The prolonged strike by Air India (AI) pilots once again demonstrates the difficulty in managing mergers in the public sector. Even six years after the merger between AI and Indian Airlines (IA), the pilots of both the dissolved organisations continue to view themselves as employees of the “original” enterprise; in their opinion the promises made then, whether explicit or implied, have to be honoured. They even argue — the contentious issue in the current tussle — that only former AI pilots have the right to receive training and fly the new Boeings, as they were ordered by the former international carrier.
The problems bedevilling AI are neither unique nor an exception. The motivation for mergers is either to create market power (and lower competition, the main motive for the Jet-Sahara and Kingfisher-Deccan mergers) or save costs by sacking workers and increasing the workload on remaining employees. Sometimes, the acquirers get banks and the government to waive part of the liabilities. These so-called synergies are at the cost of either consumers, employees or bondholders.
Even oil giant Indian Oil Corporation (IOC) has yet to untangle the merger yoke. In 1964, IOC was formed by the merger of Indian Refineries Ltd (IRL) and Indian Oil Co. Ltd. (IOCL). After 47 years, IOC still looks like two companies, with two distinct cultures, different HR practices and diverse career progressions. Inter-division relations are characterised by rivalry and mutual distrust. Every senior-level position that is open to all divisions is bitterly contested, and divided among the two merged groups by unwritten but informally understood practices and formulae.
When insurance companies were nationalised in the 1970s by the former prime minister, Indira Gandhi, and were clubbed into four large public-sector organisations, HR problems took decades to unravel. Numerous managing directors and general managers slotted into new positions not only sapped the energy of the senior management, but the resulting writ petitions and court cases took decades to resolve.
Despite the blood-letting and high human costs, very few mergers actually deliver any synergy or gains; AI is no exception, nor are Jet and Kingfisher. Significantly, the merger of AI was not driven by the boards or senior management of the two airlines — a serious breach of the autonomy promised to PSU managers. The initiative was entirely the design of the ministry of civil aviation; the two managements were bullied to assemble a joint team to work out the merger. From the start, it was obvious that HR and related issues would be knotty — instead of saving money it would actually raise costs.
To be fair, consultants had predicted an increase in HR and branding cost of Rs 385 crores over the first three years. This more or less eroded all the cost savings from integration of hangars, maintenance facilities and so on. The other gains were to come from growth in revenue and reduction in borrowing costs. Revenue growth would result from network integration and subsequently by joining the Star Alliance, which would divert international traffic towards the merged entity.
In 2007, the then minister of aviation promised Parliament that network integration would be achieved in 16 weeks. In reality, the contract for network integration of the airlines was awarded in April 2010 and realised in 2011. Four years after the merger, the new AI could not even merge its call centres or airport lounges. In 2010, it appointed a committee under Justice Dharmadhikari to sort out the wage fixation and related HR issues; this year, another committee was set up to study how Dharmadhikari’s recommendations can be implemented. It will be a decade before wage issues are sorted out in the midst of increasingly widespread disenchantment, intrigue and rumour that will sap managerial time and energy.
There could be savings from some overheads or common infrastructure and hangars, repair and maintenance facilities. But the latter requires that the fleet of the two merging entities should be identical. In AI’s case, since the two former entities had placed large orders from two rival manufacturers (Boeing and Airbus), it is unlikely that any synergy from common maintenance can be realised. The savings and synergy can be expected from fewer ladders and desks at the terminals or buses to ferry passengers. In an industry where fuel and lease rent accounts for 80 per cent of costs, these savings are peanuts.
The consultants, Accenture and Kearney, had calculated a synergestic gain of Rs 840 crores, cited by the ministry to Parliament. This gain curiously does not include the Rs 385 crores the consultants had estimated in HR and other integration costs. According to a senior manager of IA who was a member of the task force, these figures were “guesstimates”, arrived as a compromise by bickering parties and consultants.
The case of AI highlights what is generally true of PSUs in India. The alternate possibility of gains through exercising market power is remote; most PSUs (power, petroleum marketing, railways) cannot even charge enough to recover their legitimate costs, leave alone extract monopoly rent. Nor can they realise savings from the merger, which come mainly from increasing workload and reduction in overlapping manpower. Hence, in the context of the public sector, the two touted gains from mergers — market power or cost reduction — are not realisable.
The human costs of mergers in PSUs far outweigh any minor gain. Layoffs are impossible; most employees would seek protection under the mandate of writs in courts. Only in the long run, by freezing employment, can PSUs reduce workforce. During the period the so-called surplus employees are accommodated, their promotions satisfied, while the dissatisfied go to court. The senior management will spend the bulk of its time and energy sorting out human issues, rather than evolve new strategy or fight competition.
The expectations of PSU employees are not unreasonable. Well-managed public sector industrial and commercial enterprises attract high-calibre managers and personnel; they balance lower compensation with a more cooperative and stable work environment as opposed to the rat race of the private sector. High-fliers know there are no short-cuts to senior positions, with performance rewards coming in the long run. Salary gaps are narrow, and hence prestige and decision-making power associated with senior positions are seen as significant rewards. The regional manager of a Navratna will often decide and control resources greater than most business groups in India, often more than most chief ministers. Destroy this structure of HR polices and promotions, and PSUs will be unable to attract talent.
It is these promotions and seniority that are challenged when two enterprises are merged. In AI’s case, those who bag training on the new Dreamliners will command better compensation, seniority and earlier promotions. The issue is not easy to resolve: unfair to IA pilots if you succumb to the strikers, unfair to AI pilots if you don’t. The bulk of mergers fail to create value for anyone except consultants, lawyers, advisers and investment bankers. AI is no exception.
The writer is Professor, IIM Calcutta, and a member of the Board for Reconstruction of Public Sector Enterprises