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Air India seeks to get its act together

Carrier emulating Jet in a bid to rid itself of debt, aims to post a net profit by 2020
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First Published: Mon, Nov 19 2012. 10 21 PM IST
The carrier has not only appointed a consultant to help it raise funds from its real estate assets but is also seeking help to sell some planes and spin off some subsidiaries into separate entitities. Photo: Ramesh Pathania/Mint
The carrier has not only appointed a consultant to help it raise funds from its real estate assets but is also seeking help to sell some planes and spin off some subsidiaries into separate entitities. Photo: Ramesh Pathania/Mint
Updated: Mon, Nov 19 2012. 11 33 PM IST
Mumbai: The country’s oldest airline, Air India Ltd, is undertaking a series of steps to rid itself of debt while hoping to post an operating profit by the end of fiscal 2013 and a net profit by 2020, according to two senior airline executives.
The state-run firm has not only appointed a consultant to help it raise funds from its real estate assets but is also simultaneously seeking help to sell some planes and spin off some subsidiaries into separate entitities. It is discontinuing loss-making flights, reconfiguring its aircraft mix, following a hybrid model—flying both as a low-fare and full-service airline—and connecting more flights to Delhi airport to make it a true hub.
According to senior airline executives, who requested anonymity, the government’s equity infusion, induction of Boeing 787 Dreamliner planes coupled with the woes of rival Kingfisher Airlines Ltd, and punctual performance are helping the airline regain its bounce.
Air India had a debt of Rs.43,777 crore on its books on 31 December. It also has accumulated losses of Rs.27,000 crore from the past five years. The government in April approved a Rs.30,000-crore package, to bail out the loss-making company, which included an upfront equity infusion of Rs.6,750 crore and an assured equity support of Rs.23,481 crore until 2020-21. To be sure, there are critics who say Air India is beyond redemption.
“I firmly believe Air India cannot be saved and there is splendid inactivity at this carrier,’’ said Hormuz P. Mama, a senior aerospace journalist and a close observer of Indian aviation.
“Air India is trying to sell planes when there are 4,000 planes parked idle all around the world. It is spinning off profit centres—ground handling and engineering divisions—while the main businesses—passenger and cargo—are not making money,” Mama said.
Air India is largely emulating India’s second largest airline by passengers carried, Jet Airways (India) Ltd, which is discontinuing flights on loss-making routes, selling planes and monetizing its real estate assets, according to an airline consultant who requested anonymity.
Jet Airways is a private entity and, hence, decisions can be made quickly. Being a government-promoted entity, Air India lacks flexibility. For instance, it could not sell its Boeing 777 planes till now. Jet Airways had already demonstrated how to use Delhi as a hub. On the top of that, Air India is flying high largely because of government support,” the consultant added.
Jet Airways had already discontinued several loss-making routes, including Mumbai-Johannesburg, Chennai-Kuala Lumpur, Hyderabad-Dubai and Chennai-Dubai. It is also reconfiguring planes to add more business-class seats, selling planes, executing sale and lease-backs of planes and reducing capacity to chart a path to profitability, K.G. Vishwanath, vice-president (commercial strategy and investor relations) at Jet Airways, said in a conference call to analysts last week.
One of the senior Air India executives admitted the airline could not sell five of its grounded Boeing 777 planes for lack of suitors. “We have sought assistance from the aircraft manufacturer Boeing (Co. of the US) to sell these planes. We are also talking to airlines that are using these planes, including Ethiopian, Delta Airlines, Air Canada, Emirates and Qantas,” he said.
He said Dreamliner planes are replacing Boeing 777 planes that are flying the Delhi-Frankfurt and Delhi-Dubai routes. Dreamliners will allow the airline to save on costs. A Boeing 787 costs around $210 million (Rs.1,165 crore), while a Boeing 777 is around $260 million at list prices. And even though the Dreamliner is smaller than a Boeing 777, it is more fuel-efficient.
According to the Boeing website, the 787-8 Dreamliner will carry 210-250 passengers on routes of 14,200-15,200km, while using 20% less fuel than airplanes of a similar size. A Boeing 777 plane can seat 365 passengers and fly up to 14,685km. Air India has also appointed SBI Caps consultant to advise it on spinning off its subsidiaries.
“SBI Caps will draw a roadmap for operationalization of these two entities as separate profit centres. A certain percentage of revenue of these entities will be shared with the parent company, Air India, as and when these companies start making profit,” said one of the airline executives cited above.
SBI Caps executives did not offer any comments.
By hiving off its divisions, Air India hopes to drastically lower its aircraft-to-employees ratio—an efficiency metric that’s key to its turnaround. The ratio for the airline will drop to 1:100 from 1:265 now, bettering Lufthansa German Airlines’ 1:127, Singapore Airlines’ 1:140, and British Airways’ 1:178. “These firms were supposed to get operationalized this month; now it will be done during December,” the executive said. The executive added the airline has appointed real estate consultancy DTZ International to monetize 105 properties of the airline in the hope of raising Rs.5,000 crore in 10 years.
Route rationalization is one of the key decisions taken by Air India after doing an indepth route analysis, according to the second airline executive.
“We have discontinued several loss-making routes. We had cancelled a third flight to London from Delhi. We had withdrawn Toronto operations until further notice. We had cancelled flights to Damam from Thiruvananthapuram, Mumbai and Hyderabad. We have also restructured domestic routes,” he said.
The airline, for instance, has extended Bangalore-Hyderabad flights to Goa. Likewise, Thiruvananthapuram-Bangalore flights now extend up to Male. “Withdrawing from loss-making routes will help the carrier save Rs.50 crore annually,” said the second executive, adding 14 Airbus 320 flights have been reconfigured into all-economy flights.
In certain cases, the airline has reduced business-class seats on domestic flights to 12 from 20 to increase capacity (Jet Airways is doing the opposite, by gradually adding business-class seats).
“We are also increasing the acquisition of passengers through our website. We have been getting 11% of our bookings through our website. Earlier, the figure was a mere 5%,” he said.
Air India has also tied up with E-Billing Services Pvt. Ltd, or EBS, to lower fraud rates on Internet bookings.
Nishanth Chandran, co-founder and chief executive officer at EBS, said Air India implemented fraud-checking solutions during the first half of 2011.
“The time taken to conduct reviews had reduced from 8 to barely 2 hours. This meant that, as online transaction levels rose, the firm had no need to increase the number of staff carrying out manual reviews—a considerable cost saving,” Chandran said.
Air India’s charge-back rates (frauds on booking while online) fell from 0.34% to 0.01% within six months between April and September, he said. The airline executive said at least 81 domestic flights support nine long-haul international flights at Delhi, to make it a hub. “We know this is a very small number for a hub and spoke operations. But we are gradually adding more connections...We will reconfigure more planes. But we are not keen on starting a separate, low-cost brand on the domestic front as of now,” he added.
Air India operates Air India Express as a low-fare carrier on global routes. “We will be following a hybrid model—full-service facilities as well as low-fare offerings,” the executive said.
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First Published: Mon, Nov 19 2012. 10 21 PM IST