Air India's recent performance offers hope of a comeback
The carrier posted earnings before tax, interest, depreciation and
amortisation of Rs 19 crore in 2012/13. The achievement is
significant, considering that the airline has been making losses for the
past seven years.
There is no point in focusing on your market share at the cost of profi tability: Rohit Nandan <em>Photo: Shekhar Ghosh/www.indiatodayimages.com</em>
Two years ago, a section of Air India pilots went on a 10-day strike demanding better pay. The strike forced the national carrier to cancel dozens of flights, suffering a loss of revenue and market share. To regain market share, the lossmaking airline slashed fares. That proved disastrous. "It played havoc with our finances," says Chairman and Managing Director Rohit Nandan , who took over at the airline in August 2011. "After I came, I decided no more low fares. There is no point in focusing on your market share at the cost of profitability."
The dogged pursuit of profits by the 1982-batch IAS officer from the Uttar Pradesh cadre has started showing results. The carrier posted earnings before tax, interest, depreciation and amortisation (EBITDA) of Rs 19 crore in 2012/13. The achievement is significant, considering that the airline has been making losses for the past seven years. Air India's operational parameters have improved as well. Its flights, for instance, stick to their schedules more often than before. Air India's on-time performance improved to 82 per cent in May this year from 80 per cent a year earlier, according to data from industry regulator Directorate General of Civil Aviation. And its local market share leapt to 19.1 per cent in May from 16.2 per cent a year earlier, the data show.
The airline's current avatar is a result of the merger of state-run carrier Indian Airlines with Air India in 2007. Both airlines posted profits in 2005/06. But rising competition, worsening operational performance, massive aircraft purchases, and the ill-conceived merger pushed the combined airline deep into the red. Total losses have accumulated to almost Rs 20,000 crore while the debt burden is at a staggering Rs 43,000 crore. The precarious financial situation forced the government to announce a bailout package in April 2012. The turnaround plan entails an equity infusion of more than Rs 30,000 crore into the airline by 2020 if it meets certain milestones.
So far, say Air India executives, the airline is meeting the milestones. The carrier aims to become cash positive, or make a profit after excluding depreciation costs, by 2016/17. Joint Managing Director Syed Nasir Ali says the target is to make a net profit by 2019/20. "But with the pace with which we are moving, I would not be surprised if we become profitable much before."
Industry observers agree that the airline is on the right track. Mahantesh Sabarad, aviation analyst at Fortune Equity Brokers, says the airline looks poised for growth. "Financially speaking, the company is being well managed of late. Operationally, of course, it will have challenges in terms of competition, but it can still do well."
How are Nandan and his team managing this turnaround? One of the first things Nandan did after coming to the airline was to stop taking on fresh loans from banks and manage from internal resources. "When I took over we had an unsecured loan of about Rs 22,000 crore. The borrowing was reckless," he says.
The next priority was boosting staff morale. Employee morale was low mainly due to the airline's uncertain future and disparities in wages of employees of the erstwhile Indian Airlines and Air India. There also was a lack of communication between management and employees. The situation has improved since then. The time lag in getting salaries has come down to less than a month from six months earlier. "In the past, every year there were at least two strikes. The employees were not sure whether they would get their next month's salary," says Civil Aviation Minister Ajit Singh. "There are no such concerns now."
The airline is also improving fuel efficiency and maximising revenue generation from aircraft. "We will turn Air India into a hybrid service," says Singh. "While some flights will have all economy seats, others will have two classes." The airline has introduced all economy seats in 14 Airbus A320 aircraft for flights that take less than one hour. It is looking to lease 19 more A320 jets with all economy seats. The carrier also has 48 narrow-body aircraft with both executive and economy classes.
Nandan says Air India has 19 planes that are more than 20 years old on average. These jets guzzle a lot of fuel and will be replaced with new fuel-efficient aircraft that will have 180 all-economy seats to earn more revenue, he says. The airline is also inducting more Boeing 787 Dreamliners. These jets, says Joint Managing Director Ali, are 25 per cent more fuel efficient than aircraft of the Boeing 777 family, which accounts for 60 per cent of the airline's long-haul fleet. Air India, which had grounded its Dreamliners for about four months until mid-May after reports of a battery malfunction, has ordered 27 such jets.
