Air India’s failure points to inadequacies of bureaucrats as PSU leaders
Sixteen years after he first mooted the idea of disinvesting the government’s stake in Air India, minister for finance and defence Arun Jaitley has finally cleared the suspense on whether the present government would bring to an end the long-running tragedy.
Jaitley, who was disinvestment minister in 1999, said last week that the government should get out of the perennially loss-making airline and look to privatize it.
But while his prescription is right, we are still not ready to nail those who are responsible for the giant hole the public sector airline finds itself in. Somewhere, the several bureaucrats co-opted over the years to head Air India need to be held accountable.
Or maybe it is successive governments that thought it fit to appoint Indian Administrative Service (IAS) officers with little relevant experience or expertise, to head such a complex business. It isn’t just Air India but a whole host of public sector undertakings in businesses as diverse and complex as steel, oil and shipping, that have been steered by leaders who are hardly equipped to handle the challenges these industries present.
Sure, Air India should be shut down or sold off to the highest bidder the government can get because it has been a chronic underperformer which has swallowed bucketloads of scarce capital and produced nothing that can be deemed public good.
But while most critics have panned the airline for its quality of service, its operational inefficiencies as well as its woeful productivity levels, what’s not been emphasized enough is how little understanding the men charged with leading it over the years, have had of the business itself. Before Ashwani Lohani, an officer of the Indian Railways Service, took over as chairman and managing director in September 2015, the airline was led by men from the IAS.
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The airline business today, at its core, is about acquiring the planes at the right price in the right configuration. The best airlines in India—IndiGo and SpiceJet—figured out that the operational drivers of profitability are on-time performance, which is as important for the passengers as it is for the airlines for whom the priority is turning around every aircraft rapidly even if it means leaving a few passengers behind and running with a few empty seats. Equally, given that the business works on leverage, it is about smart use of capital. To that end, it is actually a derivatives business.
Sadly, given the access to free cash from the government’s coffers, none of the people who have led the airline over the years had either the inclination or the nous to figure this out. It is little surprise then that men like Rakesh Gangwal, a sector veteran who has in the past been part of turnarounds at Air France and US Air, along with Rahul Bhatia at IndiGo and Ajay Singh at SpiceJet have virtually run rings around Air India, leading to a steep fall in its market share. This, despite the captive customer base of government officials forced to use its services.
Nor did successive leaders of the stricken airline display the ability to seize the opportunities available in the market. In the last five years, IndiGo’s success and the failure of Kingfisher Airlines indicated what the market was looking for—a cheap, reliable, no-frills flying option. Across the world too, the most profitable airlines in 2016 based on operating margins included Allegiant Air, the US ultra low-cost carrier, and Ryanair, another discount carrier.
It was a slot Air India was perfectly geared to fill. With its fleet of 140 planes and 72 domestic destinations, it had the economies of scale. But Air India Express, its low-cost international subsidiary launched in 2005, has been a chronic underperformer as well.
Furthermore, most private domestic airlines can’t wait to go overseas since that’s where the real moolah is. Air India flies to 41 international destinations including all those which are on the travel maps of most Indians. Yet, it hasn’t been able to capitalize on this advantage either.
Falling oil prices have been a bonanza for airlines in India and across the globe since fuel accounts for nearly 18% of the industry’s cost structure in 2017. Its bloated structure though, has meant that Air India was among those which took least advantage of this drop.
The International Air Transport Association (IATA) expects the global airline industry to post a third consecutive year in which airlines will make a return on invested capital (7.9%) which is above the weighted average cost of capital (6.9%). Finding a buyer for the national carrier of one of the world’s fastest growing aviation markets should not be too difficult a task even if the government will have to soften the deal with adequate sops.
What’s more important is to use the Air India example to accept that installing men and women with little understanding or experience of a business to head a large public sector undertaking in a competitive market scenario is a recipe for disaster.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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