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Air India risks turbulence as it seeks to cut costs

Air India risks turbulence as it seeks to cut costs
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First Published: Wed, Mar 03 2010. 10 13 AM IST
Updated: Wed, Mar 03 2010. 10 13 AM IST
Mumbai: State-run carrier Air India is set for dramatic cost-cutting in the months ahead as part of a government bailout that will test the willingness of workers to accept painful restructuring.
Last month, the Indian government approved an injection of $173 million for the ailing company and Civil Aviation minister Praful Patel has told the airline it must “shape up” to receive the funds.
The money is part of a phased planned government injection of Rs50 billion ($1.1 billion) over three years for the carrier, which has reported massive losses in recent years.
But the government has insisted the money will only be handed over if the airline reduces costs — partly by reducing its bloated fleet size by some 30% to 105 aircraft by March 2011, and also by cutting wages.
“The airline is in a mess. Tough decisions will need to be made, for which the Air India leadership needs a free hand,” said KPMG India aerospace analyst Amber Dubey, arguing that a temporary shutdown might be necessary.
Air India’s once-dominant market share has shrunk to 18% in the face of fierce competition from private carriers, including more nimble low-cost operators, after India liberalised its commercial aviation market in the 1990s.
Some analysts have suggested privatisation but the government insists such a move is not on the cards, and that the carrier has a role to play in flying to remote parts of the nation not served by commercial airlines.
The group operates 435 flights to 117 destinations in India and overseas daily, with a fleet of 146 aircraft.
Average salaries at Air India, which employs more than 31,000 people, are 15 to 20% above those at private-sector rivals. It averages 230 employees per aircraft, compared with 105-120 at private airlines.
“Rationalising manpower is a process and will take time,” Air India chairman and managing director Arvind Jadhav told reporters earlier this month.
The company tried last year to cut loss-making routes and wages, but it ran into stiff resistance from pilot and staff labour organisations and was hit by wildcat strikes.
A bid to cut performance-linked pay sparked a five-day walkout by pilots in September, resulting in the cancellation of 400 flights.
George Abraham, secretary of the Aviation Industry Employees Guild, a trade union, is willing to consider salary cuts but “only where performance-linked incentives for senior pilots and aircraft engineers are substantial”.
Outright job cuts are out of the question, he said, adding: “No decision can be taken without our consent.”
But aviation analyst Mahantesh Sabarad at Mumbai-based Centrum Broking said: “The airline is overstaffed. Job cuts is the way ahead for Air India.”
The government’s planned bailout calls on Air India to match the $1.1 billion in handouts with a similar amount in cost cuts and increased revenue, which analysts say will be a challenge.
The airline declared a $1.19-billion net loss for the year to March 2009 due to the global economic downturn and reduced passenger traffic.
For the first half of the current fiscal year, the airline trimmed its operating loss by 23% to $438.2 million but it is still a long way from profit, industry experts say.
With India’s economy rebounding, private carriers are expected to post a total profit of $250 million to $300 million in the fiscal year starting in April, the Centre for Asia-Pacific Aviation said.
But Air India will remain in the red, dragged down by high operational costs and a fall in passenger numbers, the Singapore-based consultancy said.
“Air India will continue to have cash deficits for the next five to seven years which could cumulatively amount to four to five billion dollars,” said Kapil Kaul, India chief of the consultancy.
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First Published: Wed, Mar 03 2010. 10 13 AM IST