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Strategic management Lecture 3: A liability called Air India

The airline has been financially bankrupt for several years. The only solution is privatisation, not even disinvestment. As for serving commercially unviable routes, a more sensible way of doing this is to create a funds pool for private players.

The Air India saga goes on endlessly. There is no possibility of the airline's continued survival except on the basis of open-ended and unlimited budgetary allocations. Its accumulated losses (before tax) for the three years, 2007-08 to 2009-10, are more than Rs. 15,000 crore. Its net worth, despite repeated capital infusion by the government was negative to the tune of Rs. 4,481 crore in 2009-10, and it employs 256 personnel per aircraft against the industry average of 156! The various turnaround plans prepared by outside agencies and experts are virtual non-starters as their implementation requires a modicum of normal corporate behaviour that is apparently not possible in a politically vitiated and demoralised environment. The Maharaja is not just sick; it seems to have entered a stage of terminal decline.

IMPACT ON INDUSTRY
It will be unfair for the government to now ask public sector banks, led by the SBI, to mobilise funds for equity participation in the company. Unlike Kingfisher Airlines, where such an approach has been adopted, there is no viable plan or strategy in place or even in sight to bring Air India back to

profitability. Not only is Air India's net worth negative, it has huge outstanding payables to other public sector entities like the oil companies and the Airports Authority of India. There is a danger that this one haemorrhaging company could pull others down with it as well. Air India has been financially bankrupt for several years. As a private company it would have been closed long ago. Its continued operation with access to virtually unlimited amounts of public resources is a source of major distortions in the industry and can effectively prevent any Indian airlines company from becoming globally competitive. Not only does the continued subsidisation of Air India preclude a rationalisation of capacities and market shares which would allow other competitors to take advantage of economies of scale and scope, it also creates substantial moral hazard problems. Other airlines are unable to rationalise their workforce, and make do with less than globally acceptable levels of efficiency, safety and customer care requirements. With airline traffic growing at an amazing 20 per cent or more annually, Indian airlines have the opportunity to challenge globally established majors in the airline industry. However, this opportunity will be squandered if government policy remains exclusively focused on saving and resuscitating Air India rather than be concerned with the global competitiveness of Indian airlines industry as a whole.

BITE THE BULLET


The way forward is amply clear and been suggested on numerous occasions by political leaders, industry experts and sundry observers. But this requires the utterance of the currently dreaded and politically incorrect 'P word'. Privatisation of inefficient and haemorrhaging public sector enterprises has been banished from the Indian policy lexicon for some years. Disinvestment is the most that we can talk about, and that too in undertones for fear of being seen as politically incorrect. But as Air India's case demonstrates in ample measure, one cannot substitute for the other. The only possible way forward in the case of Air India is to sell the company, privatise it, to any willing buyer, which may itself be difficult to locate. Privatising Air India or selling it to a strategic investor should not be politically or ideologically unacceptable. The airline does not provide a public service to the under-privileged. It does not cater to some strategic needs, except for ferrying stranded Indians, which could be achieved by chartering private flights. Air India's employees certainly do not represent the 'have-nots'. Its management has not covered itself in glory either. It serves no strategic or security objective. So on what grounds has privatisation being ruled out ab-initio as an option? Incidentally, there are none. Instead, the corporation is a prime candidate for privatisation, and has been so for decades. It is time that the Exchequer and the Indian taxpayer are rid of this unnecessary burden. There are clearly no shortcuts. The alternative of handing over the management to a private company while retaining government ownership is not feasible at this stage, as employees will continue to act as government servants with minimal accountability and potential investors will remain wary of government intervention. Air India can either be closed down or privatised to save the country further financial waste and avoidable future embarrassments.

NON-VIABLE DESTINATIONS
There can only be two possible reasons for not privatising the airline. One, that it is our national carrier carrying the Indian flag. Private airlines can carry the same flag with the same degree of pride

if not more. Are we any less proud of Tatas, L&T and Mittals having acquired international status than we are of BHEL, EIL and NTPC emerging as globally competitive players? Two, that it serves vital national interests by flying to destinations which will not be served by private airlines. This can be easily and far more economically addressed by earmarking a pool of public funds to be paid to those airlines which fly to commercially non-viable destinations. This will also eliminate major distortions that are generated in the industry when a dominant player is allowed to operate without a hard budget constraint. This is anathema to competition. The Competition Commission of India should take up this case up on a suo moto basis and help the government out of its present predicament.