There has been much debate over
infusion of taxpayer monies into Air India. Fine, but is there an option?
National carriers are ‘protected
species' with sovereign governments going ‘all-out' to infuse billions of
dollars to avoid bankruptcy. Emerging economies need strong national carriers
for economic growth, tourism and trade.
Thai Airways, Malaysian, Qantas and
Air New Zealand are all classic cases of government bail-out, clubbed with
formal turnaround plans. Post 9/11, the US government committed $15 billion to
bail out bankrupt carriers. What Air India is going through today is not at all
uncommon!
Scope for turnaround
The Turnaround Plan will need to
alter some fundamental parameters of Air India's operations, which will be
challenging and frustrating. But, India's traffic potential gives a lot of
leeway for Air India to get its act together; many of the global carriers would
not have this luxury.
With less than 2.5 per cent of the
Indian population travelling by air, ‘per capita trips' being just 0.05 (China
is 0.3, US 2.1), with only 125 of the 450 airports functional and top 25 Indian
airports accounting for 95 per cent of the passenger traffic, a huge potential for
air traffic growth in India is clearly visible.
With Indian carriers expecting to
order 1,300 aircraft in the next 20 years, Air India alone would possibly buy
200 aircraft, which leaves enough scope for Air India focus on its core
‘airline business' (and hive off non-core activities such as maintenance and
ground handling ) and steadily improve its low staff productivity, without the
need for immediate staff retrenchment.
Now, should Air India be bailed out,
at any cost? With such growing traffic, the existence of five to six viable
carriers is important. In the last seven years, the number of carriers has
dwindled; Sahara merged with Jet, Air Deccan with Kingfisher, and Indian with
Air India. Paramount is gone; Air India and Kingfisher have had serious flight
disruptions, shrinking capacity — all of this resulting in increased air travel
cost. Hence it makes sense for the government to go all-out to revitalise Air
India, provided the ‘turnaround plan' is made workable.
Merger pains and gains
There is much talk about how
difficult it is to merge Air India and Indian Airlines. Globally, airline
mergers have proven to be effective for reducing costs, in spite of challenges.
A number of merger integration models are also available.
In the case of US Airways' merger
with America West in 2005, given the salary and cultural disparities, the two
sets of pilots refused to operate aircraft that came in from other airlines,
until the combined seniority list was agreed upon; this reduced operational
flexibility for more than seven years.
It took more than two years for
United and Continental to complete the merger integration process until which
time independent operations under a combined leadership continued. In 2004, Air
France and KLM took advantage of their merger to reap benefits of scale, in
spite of vast cultural diversity; only the back-end is integrated. The
front-end retains two respective brand identities, separate web sites and
independently operating respective hubs in Charles De Gaulle, Paris and Schiphol,
Amsterdam.
All mergers are frustrating, but
have to be managed for synergies and economies of scale.
Implementing the Air India-Indian
merger at the earliest is thus inevitable, irrespective of challenges involved.
The government needs to bite the bullet now.
This will reduce cost, avoid
duplications in aircraft, routes, staff, spares, office space, improve capacity
utilisation and load factor, and provide bargaining power in terms of aircraft,
fuel and insurance procurement. This is a ‘low hanging fruit' which should be
seized upon.
Leadership factor
Mr Rohit Nandan is the fifth CMD of
the carrier, in four years. Infusing funds without empowered leadership, free
from political interference, is a waste of taxpayer resources. Air India needs
focused leadership, more than anything else.
US Airways went into two successive
bankruptcies within three years of 9/11 attacks; what turned it around by 2006
was the strong leadership of David Siegel and Doug Parker, who established the
necessary trust with the pilots unions, negotiated salary cuts to the tune of
$1.5 billion and successfully merged US Airways with America West.
Piyasvasti Amranand, an economist
from London School of Business with no aviation experience, turned around Thai
Airways when government infused a billion dollars in 2008, restoring the
airline to record profitability by 2010, increasing share price ten-fold.
Air New Zealand merged with Ansett
and subsequently slipped into bankruptcy during 2001, when the government
nationalised it back and infused billions of dollars. Ralph Norris, a banker,
successfully turned around the airline by 2005. Malaysian collapsed in 2005
when faced with severe competition from low-cost carriers such as Air Asia.
Idris Jala, professional of repute working for Shell, turned around Malaysian
by 2007, aggressively restructuring and taking Air Asia ‘head-on' in pricing.
If Air India is provided with an empowered leadership, why can't it turn
around?
A common thread in all the above
successful turnarounds is gaining staff trust in negotiating staff compensation
linked with productivity, entering ‘low cost' model directly or through a
subsidiary, deploying technology to enhance Internet bookings, hedging fuel,
all of which significantly reduces costs. These can be achieved only by a
strong leader, not necessarily with aviation expertise.
staff productivity
Staff is a major contributor to any
airline's success. With severe shortage in pilots forecast over the next ten
years, nurturing them becomes critical.
Pilots also need to realise that
unreasonable demands, holding the airline to ransom, would affect the very
viability of the airline. Pilot unions in the US negotiated benefits so much in
pilots' favour that eventually they had to forego a large part of it, when
their airline entered bankruptcy protection.
Pilots should objectively negotiate
compensation linked with productivity, in line with regional benchmarks.
Possibly, when an empowered
leadership is in place, Air India employees may open up to ‘less pay-more work'
type negotiations, realising that their compromise will make a difference to
the airline's profitability; today they may not have that comfort factor.
Turnaround plans have helped global
carriers become efficient; benchmarking with low-cost carriers, parameters such
as load factor, yield and employee productivity have steadily improved.
Clearly, it is the strong leadership that has been instrumental in successfully
turning around carriers.
However, the financials of these
carriers are still very sensitive; profitability is still minimal even at close
to 80 per cent load factors, signalling that a minor drop in demand for air
travel, due to whatever reasons, could spell catastrophe.
In spite of infusing capital,
empowered leadership and effective turnaround, Air India may still be exposed
to difficult times; after all, even the most efficient airline in the world,
South West reported third quarter losses in 2011. The story thus does not just
end with the infusion of Rs 30,000 crore, but the efforts, for sure, could
strengthen Air India.
If turnaround stories in other
airlines are anything to go by, a strong leadership can do the trick for Air
India.
http://www.thehindubusinessline.com/todays-paper/tp-opinion/article3506640.ece
