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Air-India Limited operates passenger and cargo flights from Bombay to destinations in the

United States, Europe, the Middle East, Africa, the United Kingdom, Russia, China, Japan, and
other countries. It holds the distinction of being the world's first all-jet airline. Founded as a
small, private, domestic carrier in 1932, Air-India is now government owned. Once regarded
as a "little jewel" of an airline, its reputation became somewhat tarnished as service and
profits slipped. Significant changes, however, have rejuvenated the airline, put it back in the
black, and restored its ranking among the better airlines of the world. Three million
passengers a year fly Air-India.

Air-India began operating in 1932 as Tata Airlines, named after J. R. D. Tata, its founder. The
line carried mail and passengers between the Indian cities ofAhmadabad, Bombay, Bellary,
and Madras, and Karachi, Pakistan. Within a few years Tata Airlines' routes included the Indian
cities of Trivandrum, Delhi, Colombo (in Sri Lanka), Lahore, and other locations in between.

In 1946, at the conclusion of World War II, the airline became a public company and was
renamed Air-India Limited. In just two years, with the government having a 49 percent share
in the company, the airline was flying further outside of India, with regular flights to Cairo,
Geneva, and London. The line's name changed again to reflect its new scope of operations,
becoming Air-India International Limited.

India enjoyed more success in the airline industry than most other developing countries for a
number of reasons. Whereas others had to rely on foreign pilots to fly their planes, Air-India
used mostly native-born pilots. Similarly, skilled Indians were plentiful enough to maintain
India's fleet as well as to train and supervise its personnel; many other countries had to go
outside for this kind of expertise. Air-India benefited from these advantages along with its
sister carriers.

Air-India first encountered competition for its routes in the early 1950s. Many new airlines
were forming, propelled into business by the availability of inexpensive, war-surplus DC-3s. No
fewer than 21 airlines had been established, with 11 of them licensed to fly the skies of India.
A 1985 article in the Economist cited Tata's foresight of what thisplethora of airlines could lead
to: "The scene was well and truly set for the ultimate debacle."

To prevent that debacle from occurring, the Indian government in 1953 took control of all of
the airlines within its borders. Along with the nationalization the government created two
corporations. Indian Airlines Corporation, which merged Air-India Limited with six smaller
lines, served the country's domestic travel needs. Air-India International Corporation flew
routes overseas. By 1960 the international airline had routes to Singapore, Sydney, Moscow,
and New York. By 1962, when the name was shortened to Air-India, it had become the world's
first all-jet airline.

Beginning in the 1970s, however, Air-India saw difficult times. It suffered a net loss in three of
the years between 1976 and 1985. The downturn in the world economy had a significant effect
on air travel throughout the world, and India was no exception. In addition, the government
kept a number of unprofitable routes open simply for prestige purposes--a strictly commercial
airline may have closed those routes. Its flights to New York, for example, resulted in losses
for a number of years, even though many of those flights were full. At one point an airline
official estimated that only about ten percent of Air-India's passengers to New York were
business travelers who would buy the more expensive seats. Flights to Canada were even less
profitable, flying at around 55 percent of capacity. Another factor in the airline's financial
problems was that, to compete for American and European travelers with American and
European airlines, Air-India had to discount many of its fares. In addition, the airline depended
heavily on local citizens--"ethnic traffic"--which generally meant lower fares.

The routes that had proven to be most profitable for Air-India had been those to the oil-
producing nations. Flights to the Persian Gulf accounted for 35 to 40 percent of Air-India's
traffic in the mid-1980s. Working with Gulf Air, Air-India operated 60 flights each week
between the Gulf and India. But even these routes saw profits fall, as revenue in the gulf
states declined. Another problem was the shortage of tourists traveling to India. Communal
violence and the assassination of Indian Prime Minister Indira Gandhi in 1984 kept tourism
down. In addition, to combat the terrorism that was becoming a major problem at many of the
world's airports, the government imposed heavy restrictions at airports, giving tourists
another reason to stay away.

