FDI limits and provided special
permissions to the airline for the airport shares and rents (Shome et al, 2018).

ECONOMICAL FACTORS

1) The economic conditions of India have improved a lot and the air business has
increased which has led to generation of revenue for the company.

2) The government has removed the subsidiary it was providing for the rising fuel
prices which has increased the expenditure of the airline.

3) The big firms are becoming increasingly interested in the aviation business.

4) The spending power of middle class improved and they prefer to travel by air as it
saves time and provides them great experience (Patil, 2018).

SOCIAL FACTORS

1) The government is constantly trying to improve the country’s infrastructure and

launching projects to improve the air connectivity between different cities as a result
there are new routes for the airline.
 15

2) Employment opportunities-the aviation sector provided a lot of employment

opportunities because the industry is so vast that a lot of people can be employed

3) Travelling by plane is still a status symbol and getting that at cheap prices has made
a positive impact (Kotha, 2016).

TECHNOLOGICAL FACTORS

1) With the growth of e-ticketing and e-commerce the airline companies have moved
online which has increased business opportunities and brand visibility.

2) Satellite based navigation system has made the plane tracking efficient people are
now aware of flight schedules and delay.

3) Privatizations and modernization of the airport (O’CONNELL, 2012).

ENVIRONMENTAL FACTORS

1) The growing concern on global warming and air pollution has made a bad effect on
the

4) Saturation of tourism business (Kotha, 2016).

LEGAL FACTORS

1) Bi lateral treaties between counties.

2) Acquisition and leasing cost of the airline (Kotha, 2016).

Revival Strategies for Air India

The announcement was made on 14 July 2010 by the chief of Air India Arvind Jhadav

that they are planning to make new terminal 3 for the flight operations catering to both

international and domestic operations. It operated direct flights from Toronto and

Chicago even the international haul flights because of lack of space. This provided

passengers a lot of ease before they were transferred to domestic and international

airport sites as these were completely different sides of the terminal. Passengers were
 16

now able to board there fights from the same terminal which saved a lot of time and

efforts of the customer. The chief Arvind Jhadav wanted to change the policies of 111

planes ordered in the year 2006 to get narrow flight planes instead of wide shaped

aircraft. Despite various failure reasons Air India continuously remained the winner in

various segments and it was recognized by a much-renowned organization such as

Readers' Digest, the best airline of the South, World’s largest operator of Airbus and

World’s first All-jet Airline (Archana and Subha, 2012). The main reason that the airline

could not curb costs was due to high fuel prices which led to the decline of air traffic.

The government norms changed continuously the Airline had to compete in order to

secure its position. It was facing competition from other airlines as well such as

Kingfisher and Jet Airways. Secondly, the merger along with the Indian Airlines had put

the company in loss of Rs 7200 crores.

This merger caused several challenges for survival in front of Air India. Air India took a

loan of The US $ 534 million from the Indian government to fulfill its losses. In July SBI

Capital Ltd decided to prepare a revival strategy for Air India. Arvind Jadhav also

prepared a turnaround plan with the help of Accenture and SBI Capital but it also failed.

Due to the incomplete merger, the organization's structure becomes massive and

unwieldy. There were two sets of managers for practically every position and nothing is

shared. Its staff strength is roughly three times what an airline of its size should have

(Archana and Subha, 2012).

It has strongly entrenched unions who oppose tooth and nail any effort to cut

costs. It has a terrible reputation for service and even worse one for on-time arrival and

departure.Between the year of 2006-2007 the total losses of Indian Airlines and Air
 17

India war 7.7 billion which raised to 72 billion after the merger. Rising oil prices, Slow

growth in the economy were some of the reasons. It is different from privately owned

and it is state-owned. In just 2 years the losses grew by 800%. After the merger, the

aircraft were either purchased or leased to foreign airlines under bilateral agreement.

Ground handling in Hyderabad and Banglore were surrounded and a joint venture was

proposed (Archana and Subha, 2012).

However, the actual losses began in the year 2006 when the airline decided to

lease its aircraft in order to increase the market share. There were no marketing policies

and the proper route. The heavy losses began to till the market was built up. In the year

2006, 4 Boeing 777 were leased and it started delivering its own aircraft from July 2007.

