Mr Balduf's dilemma

No escape from mid-air turbulence for India's aviation behemoth

Earlier this week, Gustav Balduf, Air India's new Chief Operating Officer, told reporters in Berlin that the airline needed to cut costs and improve passenger services to turn around. This is an unexceptionable statement: controlling costs and focusing on service is, after all, at the heart of any airline’s success. But in state-owned Air India’s case, Mr Balduf’s statement suggests irrational optimism. In theory the nature of ownership doesn’t matter as far as performance is concerned, look at Singapore Airlines, but in practice it seems to matter a lot for Air India.

A look at the numbers shows why. For any Indian airline, the big-ticket costs are fuel, staff and aircraft, of which the first two together typically account for a little over half total expenditure. Fuel costs, which account for over a third of expenses, tend to be somewhat rigid since they’re linked to global crude prices. However, Air India also has little opportunity to derive the kind of cost efficiencies that can be obtained from negotiating discounts from oil companies for on-time payment because it currently owes them over Rs 1,200 crore. It also owes the Airports Authority over Rs 600 crore for landing and navigation charges. That leaves aircraft and staff costs. Neither is likely to diminish anytime soon, for decisions that have little connection with commercial reality. In 2005, a government committee decided to okay the purchase of 111 aircraft at a stupendous cost of Rs 45,000 crore, a decision that has not only raised borrowing costs but also flies against the cost-effective industry practice of leasing aircraft.

As for staff costs, which account for about 16 per cent of expenditure, Air India’s bloated pay-rolls have long been a headache for the airline's management. At 214 employees per aircraft, Air India has one of the worst efficiency ratios in the world (it is comforting to know that there are airlines with worse ratios like state-owned EgyptAir, Air Lanka and PIA). Pure commercial decision-making would suggest that any saving from staff cutbacks will go straight to the bottom-line. But Mr Balduf's ability to do this is constrained by a level of employee activism that has almost become part of the airline's DNA. The 2007 merger between Air-India and Indian Airlines did nothing to diminish this: the new airline inherited 13 trade unions representing a variety of interests from pilots to engineers to ground crew and so on and so forth, each with an extraordinary capacity for self-interested action. In the past year, various unions have gone on strike for reasons ranging from attempts to cut productivity-linked allowances paid to executive pilots and decisions to delay salary payments to tide over cash flow problems to management orders not to talk to the media. Last month, the Air India management’s effort to deal with this by de-recognising two key unions representing some 15,000 employees, is unlikely to help matters. First, the two unions will continue to function as registered trade bodies; derecognition only means they'll be excluded from ongoing wage negotiations. Excluding bodies representing more than half the workforce will render wage talks meaningless. More to the point, it is likely to ratchet up the distrust between management and employees, a circumstance that does nothing to help Mr Balduf’s goal of improving passenger service.

In short, Mr Balduf’s strategy for resuscitating Air India is spot on; it’s the implementation he's going to find a huge challenge. Especially since the airline's long-time owner, the government of India, pumped in Rs 800 crore to boost its Rs 145 crore capital base last year and it is planning to inject another Rs 1,200 crore. With such a commitment, selling Air India, the only feasible decision for the airline, is unlikely to happen anytime soon.