Air India cannot focus on market share at cost of profitability, says Nandan

National carrier Air India is undergoing a major restructuring as part of an ambitious turnaround plan. Its performance has already started showing signs of improvement. Air India Chairman and Managing Director Rohit Nandan tells K.R. Balasubramanyam about his approach to the carrier's problems:

Q. You have been around as CMD for about two years now. What was your major challenge?
A. My first task on taking over at Air India was to improve the morale of employees, which was at an all-time low. I was convinced that unless you improve the employee morale, it was not possible to tackle other problems. I noticed that there was a total lack of communication between management and employees. I started the culture of Open House. Anyone could walk in during the designated hours and air their grievances to me. I created a mechanism to address them. Gradually, they started gaining faith in management and the stream of visitors started declining. Our sincerity to solve their problems acted like a healing touch and bolstered employee morale. We institutionalised the system of grievance redressal. This was quite a unique initiative at Air India.

Q. How did you fix your finances?
A. My other priority was economic restructuring. The first thing I did was to stop taking any fresh loans from banks. When I took over, we had an unsecured loan of about Rs 22,000 crore. The borrowing earlier was reckless. We were firm: no more loans and manage with own resources. We took a credit period of three months from oil companies in place of the earlier cash-and-carry system, and that was a big relief. We did not default on a single payment. We are now back on the cash-and-carry mode.  At the same time, we started paying employees their salary, besides performance-linked incentives, on time. That restored their faith in management. At one point, the situation was so bad that they were not sure of getting their salary for the month.

Q. What has been your approach to building market share?
A. In early 2011, following the pilot strike, the Air India management had slashed fares to regain the lost market share. It played havoc with our finances. After I came, I decided no more low fares. We must try to recover whatever cash costs we were incurring. My basic philosophy has been we must first build profitability, not market share. There is no point in focusing on your market share at the cost of profitability. I have always been categorical: you have got to first recover costs. Our market share too has been improving. In October 2012, our domestic market share touched a high of 20.8 per cent.

Q. What are you doing to improve profitability?
A. Two years ago 69 per cent of our capacity was sold below cash costs. Now, it has come down to 25 per cent. Our target is to bring it further down to industry standards of five to 10 percent by the end of 2013/14, and improve profitability.

Q. How are you bringing down operating costs?
A. We have 19 planes that are fairly old, guzzle a lot of fuel, and entail increased maintenance costs. We will be replacing them with 19 new single-aisle aircraft. We will have 180 all-economy seats in each of these aircraft - much higher than the aircraft under replacement - so that we will be able to recover more revenues from them. Fuel accounts for about 52 per cent of our costs. Once the old planes are retired, this proportion will come down significantly. Private airlines spend between 40 to 45 per cent on fuel.

Q. Any other measures to trim costs?
A. We are trying to cut costs such as distribution costs and introduce changes in the way we handle catering. I think Air India is the only airline that is losing money in the catering business while other airlines are making money. Of course, Air India stands out for its quality of food. So any measures with regard to catering will be seen as radical. But we will do it in such a way that the quality of food that we serve is not compromised while, at the same time, our catering services become profitable.

Q. Any lesson that you picked up from private carriers and implemented at Air India?
A. One very useful lesson I learnt from private airlines is their revenue management system. We have switched to the most advanced system of revenue management and have completely computerised the system. It is foolproof and no manipulation in fare fixation is possible. The price buckets are dynamic and the system is transparent. At another level, we have introduced a crew management system that has removed any arbitrariness that may have existed earlier.

Q. What has been your experience after introducing Boeing's Dreamliners?
A. Earlier, we were losing on London, Frankfurt and Paris routes. But now with the introduction of the Boeing 787 Dreamliner, we are seeing that these routes have started making money. We are confident they will soon start reporting profits.

Q. What will be the impact on Air India of higher entitlement of seats to Middle East carriers?
A. We were affected by Emirates Airlines earlier, besides other factors. But higher allocation of seats under bilateral treaties is part and parcel of the travel industry. We will not be affected by the Jet-Etihad combine because our business model is different. We offer travelers point-to-point direct travel facility. One need not break the journey. This will be our USP [unique selling point] with increased deployment of Dreamliner planes.

Q. What is your long-term vision for Air India?  
A. At Air India, we need to have a long-term road map for the health and growth of the airline. This should include various strategies including having private-sector investments some time in the future.

Q. Any plans to hire from the private sector?
A. We will hire a CEO for our MRO [maintenance, repair and overhaul] operations from the private sector. We have a clear roadmap for our subsidiaries.