Mumbai: Airlines and the millions of passengers they shuttle around the globe share a common experience: Periods of smooth flying are interspersed with nervous episodes of gut-wrenching turbulence.
Air India is now in the middle of one of those bumpy patches.
India’s national carrier had accumulated losses of Rs7,200 crore on 31 March. Salaries were delayed in June because of a severe cash crunch. Borrowings at least doubled to touch Rs15,241 crore in June, from Rs6,500 crore in November 2007. The airline has asked the government to infuse Rs5,000 crore of equity and give a soft loan of Rs10,000 crore to help it stay on course in the midst of violent cross winds.
Arvind Jadhav, a 1978-batch officer of the Indian Administrative Services (IAS) who took charge as chairman and managing director of the government-owned National Aviation Co. of India Ltd (Nacil) in May, has a tough task ahead of him, as he attempts a safe landing for the company that runs Air India.
Towering issues: (top) Air India aircraft at the Mumbai airport. PTI; the Nariman Point building in Mumbai. Girish Srivastava / Hindustan Times
It will not be easy going. These are tough times for the global airline industry, which is caught in a pincer of high fuel prices and slack demand. Besides, Air India has its own problems: stiff competition from domestic and global airlines that have greater access to the Indian market, poor passenger demand due to the economic downturn, high interest costs because of an ambitious plan to buy new planes, a delay in integrating Indian Airlines and high jet fuel prices.
Jadhav will have to submit a turnaround plan to Prime Minister Manmohan Singh on 25 July.
“One has to take harsh and drastic steps to overhaul Air India. Certainly, this is not going to be an overnight exercise, but it needs to make a turnaround plan that will be followed by a specific business plan,” says a director of Air India. He did not want to be identified.
But just as sharp downturns are common in the global airline industry, smart turnarounds are not unheard of either.
Also See Falling Fortunes and Turnaround Lessons (PDF)
Many international airlines have survived such tough times. Germany’s Deutsche Lufthansa AG, that runs Lufthansa German Airlines, also had losses during the 1990s. It swung back to profits by 1999. UK’s British Airways Plc and SriLankan Airlines have similar stories to tell. SriLankan Airlines had to deal with terrorism, as when separatist group Liberation Tigers of Tamil Ealam (LTTE) had bombed Colombo Airport—the hub for the carrier—several times. In December 2005, Malaysia Airlines had cash to support just four months of operations. It was a profitable airline two years later.
What can India’s own national carrier learn from these episodes?
Mint spoke to several management consultants, airline experts and Air India directors to collate a list of seven steps Jadhav and his team need to take on board as they try to steer Air India into calmer climes.
1. Create a crisis. Tell stakeholders the blunt truth. A clip on online video portal YouTube.com shows scenes from a town hall meeting that Malaysia Airlines managing director and chief executive officer (CEO) Idris Jala organized in December 2005 for some 700 employees. Then Prime Minister of Malaysia Abdullah Ahmad Badawi spoke to the assembled employees and made it clear that the government would not rescue Malaysia Airlines. The airline would have find its own solutions. Malaysia Airlines then had 23,000 employees.
With this meeting, Jala sent a strong message to employees: They had to act to save their jobs. Incidentally, Malaysia’s Jala and Air India’s Jadhav met during the 65th annual general meeting of the International Air Transport Association (Iata) in Kuala Lumpur in early June.
Jadhav has done something similar in Air India, with the surprise announcement that June salaries would be delayed by 15 days, the first such instance in its history. Air India killed two birds with that one stone. It let employees know that it is running out of cash, and business as usual was not an option. It also conveyed to its owner—the Indian government—that it needs urgent fresh equity and soft loans.
On 20 June, Jadhav also wrote a letter to his 31,500 employees stating that expensive commercial loans for working capital could not be endlessly used. The time has come for them to face the moment of truth. However, employees of Air India staged a two-hour protest on 3 July, further disturbing flight operations.
“In general, the crisis-induced sense of urgency that has now taken hold at the airline and all its stakeholders, and the aggressive actions being taken at present to rationalize costs, integrate Air India and Indian Airlines (especially in IT platforms and operations) to improve revenue generation, and change the incentive model for employees should bode well for the combined carrier’s turnaround,” says Saikat Chaudhuri, assistant professor of management at The Wharton School, University of Pennsylvania. Chaudhuri researches on mergers, acquisition and innovation management.
2. Take drastic steps. “There was never a mega merger without retrenchment of employees, except in the case of Air India and Indian Airlines. The whole objective of merger is to attain synergy and reduce the number of employees. But the government has reiterated that there will be no retrenchment,” says M.S. Balakrishnan, former director of finance with Indian Airlines.
He suggests that the airline needs to take a few drastic steps and retrench employees above 55 years old and do away with contract labourers.
“Air India could give its iconic Nariman Point building or its New Delhi’s Airline House to new tenants, rather than losing them. This could generate some revenues for the airline,” says Balakrishnan.