Some of the operations were spent as the lease was expired. India airlines and Air

Indian express competed with each other even after the merger (Backx, Carney and

Gedajlovic, 2002). At the

airports of Bangalore and Hyderabad, Air India has to share its revenue from ground

handling with Singapore airport terminal services. The industry average for a first officer

to become a commander is 4 years. In the air, India pilots spend close to 10-11 years to

be the first officer. Airline's inadequate planning for command training from 2003

onwards meant hiring over 160 expatriate pilots and paying them to double the salary

paid to Indian counterparts.

Being a government airline Air India also had obligations to fulfill the demands of

politicians, bureaucrats that the company could not refuse. There were economic favors

that the political parties were doing for the airline hence they could not call of their duty.
 18

When Arvind Jhadav took the charge he started charging an amount of goodwill. He

served as a great leader and made sensible decisions for a proactive bureaucrat. He

openly stated the problems that the airline was facing and took corrective measures to

come out of it (Backx, Carney and Gedajlovic, 2002). The most important argument of

how the airline would repay the debts was unfortunately managed by the chief in a

different manner and he alienated the complete staff after taking the charge.

In an interview, Jhadav clearly stated that the management of the airline was not

active and it lacked innovation and creativity to make valuable decisions. He also felt

that the staff was very pampered and were given extra wages He also highlighted that

the company has appointed 32000 staff members whereas there is not a requirement of

more than 12,000 members (Backx, Carney and Gedajlovic, 2002). His motion was

supported by many aviation industry experts. His words are harsh but they were the

truth. He also quoted that if any organization has to overcome its limitations then it must

accept its weakness and work upon it. Strategic practices could only make the survival

of the company practical. In all the financial crises the company's survival was the

question and it needed a smart leadership under whose influence the airline could

flourish.5

Suggested Corrective measures

Financial crisis aside, in other management scenarios also the airline needs corrective

qualitative measures. The first way of improvement is by changing the methods of

5
Backx, Mattijs, Michael Carney, and Eric Gedajlovic. "Public, private and mixed ownership
and the performance of international airlines." Journal of Air Transport Management 8.4 (2002):
213-220.
 19

induction and recruiting in this regards the HR department and needs to play proper

action. There must be various levels if induction. Currently, the company is dependent

upon the home-grown talent and in terms of seniority, it is resisted. The marketing

policies of the company need to become collaborative and it must highlight the best in

class infrastructure which can benchmark Air India and its services.

This leads to the creation of brand loyalty which is an essential factor in the business

(O’Connell and Williams, 2006). Customer retention is also important in order to secure

a brand image in the industry. The staff of Air India is experienced and talented which

provides further opportunities for growth.

Influence on stakeholders
When the company undergoes any transformation or any business problem both

the internal and external stakeholders are affected. In the case of Air India financial

crises internal stakeholders i.e. the employees had to go through major difficulty.

The employee salaries were reduced there was some instances of late payments and

their growth opportunities were hampered. The board of directors was in extensive

pressure of making the revival and they were answerable to the sponsors.

The external stakeholders that are the customers also had to bear the increased fare

prices cancellation on some major routes. Overall their loyalty with the brand was

affected.

Conclusion
The above essay throws light upon the development of Air India flight services,

its current market position and the financial crises it is going through. From the
 20

evaluation, it can be known that the merger was the main reason leading to the losses

and financial crunch. Initially, the airline was controlled by the government but after

liberalization of the aviation sector, there were multiple carriers. The airline had to lease

its resources an in the two years that is between 2006 to 2008 the losses and debts

grew by 800%. Since then the airline has been making efforts to secure a place in the

market there were some new routes also opened by the airlines. However, when the

chief was changed it was analyzed that only rising fuel prices and competition did not

lead to financial instability but poor management skills, over-staffing, government

obligations, and high wages were also the contributors. In this regards, the leader

Arvind Jhadav introduced some new places. The induction method was completely

transformed and the staffing was also cut. It adopted the plan set by SBI to overcome

the process. New marketing strategies also evolved that helped in creating brand

differentiation factor. Lastly, it can be said that the airline has successfully been able to

reorganize itself and is putting continuous effort to improve financial stability. Though

the times were tough for the airline but due to the introduction of direct flight and unique

customer service the company is regaining its market pace. Therefore the thesis

statement can be restated as “Air India has been able to recover from its financial crises

to a large extent.”
 21

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 22

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Backx, Mattijs, Michael Carney, and Eric Gedajlovic. "Public, private and mixed
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