G V Ramakrishna: Resolving the AI crisis

The airline's board must examine if it can be offered for strategic sale on the lines recommended by Disinvestment Commission

In its eighth report submitted in August 1998, the Disinvestment Commission examined various options for dealing with the problems of Air India (AI). Its basic recommendations are valid even today. Four options were examined.

In the first option, there would be no financial support by the government and no disinvestment. AI’s financial performance was bound to deteriorate further and it would become a sick company in the near term. Sickness would result in total dominance of traffic in and out of India by foreign airlines, with attendant consequences.

While examining the second option of continual support, the commission had pointed out that unless AI’s operating performance improved substantially, the benefits of financial restructuring would not be sustainable in the medium term and similar fund infusions would need to be repeated at regular intervals, implying a recurring and substantial financial burden on the exchequer.

The third option related to government support of Rs 1,000 crore as suggested by AI at that time, but also for meeting fleet replacement, modernisation and expansion to the extent of Rs 20,000 crore.

The fourth option involved government support to the extent of Rs 1,000 crore for immediate financial relief, followed by a strategic sale. The Disinvestment Commission recommended that the fourth option be adopted, and the following steps were recommended:

• The government should immediately provide Rs 1,000 crore as equity, as per AI’s estimates, for financial restructuring of the airline, which would raise its paid-up share capital to Rs 1,154 crore.
• Simultaneously, the process of induction of a strategic partner in AI should be initiated, on the basis of global competitive bids, through issue of fresh equity shares of the face value of Rs 770 crores. This would enhance the paid-up equity capital to Rs 1,924 crore and reduce the government’s holding to 60 per cent. The strategic partner should be a consortium of airlines and investors, with at least 25 per cent of the equity brought in by the consortium being held by Indian investors. The selection of strategic partner should be through global competitive bidding among pre-qualified bidders. The pre-qualification of bidders should be based on their financial, technical, marketing and managerial capabilities and commitment to AI’s fleet expansion. A shareholder agreement providing for an appropriate share in the management to the strategic partner would also be necessary.
• The government should thereafter disinvest 20 per cent of the total paid-up equity capital by offering 10 per cent to domestic institutional investors at the price paid by the highest bidder for AI shares, and the remaining 10 per cent to retail investors and employees at a discount. Any shares not taken up by retail investors and employees may be offered to domestic institutional investors. This would eventually bring the government shareholding in AI down to 40 per cent.

Subsequent to the implementation of these steps, the government and the strategic partner would each hold 40 per cent of the equity capital and the remainder would be dispersed among domestic institutional investors, employees and the public.

Global advisors may be appointed to assist in conducting the strategic sale, as already elaborated by the commission in its first report.

While steps are being taken for putting through the strategic sale expeditiously, the following measures may also be taken:

• The maintenance, engineering and ground support operations of AI, which are its inherent strengths, could be hived off as separate companies. In line with current global trends, this would enable the airline to benefit from outsourcing these services and reduce its overheads.
• Currently, AI connects major international destinations with all major international airports in India. A well-knit and effective hub-and-spoke arrangement with Indian Airlines would enable AI to provide direct and convenient connectivity with all Indian airports to its customers. For this purpose, there should be a clear demarcation of the roles that these two airlines will have to play in providing better customer service and jointly competing with other international airlines.
• A voluntary retirement scheme should be immediately introduced to initiate a reduction in manpower.
• Since aviation is a highly service-oriented industry, AI should initiate steps to improve its service quality, and this will help enhance its market share.
• In its sixth report, the commission had given its recommendations on Hotel Corporation of India Ltd, a wholly-owned subsidiary of AI. These included the sale of the Delhi and Mumbai Centaur hotels as separate units, initiation of a dialogue with the J&K government for Centaur Srinagar and a decision to be taken by AI on its flight-catering services. The AI management should take a view on these recommendations while undertaking financial restructuring.

While the commission was examining the case of AI, the government appointed a committee to examine its merger with Indian Airlines. This matter was not referred to the commission. The committee recommended that Indian Airlines should be merged with AI with other consequential arrangements. The government recently decided to merge Indian Airlines with AI without referring the committee’s recommendations to the Disinvestment Commission, which had submitted the report in August 1998.

The only action taken on the commission’s report was to segregate AI’s Centaur Hotel and go in for a strategic sale, which became controversial.

When the commission’s report was submitted, AI had asked the government for financial support of Rs 1,000 crore. Now, after the 10-year delay in taking action on the commission’s recommendations, the airline is asking the government for Rs 10,000 crore.

The situation for AI, and indeed for the government, is dire. Any decision taken now will apply to both the foreign and domestic operations, as Indian Airlines has been merged with AI. The question of the airline’s surplus employees has not yet been addressed. When the commission submitted its report, the problems were relatively easy to manage. The cost of the 10-year delay has become very heavy. Apart from the delay, the need for an additional Rs 10,000 crore will cast a heavy burden on the government and the company. The restructuring of the merged foreign and domestic operations has become more complicated. It is not clear how long AI can manage both domestic and foreign operations without a major restructuring of both.

It is time for the airline’s new board to revisit the Disinvestment Commission’s recommendations and see if they can be adopted with modifications to meet the present situation. It may be possible to separate AI from Indian Airlines and, with short-term government-guaranteed support from institutions, offer AI on strategic sale on the lines recommended by the commission.

The author is former chairman of the Disinvestment Commission