It currently has six Dreamliners and will get eight more by December. The new aircraft will help it wipe out losses in the Europe sector and fly to more international destinations. Air India flies to 33 cities overseas and plans to connect Birmingham, Melbourne, Sydney, Milan, Rome and Moscow this fiscal year.
Another important reason for Air India coming out of turbulence is falling staff costs. Its wage expenses dropped about seven per cent in 2012/13 to Rs 3,323 crore. Finance Director S. Venkat says wages accounted for a quarter of revenue in 2012/13, down two percentage points from the previous year. The ratio would drop to 14 per cent from 2013/14. The airline is getting leaner - almost 7,000 employees will retire over the next five years. It has about 24,000 employees now. This includes staff at its ground handling and engineering services businesses, which have been hived off into separate companies. The hive-off of Air India Air Traffic Services Ltd, its ground handling business, and Air India Engineering Services Ltd will cut costs by Rs 1,000 crore a year. This has also led to a fall in the number of employees per aircraft, a measure of operational efficiency, to 100 from about 220 previously, which was nearly double the number at some local rivals.
The airline is implementing several other measures to curb expenses, as suggested by a committee led by Ravindra H. Dholakia, a professor at the Indian Institute of Management, Ahmedabad. The steps, announced in May, include restructuring or withdrawing lossmaking flights, selling or leasing out underused assets such as land and buildings, and stopping excessive allowances to pilots and crew members.
Air India expects to save Rs 1,000 crore this year by implementing these measures. The carrier had also appointed global consultant DTZ to raise money from its real-estate assets. The target is to get Rs 5,000 crore from leasing and selling off its assets in the next 10 years.
Air India is also managing its units better than before.*Air India Charters, which runs low-cost carrier Air India Express, will likely make a cash profit this fiscal year. Air India executives say the ground handling business will make EBITDA profit in the current fiscal year, while the engineering arm will take another two years.
What could jeopardise Air India's return to profitability, however, is any further discontent among employees. Increasing competition poses a big threat, too. Malaysian low-cost carrier AirAsia is set to launch an airline in India in a venture with the Tata group. And Jet Airways, Air India's main full-service local rival, is looking to expand after selling a stake to Etihad Airways, the deeppocketed flag carrier of the United Arab Emirates.
The competition will intensify if the government raises the limit of foreign direct investment in local airlines from the current 49 per cent. Amber Dubey, head of aerospace and defence at consulting and accounting firm KPMG India, says the government should privatise Air India. "The preferred way could be offering a 74 per cent or 100 per cent stake to strategic investors, including foreign airlines, and not divestment to government-controlled financial institutions," he says.
While that seems unlikely in the near future, the worst seems to be over for the airline.
*An earlier version of this story said Pawan Hans, a helicopter services company, was a subsidiary of Air India. Pawan Hans is owned by the Indian government, which is the 100 per cent owner of Air India too. Pawan Hans, posted a net profit of Rs 7.7 crore in 2012/13 compared with a net loss of Rs 10.35 crore in the previous year.
The airline's current avatar is a result of the merger of state-run carrier Indian Airlines with Air India in 2007. Both airlines posted profits in 2005/06. But rising competition, worsening operational performance, massive aircraft purchases, and the ill-conceived merger pushed the combined airline deep into the red. Total losses have accumulated to almost Rs 20,000 crore while the debt burden is at a staggering Rs 43,000 crore. The precarious financial situation forced the government to announce a bailout package in April 2012. The turnaround plan entails an equity infusion of more than Rs 30,000 crore into the airline by 2020 if it meets certain milestones.
So far, say Air India executives, the airline is meeting the milestones. The carrier aims to become cash positive, or make a profit after excluding depreciation costs, by 2016/17. Joint Managing Director Syed Nasir Ali says the target is to make a net profit by 2019/20. "But with the pace with which we are moving, I would not be surprised if we become profitable much before."
How are Nandan and his team managing this turnaround? One of the first things Nandan did after coming to the airline was to stop taking on fresh loans from banks and manage from internal resources. "When I took over we had an unsecured loan of about Rs 22,000 crore. The borrowing was reckless," he says.
