CAG raps Air India for understating losses

Air India sold five Boeing 777-200 LR aircraft to Etihad Airways at a lower price and ‘significantly’ understated its losses, the CAG report said


The government bailed out heavily-indebted Air India with $5.8 billion funding in 2012. Photo: Ramesh Pathania/Mint
The government bailed out heavily-indebted Air India with $5.8 billion funding in 2012. Photo: Ramesh Pathania/Mint

New Delhi: Air India lost money on the sale of five planes, understated its losses, was short-changed in a plane deal and could not meet most performance targets set for winning about Rs42,000 crore in a government equity infusion, government auditor Comptroller and Auditor General of India (CAG) said in a stinging report on Friday.

The 197-page report on the Turnaround Plan and Financial Restructuring of Air India Ltd was tabled in Parliament on Friday. Another report in 2011 on the merger of Air India and Indian Airlines had come down hard on the aviation ministry, then under Praful Patel, for failing to protect Air India’s interests.

Air India “significantly” understated its losses during the period under audit.

The understatement of losses was to the tune of Rs1,455.8 crore in 2012-13, Rs2,966.66 crore in 2013-14 and Rs1,992.77 crore in 2014-15.

Air India’s turnaround plan included infusion of Rs42,182 crore in equity between 2011-12 and 2031-32 and restructuring of working capital to the tune of Rs22,157 crore. Monetization of assets was projected to bring in revenue of Rs5,000 crore between 2012-13 and 2021-22.

The company was expected to be Ebitda-positive from 2012-14 and generate a cash surplus from 2017-18. Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability. It has missed the target so far.

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CAG has asked the government to review the equity support promised to Air India over the next decade.

Air India’s working capital requirement exceeded the prescribed limits, which resulted in the airline availing of additional short-term loans. The increase in working capital requirements and a consequent increase in short-term loans was due to its failure in generating projected revenue. That’s mainly on account of its inability to meet its asset monetization target and increase in staff costs.

In these years, in contravention of rules, Air India approved the promotion of 2,482 managerial employees, allowed crew members to stay in five-star hotels and free passage for family members of staff. The airline also did not meet targets set for utilization of planes and on-time performance but was able to do so for yields.

According to the CAG report, Air India sold five Boeing 777-200 LR aircraft to Etihad Airways PJSC at a significantly lower price than the indicative price of $86 to $92 million per aircraft obtained by the company before initiating the sale process.

It incurred a book loss of Rs671.07 crore on the sale of the five aircraft and had to pay Rs324.67 crore towards interest on loans availed for the procurement of these aircraft.

This price was significantly lower than what it obtained from consultants Avitas and Ascent. “The reports (of these consultants) were not made available to Audit despite request,” the CAG said.

“The report of M/S Aviation Specialist Group which estimated a lower realisable value and on the basis of which the aircraft were sold to Etihad Airways was obtained only after opening of the financial bids. Audit has commented on the aberration in the process of sale where the valuation on the basis of which the sale was finalized was obtained only after completing the tendering process,” CAG said.

Etihad did not reply to emailed queries from Mint.

Air India ordered 68 planes from Boeing in 2006 and the CAG, in its 2011 report came down hard on the aviation ministry for pushing the airline to buy more aircraft than it needed.

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In its latest report, the CAG said it had been vindicated.

The airline was to initially procure only 35 planes with 15 options, which became a deal for 68 planes valued at about $11 billion.

Consultant SH&E, appointed by AI in 2009, said the airline’s wide body fleet was oversized, the CAG said in its latest report.

“It was also seen that B-777-200LR aircraft was unviable due to higher unit cost. These facts indicated that procurement of B777-200LR aircraft was ill advised,” it said.

Air India also failed to reach an agreement with Airbus on the terms of setting up an aircraft maintenance facility in return for an Airbus plane order in 2006.

“All the aircraft have since been delivered though the commitment of Airbus regarding setting up of a MRO (maintenance, repair and overhaul) facility had not been fulfilled. Though Airbus did not fulfil its commitment regarding investment in MRO facility, Air India paid the agreed sale price for A320 aircraft to Airbus,” CAG said.

A delay in induction of Boeing 787 aircraft led to Air India operating existing, inefficient aircraft on some routes. Air India lodged a claim of $710 million against which the company received only $328 million from Boeing, the CAG noted.

Six Boeing Dreamliner 787 planes had to be grounded soon after induction for four months because of malfunctions in their lithium-ion batteries.

“The purchase agreement did not contain any provision for levying penalty on the manufacturer in case of inherent technical fault,” it said.

Against a claim of $50 million made by Air India, Boeing has paid only $24 million in cash and $3.4 million in waiver of late fee.

Air India incurred huge expenditure due to the unplanned grounding, the CAG report said.

Boeing Dreamliner planes were also heavier by 10 tonnes than what was promised, which meant more fuel consumption. There were no safeguards to enforce compensation.

“Boeing refused to negotiate the ceiling on compensation but offered negotiation in good faith,” it said adding, “Air India calculated the loss by way of extra fuel at $400 million.”

Boeing did not reply to emailed queries by Mint.

The aviation ministry also failed to protect Air India’s interests during the period of the audit, the report said.

A ministerial delegation decided in 2011 that the existing bilateral entitlements for foreign carriers should not be relaxed until Air India utilized a significant portion of its targeted bilaterals and derived certain advantages vis-à-vis its competitors.

Still the ministry increased seat entitlements for Dubai in February 2014 from 54,000 seats to 66,504 seats per week-up 22.7%.

“This enhancement was based on the high load factor of Dubai carriers (led by Emirates instead of Indian carriers utilization). Audit noticed that the enhancement led to an increase in the 6th freedom carriage of Dubai carriers..from 60.69% in 2010-11 to 66.95% in 2015-2016,” it said.

Airlines like Emirates, Etihad and Qatar carry forward passengers from India via their hubs to the US, Europe and other countries under the 6th freedom rights.

Air India’s estimated loss adds up to $4.5 million per year for every 1,000 seats per week given to Emirates, it noted

The audit report also said that the aviation ministry enhanced entitlements to Abu Dhabi from 13,330 seats per week to 50,000 seats per week at the request of Etihad Airways.

Air India estimated that by winter 2015, the diversionary loss due to a 375% increase in seats on the India-Abu Dhabi route was Rs3,464 crore per year.

These increases were similar to the ones made by the ministry in the past decade for which CAG had pulled it up in its last report too.

Dubai’s allocation rose from 10,400 seats a week to India in 2003-04 to just six cities to 54,200 seats a week and 14 cities by 2008-09.

“The sequence of events clearly demonstrates the one-sided nature of benefits to Emirates/Dubai,” CAG had said then, adding that while Dubai’s aviation authority protected the interests of its airlines, India’s did not.

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