The darkest note in Air-India's history was the tragedy that took place in June 1985 when one
of its 747s, on a flight from Toronto to Bombay, crashed to the sea with 329 passengers
aboard. A Canadian Safety Board Report, addressing an inquiry by Indian High Court Judge
Bhupinder Nath Kirpal, concluded that an explosive device was the probable cause of the
crash. The board reported that an X-ray machine at Pearson International Airport in Toronto
broke down before all the luggage had been checked. Nonetheless, the effect on the
reputation of Air-India was severe.

Despite these problems, Air-India's productivity was high. By acquiring large-body airliners, its
productivity almost doubled from the year 1974-75 to the year 1983-84. In terms of rupees,
this productivity figure translated to a per-employee production of Rs 125,000 (US $16,000) in
operating revenue in the 1974-75 year and Rs 439,000 in the 1983-84 year. In 1985 Air-India
flew 8.1 billion passenger-kilometers (number of passengers times distance), a figure that
prompted the International Air Transport Association to rank Air-India 15th out of 136
member airlines in passenger-kilometers on scheduled services.

Nevertheless, Air-India lost US $23 million in the 1987-88 fiscal year. To stem such losses,
Prime Minister Rajiv Gandhi named Rajan Jetley chairman of Air-India. Jetley took command
of an airline that was overstaffed, mired insticky negotiations with unions, and struggling
under difficult working conditions. In addition, some bureaucraticmeddling and high gasoline
taxes interfered with procedures and made operating the airline expensive.

A number of these factors came together to have a significantly negative impact on the airline.
Specifically, Air-India was flying many flights with intermediate stops, while competing airlines
were flying the more attractive nonstopflights. One reason for these intermediate stops was
the pilots' refusal to fly more than nine hours. A second reason was that, to minimize the
effect of the high cost of fuel, Air-India did much of its refueling outside of India's borders.
Jetley dealt with these problems by convincing the government to reduce its gasoline tax and
by convincing the pilots to fly longer flights.

According to Jetley, as quoted in a 1990 New York Times article, the carrier was "packing the
back of the bus" on many of its routes. In addition to selling coach fares, Jetley hoped
to entice affluent fliers to purchase the more profitable business-class seats. Toward that end
he bought new planes and changed the look of the airline, ordering a new logo and a redesign
of the planes' decor and employees' uniforms and improving in-flight service and meals. He
increased the number of flights to Europe, making Frankfurt, Germany, a hub and enabling
passengers to connect to other European cities. In addition, he adjusted the timing of flights,
making it more convenient for passengers to connect with other flights. Under Jetley's
direction, Air-India turned the loss of the previous year into a profit of US $23 million. The
airline rose to number 22 on the International Air Transport Association's list of the world's
most profitable airlines. The revitalized Air-India saw record profits of US $41 million in the
year 1989-90, then topped that the following year with profits of US $42.7 million. These
accomplishments were all the more startling because they came at a time when many of Air-
India's flights to the Persian Gulf had to be suspended because of the conflict between Iraq
and Kuwait and the ensuing Persian Gulf War. The airline, though, did experience activity
during the conflict, launching a massive airlift to help 110,000 Indians flee war-torn areas.
Ravi Mani, deputy general director of cargo for Air-India, was quoted by the Journal of
Commerce as saying that compared with this airlift, "the Berlin airlift was chicken feed."

Air-India was intent on continuing its success of the early 1990s. Although it controlled 28
percent of air passenger traffic out of India, that was a drop from 32 percent just a few years
before. Subbash Gupte, acting chairman after Jetley left his post, explained, as quoted by
the New York Times: "The reason for the drop is simple. Other airlines have expanded, bought
new aircraft; we haven't." Between 1982 and 1986 the airline had kept its capacity at
astandstill. While Jetley was still in command, however, plans were implemented to increase
capacity by six to eight percent each year from 1990 to 1995, reducing the average age of its
fleet--13 and one half years in 1990--to about four and one half years by the turn of the

Succeeding Jetley was Chairman and Managing Director Yogesh Deveshwar, who outlined the
airline's direction for the 1990s. As reported in Travel Weekly in 1992, Deveshwar said: "We
want to make Air-India a boutique carrier, as opposed to a department store." Parts of those
plans called for expanding the carrier's United States routes to include Chicago, Los Angeles,
and Newark. Flights to Los Angeles, it was hoped, would attract many ethnic Indians, who
were using other carriers to other points in the Far East and then transferring to Air-India.
New aircraft, including long-haul 747-400s, would help to bring those plans to fruition.

