No flight plan

Converting debt into equity could open exit route to Air India

When Vayalar Ravi, with his socialist credentials, was appointed minister for civil aviation, replacing the business-friendly businessman-politician Praful Patel, there was great hope that the troubled state-owned Air India would finally begin to implement a revival plan that had been in the works for some time. More so because the long-standing complaint of successive airline managements has been that there is too much political interference in managerial decisions pertaining to the airline. It was certainly the case before, what with Air India being dragged into debt on the back of huge and unsustainable aircraft purchases. But it would appear that the appointment of Mr Ravi has done little to improve Air India or get the turnaround plan off the ground. After a disastrous 2010 that saw an air crash and a controversy over senior appointments, 2011 has seen yet another pilots’ strike on an issue that has been festering since 2007, and now, in peak summer season, the airline has been forced to cut back on flights because of its inability to pay fuel bills.

With this level of constant crisis, most other airlines would have been closed or sold. Air India does not have these options. Being government-owned, it would not be politically expedient to lay off some 45,000 employees at one stroke. As for a sell-off, with accumulated losses of Rs 16,000 crore, a debt of Rs 18,000 crore and a militant workforce, it is unlikely to find a buyer in a hurry — if at all. A plan to restructure its debt and convert part of it into equity at a distant later date is in the works. That should partially ease the burden on the balance sheet (banks themselves have no option to comply, otherwise Air India will weigh on their bad loan portfolios). But the shorter-term plan to sell its real estate assets hasn’t yet taken off. And the longer-term plan to set up strategic business units (SBUs) for ground handling and engineering seems to be at a standstill. The move will reduce the airline’s wage bill by about Rs 1,570 crore by shifting nearly 18,000 people from the airline.

For once, the unions have no cause for complaint because the employees in the spin-off units will be employed on the same conditions as before. But Air India’s reputation for restive employee relations has come to haunt it. As of now, only 10 per cent of the staff of the ground-handling SBU comes from Air India. Air India’s joint venture partner Singapore Airport Terminal Services has declined to take staff on existing conditions, preferring to hire on a contract basis instead. Another SBU for other airports has run into negotiating problems with some airports. As for the engineering subsidiary, the airline is scouting for a joint venture partner and is aiming to get third-party business to cash in on a growing opportunity. But it is possible that potential partners will watch the progress of the ground-handling SBU before venturing into a tie-up. In short, the airline appears to be on autopilot to nowhere.