The next priority was boosting staff morale. Employee morale was low mainly due to the airline's uncertain future and disparities in wages of employees of the erstwhile Indian Airlines and Air India. There also was a lack of communication between management and employees. The situation has improved since then. The time lag in getting salaries has come down to less than a month from six months earlier. "In the past, every year there were at least two strikes. The employees were not sure whether they would get their next month's salary," says Civil Aviation Minister Ajit Singh. "There are no such concerns now."
The airline is also improving fuel efficiency and maximising revenue generation from aircraft. "We will turn Air India into a hybrid service," says Singh. "While some flights will have all economy seats, others will have two classes." The airline has introduced all economy seats in 14 Airbus A320 aircraft for flights that take less than one hour. It is looking to lease 19 more A320 jets with all economy seats. The carrier also has 48 narrow-body aircraft with both executive and economy classes.
Nandan says Air India has 19 planes that are more than 20 years old on average. These jets guzzle a lot of fuel and will be replaced with new fuel-efficient aircraft that will have 180 all-economy seats to earn more revenue, he says. The airline is also inducting more Boeing 787 Dreamliners. These jets, says Joint Managing Director Ali, are 25 per cent more fuel efficient than aircraft of the Boeing 777 family, which accounts for 60 per cent of the airline's long-haul fleet. Air India, which had grounded its Dreamliners for about four months until mid-May after reports of a battery malfunction, has ordered 27 such jets.
It currently has six Dreamliners and will get eight more by December. The new aircraft will help it wipe out losses in the Europe sector and fly to more international destinations. Air India flies to 33 cities overseas and plans to connect Birmingham, Melbourne, Sydney, Milan, Rome and Moscow this fiscal year.
Another important reason for Air India coming out of turbulence is falling staff costs. Its wage expenses dropped about seven per cent in 2012/13 to Rs 3,323 crore. Finance Director S. Venkat says wages accounted for a quarter of revenue in 2012/13, down two percentage points from the previous year. The ratio would drop to 14 per cent from 2013/14. The airline is getting leaner - almost 7,000 employees will retire over the next five years. It has about 24,000 employees now. This includes staff at its ground handling and engineering services businesses, which have been hived off into separate companies. The hive-off of Air India Air Traffic Services Ltd, its ground handling business, and Air India Engineering Services Ltd will cut costs by Rs 1,000 crore a year. This has also led to a fall in the number of employees per aircraft, a measure of operational efficiency, to 100 from about 220 previously, which was nearly double the number at some local rivals.
The airline is implementing several other measures to curb expenses, as suggested by a committee led by Ravindra H. Dholakia, a professor at the Indian Institute of Management, Ahmedabad. The steps, announced in May, include restructuring or withdrawing lossmaking flights, selling or leasing out underused assets such as land and buildings, and stopping excessive allowances to pilots and crew members.
Air India expects to save Rs 1,000 crore this year by implementing these measures. The carrier had also appointed global consultant DTZ to raise money from its real-estate assets. The target is to get Rs 5,000 crore from leasing and selling off its assets in the next 10 years.
What could jeopardise Air India's return to profitability, however, is any further discontent among employees. Increasing competition poses a big threat, too. Malaysian low-cost carrier AirAsia is set to launch an airline in India in a venture with the Tata group. And Jet Airways, Air India's main full-service local rival, is looking to expand after selling a stake to Etihad Airways, the deeppocketed flag carrier of the United Arab Emirates.
The competition will intensify if the government raises the limit of foreign direct investment in local airlines from the current 49 per cent. Amber Dubey, head of aerospace and defence at consulting and accounting firm KPMG India, says the government should privatise Air India. "The preferred way could be offering a 74 per cent or 100 per cent stake to strategic investors, including foreign airlines, and not divestment to government-controlled financial institutions," he says.
While that seems unlikely in the near future, the worst seems to be over for the airline.
*An earlier version of this story said Pawan Hans, a helicopter services company, was a subsidiary of Air India. Pawan Hans is owned by the Indian government, which is the 100 per cent owner of Air India too. Pawan Hans, posted a net profit of Rs 7.7 crore in 2012/13 compared with a net loss of Rs 10.35 crore in the previous year.
