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BW Businessworld

The Big Bailout

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Last week, the Cabinet agreed to infuse Rs 30,231 crore (about $6 billion) in Air India over the next eight years, amounting to an equity infusion of over Rs 3,000 crore every year. The government has already infused equity of Rs 3,200 crore in the last two financial years. Further equity infusion, however, remains conditional on certain milestones being achieved (see chart).

Senior Air India officials tell BW that the turnaround plan of the carrier hinges on two things: further equity infusion by the owner and induction of the new B787 Dreamliner, which is expected to give a new lease of life to the airline's international operations.

Air India will reduce staff strength by shedding ground handling and MRO (maintenance, repair and operations) and hiving them off into two separate subsidiaries. These two will then be offered to other airlines to earn revenues.
The airline proposes to introduce the Dreamliner on various routes including Singapore, Kuala Lumpur, London, Melbourne, Sydney, Frankfurt and certain Gulf countries. Six of these aircraft will be with the airline by the end of this year. It is already in talks to lease out five of its B777-200LR aircraft.

Officials say that the airline will no longer cut fares and is committed to improving yields by at least 5 per cent on both wide and narrow-bodied aircraft. The yield on narrow bodies at present is 5.15 per passenger kilometre and on wide-bodied it is 3.10 per passenger kilometre.

What will actually benefit the airline is the two-year moratorium on interest payments on working capital, which costs it Rs 2,400 crore a year. After the restructuring, this will come down to Rs 1,400 crore a year.

However, experts say there are many unresolved issues. "The reason why Air India does not work like a private airline is because HR issues have not been resolved and there are deep schisms between the two sets of employees of the merged airlines," says a former chairman and managing director of the airline.

"We have 27,000 employees with a salary bill of Rs 3,700 crore annually. But almost 30 per cent of this goes to just 8-9 per cent of the staff," says one official. This implies intense negotiations with the more pampered sections within the airline and perhaps some more resistance by them before falling in line.

Also, many costs of Air India Express — which runs as a separate entity — are currently loaded onto the parent airline Air India, which need to stop. "Air India Express also needs to be restructured and made into a viable independent entity. Wherever it uses Air India's services, it needs to pay for them," says an official.

In other words, the parent airline — the behemoth created by the merger of erstwhile Indian Airlines with Air India — needs to start again with a clean slate, shedding the baggage of years of mismanagement. Will it manage to do so is the big question.

(This story was published in Businessworld Issue Dated 23-04-2012)