Malaysia Airlines sold its headquarters in downtown Kuala Lumpur for 130 million ringgit, giving the airline a cash cover for 20 days in 2006. A top Air India executive said on condition of anonymity that either the government can take politically correct decisions and allow Air India to die, or take drastic steps to save the national carrier.
“You will have to suspend the operations of Air India as a part of laying off people. A lock-out will help you expedite the retrenchment programme. I know it is tough...but you cannot run an airline with 31,500 people. Heavy downsizing is required in terms of aircraft and people,” he adds.
SriLankan Airlines cut staff numbers by a fifth, from 1,500. K.J.L. Perera, president of the Jathika Sevaka Sangamaya Employees Union of SriLankan Airlines, was quoted as saying in various websites, “Given the turmoil that existed in the global aviation industry after 11 September 2001, and particularly the damage caused to our airline in July 2001, our union decided to accede to the request of the management to extend the existing Collective Agreement.”
Jurgen Ringbeck, a Dusseldorf-based senior partner with consulting firm Booz and Co. Inc. said employee productivity has to be increased and the current employee-aircraft ratio of Air India has to be reduced.
The state-owned carrier has some 210 employees to one aircraft while the global norm for a full-service carrier is 150 per plane. Ringbeck has led several international strategy and transformation assignments in transportation sector and worked with a leading European airline group on core assignments that addressed profit improvement.
3. Let the leader do the job. “The first and foremost thing required to turn around Air India is to have a clear and strong mandate from the government to transform the carrier,” says Ringbeck. “This should be supplemented by re-establishing the leadership team of Air India by incubating the best private managers who can demonstrate better capabilities to run an airline.”
Ringbeck, who heads his firms’ transportation practice, says Air India could also engage an international airline expert. “But this leadership team should be given full freedom to act and accomplish the mission. The government needs to make it very clear about the freedom before incubating them for the airline.”
In an interview for the McKinsey Quarterly in November, Malaysia Airlines’ Jala was quoted as saying: “When the government approached me for this job, I said I would need the freedom to act. Of course, they promised I would have it. For example, nobody disturbed us as we improved the yield, which often meant increasing fares. We could change flight frequencies, get rid of routes, cut costs. These were things that were virtually impossible for my predecessors to do, because they did not have such freedom.”
Union civil aviation minister Praful Patel, on 14 July, admitted that Air India used to operate non-economic flights to the north-east region, Andaman and Nicobar islands, transportation of the army troops, transportation of Haj pilgrims, disaster relief and other unprofitable but necessary operations that have been entirely in the country’s interest.
For the past 15 years, the government had engaged IAS officers to run Air India. Patel has indicated Air India would get a global CEO and a public listing in the future.
4. Bring in talent from the private sector. “Air India should also focus on its long-term market positioning, keeping in mind that it will be stock market listed and engage private capital in future. The immediate next step would be bringing executives from private companies in the top management of the airline,” said Ringbeck.
“Strategic leadership is the key element for airline restructuring. This was the case with several other international airlines. Incubating private management had worked in several instances. International senior management who know how to manage commercial operations and fleet development will help an airline to quickly turnaround,” adds Ringbeck.
According to him, the best case of airline transformation is Emirates and Lufthansa. Lufthansa posted huge loses in 1993 but turned to be a profitable airline and got publicly listed. Swiss Air is another example. In all these, leadership played a crucial role.
“Leadership is very important in two ways. One, the leader should be able to simplify complex structures of business and communicate that to the employees. Secondly, s/he should also be able to convince his/her employees that they can do it. S/he will have to communicate the sense of urgency and excitement to employees while scripting a turnaround plan,” says Raj Varadarajan, partner and managing director of the US-based Boston Consulting Group, a US-based general management consulting firm. Varadarajan advises several international airlines in business strategy.
Leading representatives of Air India’s union say they were not consulted when the management took a decision to delay salary and making a turnaround plan. A faction of union representatives is going to write to the Prime Minister separately.
5. Learn from the Satyam experience. Kapil Kaul—CEO, Indian subcontinent and West Asia, Centre for Asia Pacific Aviation (Capa), a consulting firm—points out: “Independent directors have never reacted when the carrier was flying towards huge losses. You need to have independent directors from various sectors who will take active interest in the carrier.”
Kaul also suggests a special administration body for Air India as was done with Satyam Computer Services Ltd. After the accounting fraud at Satyam came to light early this year, the government superseded the company board by appointing six directors. “If the government is unable to help Air India in retrenching people, it has to extend a special administration status to Air India, with independent directors and fiscal grants,” he adds.
According to the Air India website, apart from the functional heads and CMD, the remaining directors include Prashant Narain Sukul, joint secretary, ministry of civil aviation, N. Vaghul ex-chairman, ICICI Bank, K. Bharat Bhushan, joint secretary and financial adviser of the ministry.
