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Air India’s Boeing buy forced: CAG

Air India’s Boeing buy forced: CAG
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First Published: Fri, Apr 29 2011. 12 50 AM IST
Updated: Fri, Apr 29 2011. 12 50 AM IST
New Delhi: Was India’s beleaguered state-run carrier forced, in 2006, to buy planes it didn’t need?
That’s the between-the-lines message of a report of the government’s auditor, the Comptroller and Auditor General of India (CAG), that is to be tabled in Parliament and which criticizes a ministerial group for the decision to buy 50 aircraft from Boeing Co. for Air India Ltd.
Mint has reviewed a copy of the CAG report, which looks at Air India’s acquisition of aircraft and the impact of this on its finances. The airline, which is weighed down by debt, is trying to arrive at a debt restructuring deal with banks even as it faces labour trouble.
Air India suggested that the order to Boeing include 15 long-haul aircraft valued at $3 billion (around Rs13,300 crore today) as an option. CAG’s audit shows that an empowered group of ministers (eGoM), after discussing the matter with the US firm, decided to buy all 50 aircraft because it was a good deal. The 50 were part of the 111 aircraft deal (worth around $11 billion) signed by the airline with Boeing and rival Airbus SAS in 2006, and CAG’s report claims this purchase was done without adequate due diligence or independent verification of cost-escalation claims by the manufacturers.
The CAG report doesn’t feature the airline’s response regarding eGoM’s role in finalizing the deal.
The ministry of civil aviation confirmed that the ministerial group had held negotiations with Boeing and decided to acquire all 50 aircraft, but former aviation minister Praful Patel, who was part of the group, defended the decision.
“The ministry of civil aviation placed a note for consideration of the cabinet for acquisition of 50 aircraft, 35 on firm basis and 15 on option basis,” said the ministry. “However, the cabinet decided to have the price negotiations with the manufacturer and accordingly an empowered group of ministers was set up for the purpose.”
The CAG report said the group, headed by then finance minister P. Chidambaram, negotiated with the manufacturers and “decided to place a firm order for 50 aircraft”.
The decision was “based on the strong growth potential of air traffic in India at that time and (arrived at) after extracting considerable concessions”, said Patel.
Chidambaram didn’t respond to a request seeking comment; nor did the other two members of the group, then law minister H.R. Bhardwaj and then minister of state for statistics Oscar Fernandes.
The decision “closed the option of not buying 15 aircraft in event of unfavourable conditions”, said CAG’s report.
And it merits a closer look, said an activist lawyer and a former employee of Air India.
“Normally when an airline places an order, it’s broken into ‘firm’ and ‘options’. And Air India had been doing it in all the previous orders. Why (did it change for this order)? How? Well, only a proper investigation can find out,” said Jitender Bhargava, a former executive director at the airline who retired in 2009 and has since turned a trenchant critic of the airline’s performance and efforts to effect a turnaround at it.
Prashant Bhushan, a Supreme Court lawyer, who is pursuing a public interest litigation seeking a court-monitored investigation into the deal, said: “Clearly this needs investigation. Prima facie it’s a thoroughly corrupt case as big as the 2G scam, involving huge kickbacks, politicians and bureaucrats. Here is a case where Air India, which was flying below capacity, was forced to buy aircraft, which were probably not required, at an exorbitant rate. We will press for a court -monitored investigation by the Central Bureau of Investigation (CBI).” Bhushan is one of the leading actors in the ongoing investigation into the allotment of licences and spectrum to telcos on allegedly favourable terms (aka the 2G scam) and his public interest case succeeded in having this investigated by the federal investigation agency CBI under the supervision of the Supreme Court.
The CAG report paints a bleak picture of the airline’s future. There is also a market divergence between the turnaround plan detailed by Air India to CAG and the airline’s actions. For instance, in the plan submitted to CAG, Air India speaks of a reduction in fleet size by returning leased aircraft while the plan put forth by the airline in March seeks to effect a turnaround by expanding, and adding, by 2015, 113 aircraft to its fleet size of 135. Last week, the airline uploaded a fresh tender on its website to lease at least 16 new Airbus A320s to add to its current fleet of 48 A320s for use on flights within the country. “The turnaround plan has to be dynamic,” said an Air India spokesman. “If you have to compete in the market, you have to grow. Where is the controversy?”
Air India, which has capitalized the acquisition cost, has around Rs40,000 crore of debt on its books and was losing around Rs19 crore a day in the first half of 2010-11. It has sought an equity infusion from the government. Although the government has released some money, it will put in more only after the finance ministry vets and clears a turnaround plan for the airline. The Air India spokesman added that the airline’s board had approved the March turnaround plan, in principle, but confirmed that a final clearance is required from the finance ministry.
tarun.s@livemint.com
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First Published: Fri, Apr 29 2011. 12 50 AM IST
More Topics: Air India | Nacil | Boeing | CAG | Aviation |