In addition to passengers, cargo has always been a large portion of Air-India's business. Its
major cargo markets are the Persian Gulf countries, Europe, the United States, the United
Kingdom, and Japan. In 1989 (the last year for which figures were available) Air-India ranked
19th among all International Air Transport Association carriers in scheduled international
freight tons. The carrier handled 66,000 metric tons of cargo that year.

One of the major goals of Air-India for the 1990s was to increase its cargo operations still
further. At the beginning of the decade Air-India had about 30 percent of the country's air
cargo market, while more than three dozen airlines from other countries carried the balance of
the country's cargo. The airline planned to lease additional jet freighters to increase its
capacity to carry exports. The International Airports Authority of India improved the
infrastructure and ground handling at the gateways it operates, making them more attractive
to carriers and freight forwarders. With these changes under way, cargo revenue for fiscal
1990 amounted to US $195 million, 21 percent of Air-India's revenue.

Air-India lost $171 million in the three years beginning with 1994-95. The airline gained a
reputation for poor service and poor on-time performance. The company initiated a
generous incentive program to motivate employees, which proved successful. In addition, a
computerized flight system and updated lounges and cabin interiors were added to update the
company's image among customers. Management cut fares drastically and provided two-for-
one discounts.

In the summer of 1997 the carrier negotiated code-sharing deals with Air France and
Singapore Airlines. Streamlining the carrier's route network became an ongoing process. In
fact, Air-India was notorious for constantly adding and dropping routes. Its network dropped
Canada, Australia, and South Africa in an attempt to cut losses.

Air-India sought to offer its $150 million annual North American income streams as debt
securities, pending the approval of a hesitant Indian government. The company also planned
to raise cash (it already had reserves of more than $110 million) by selling its Hotel
Corporation of India subsidiary, worth at least $220 million, as well as some older Boeing 747-
200s, valued at $60 million.

Still, the company owed $900 million on new aircraft purchases. In spite of this impressive
sum, Air-India found itself chronically short of medium-sized long haul aircraft, reported Air
Transport World. Most of its planes were too large to be profitable on their particular routes, a
liability previously covered by an especially profitable Persian Gulf market.

A recovery seemed to be in place upon the announcement of a quarterly profit of $10 million
in the fall of 1997. More positive results were projected. Operating revenue was expected to
reach Rs 4,189 million in 1997-98.

It was later announced that these results had been overly optimistic; the $10 million profit
was in fact a $10 million loss. Managing Director Michael Mascrenhas announced the news
after taking over from Brijesh Kumar, whose two-year term had just expired. Mascrenhas
colored the news in the best possible light, noting in Air Transport Worldthat Air-India had lost
money only "six times in the last 43 years."

A planned merger between Air-India and Indian Airlines was canceled in spring 1998.
Nevertheless, closer ties between the two carriers remained after the aborted deal. As Air-
India cut routes, it maintained code-sharing deals with Air France, SAS, Singapore Airlines,
and Austrian Airlines. Still, market share fell from 35 percent to 20 percent in 1997-98.

Reducing its annual payroll costs of $40 million was a top priority for Air-India, which had not
found sufficient productivity increases to match its generous incentive programs. Air Transport
World reported that Mascrenhas trimmed $23 million in other areas.

In spite of these savings, Mascrenhas predicted Air-India would not pull out of the red for
another two years after projecting a 1997-98 loss of $44 million. To raise desperately needed
cash, the airline offered its hotels and two 747 airliners for sale. As the carrier planned for its
$150 US/Canada security issue, the Indian government also was considering a rescue plan.