Craig Jenks, head of New York-based Airline/Aircraft Projects Inc., a firm that is actively involved in strategic work for both airlines and governments, says there should depoliticization of decision making, and Air India “must be run as business and less as a government department”.
6. New network, new fleet. Varadarajan of Boston Consulting says small changes in the schedule can yield bigger results. Realigning of flights will help in better utilization of planes and ground assets, apart from load factor. For instance, instead of all flights to key metros starting at 9am from Mumbai, Air India can spread the timings with 10 minutes gap. This will ensure better utilization of airport gates, counters and staff efficiency. Balakrishnan, former Indian Airlines director, says the carrier need to review its aircraft acquisition plan and initiate heavy cost-cutting as it is unable to increase revenues in the current downturn.
Many experts suggested cutting down the loss-making routes, especially in the US, the UK, West and South Asian routes.
“If you are forced to operate such routes for political or other pressures from Delhi, then list them out and insist that the government subsidize these routes,” Inder Sethi, former deputy managing director and commercial director (1957-80) of Air India, wrote in an email to Jadhav on 15 July. At least five of his emails were reviewed by Mint.
He also suggests maximum aircraft utilization. For instance, three Boeing 777 jumbos had to sit idle at New York’s JFK and Newark airports. “In my time as head of the planning division, we had as a rule of thumb, an optimum economic utilization of around 4,000 hours for each aircraft. I presume this figure has not changed by any appreciable extent. If all three flights were rescheduled to turnaround after 3 hours, we would have 24 hours of available aircraft capacity daily. Multiplying this by 365 days, we get an annual figure of 8,760 hours or the equivalent of more than two complete aircraft,” Sethi explains.
In other words, Air India will have have two Boeing 777 aircraft sitting on ground—doing absolutely nothing. At a price, approximating $250 million (Rs1,210 crore) per aircraft, the airline could save at least $500 million. Capa’s Kaul brings a different point. “If I am the CEO of the company, I may not cancel the planes but I will defer those, because you would need brand new planes when the market rebounds.”
“I strongly feel that the fleet acquisition, albeit expensive, must continue (even if at a slower pace) in order to make Air India competitive—trying to battle it out with the old tattered aircraft will render Air India an unviable competitor from the outset,” says Wharton’s Chaudhuri.
In 2005, at the peak of aviation boom in India, Air India had placed orders for 111 aircraft—68 from Boeing and 43 from Airbus SAS—at a list price of nearly $15 billion. Out of 111 planes, 49 have already joined the airline. Last week, minister Patel informed that Air India would cut loss making routes and reschedule or cancel future aircraft deliveries. He also suggested that the carrier will return leased aircraft prior to the agreement expiry.
7. Marketing, yields and revenues. Booz’s Ringbeck says the new management should implement quick ideas to get its customers back and stop losing market share. “If you are not stopping this, you are going to lose out in the game. Therefore, marketing activities should be on the top of the list of the new management. India carriers are known for very bad customer reputation and the load factors. Therefore, it should have smart network management with competitive pricing policy. For this, a carrier should need advanced technical and IT tools. Smart pricing and market will hold the key.” He also suggests complete integration with Indian Airlines for revenue enhancement.
Many of the airline experts suggest creating small groups per aircraft and to deliver best results in terms of services, profitability and standards. “Ideally, it is better to avoid external benchmarking for short term. It would be useful to benchmark internally to meet targets,” says Varadarajan of Boston Consulting.
Earlier, private airline Jet Airways (India) Ltd had also adopted a programme among employees to “adopt a plane” where in a small group of employees will be liable for break-even of one particular plane and for offering best services. Experts advise a similar strategy for Air India.
Jala of Malaysia Airlines had created groups of 10-15 people, called laboratories, from various functions and backgrounds. All people had direct stake in a given activity and were told to come out with solutions for a problem. “In the first three months, we got rid of routes that were bleeding cash and not contributing to the profit and loss. Within another six months or so, we got rid of most of the ones that were unsalvageable. But we rescued a lot of routes, too,” says Jala.
Executives at Air India confirm that the airline sells tickets at an average 30% lesser price than the average cost of the flight. “The net yield is way lower than what Air India experienced in 1980 or even in 1986. Taking inflation into account, how can Air-India justify such a low yield?” asks Sethi. “If the intention is to drive out competition on the route, then the proponents of this scheme may be living in a fool’s paradise. Some of Air India’s competitors have much deeper pockets and many of the Arabian Gulf airlines are not concerned with profitability.
They want to “show the flag” and a few of them do not even publish authentic annual reports. I should know—I worked for one of them for five years,” says Sethi. “If a drop in traffic and competition are some of the reasons, a more suitable alternative may be a cut in capacity to meet demand.”
But the most important thing according to most of airline experts is that Air India should do its best to boost the staff morale and build on it. Air India’s Jadhav will have to bring in a “change” manager to do that.
Graphics by Sandeep Bhatnagar / Mint