It's the expenses, stupid!

Air India's revival plan will depend critically on its ability to cut its annual expenses bill

Even as private carrier Jet Airways struggles for survival, a new revival plan for Air India is in the works. The whole idea has such a tired feel to it that I don’t blame everyone I tried talking to about it begin the conversation with a yawn: Here comes the crazy journalist to trouble us this morning with something we know ain’t happening anytime soon, if ever. The beauty of Air India is that no one has a stake in it really, barring its 25,000-odd employees who are so used to working on their own terms that they may actually have something to lose if it goes under or is sold. 

 

Well, I’m not one to give up so I did manage to chat with half a dozen or so relevant and informed sources. Those who may have a clue on how the future might unfold. To be honest, actually nobody including the minister in charge actually knows that but everyone is willing to hazard a guess.

 

I’ll begin with the facts. The failed sale attempt is a matter of much regret — at least in theory and on paper. I am convinced no government official, minister or bureaucrat actually wants to see the airline sold but they insist they do. There are touches of regret — that the terms of the deal on offer were skewed and impractical — but there’s no blame game here since, as I explained, nobody is really accountable. We tried and failed, so what? At least we tried.

 

Two, the ministry of civil aviation has promised to announce a revival plan for the carrier this month, as part of the original privatisation plan. There is the proposal to remove Rs 290 billion of debt from the airline’s books to be transferred to a special purpose vehicle (SPV). The SPV would be able to service and pay off this debt through monetisation of the assets of the airline — such as real estate, art and so on. It is a bit like selling the family silver to meet daily expenses but that’s where it is at. This will mean a reduction of interest payouts of around Rs 30 billion from the present books, if one assumes an annual interest rate of around 9-10 per cent.

 

The revival has two other planks. One is to increase the present yield by around 5 per cent and the other is to cut costs by around 5 per cent. Both these could help the airline save close to Rs 10 billion each and this coupled with the reduced interest burden could help the carrier keep its nose above water.

 

Therein lies the rub. Increasing yields by 5 per cent is to my mind more of a dream that almost all airline chiefs in India today hope to turn to reality. But it’s more a chimera than anything else. With competition on both domestic and international fares intense and intensifying, increasing yields is not something in Air India’s or anybody else’s control. 

 

Pinning its hopes on something as unlikely as this is a bit like expecting its 25,000-odd recalcitrant employees to suddenly adopt rules, procedures and norms like the Indian Army rank and file. I’d advise everyone to forget about it!

So the hope is only one: cutting costs. Now Air India has operated for several decades like money grows on trees. 

 

It has also displayed scant regard for how money is spent. Almost everyone I spoke to including its own senior officials agreed that like any good ol’ Maharaja, profligacy runs in its fabric. If it brings in even one or two of the principles of operation followed routinely by the other commercial airlines, it can save not just 5 per cent but even 10 per cent of its current yearly expense of Rs 260 billion. 

 

Even from the outside, I can tell you at least 10 areas where the airline can cut costs including rationalising routes and reducing the salary bill by trimming numbers. A saving of Rs 25 billion annually on this front alone is not an impossibility. 

 

But it requires — like everything else — some common sense and a huge will, neither of which the airline’s management is famed for. A former aviation secretary I spoke to said that he had lost count of how many revival plans had been drawn up for Air India but all had amounted to little as can be seen from where we find ourselves today. He didn’t see how this one would be any different.