The travails of Air India, the country’s national carrier, are well-known. Marred by inefficiency and hobbled by debt, the carrier has lost market share dramatically since Indian skies were opened to competition. A new report by the Comptroller and Auditor General (CAG), tabled in Parliament on Thursday, may be useful in apportioning the blame.
Among the issues looked into by CAG, the one that stands out is that of Air India’s purchase of 50 medium capacity, long/ultra- long-range aircraft. Instead of turning into an acquisition of productive assets, it is now a potent source of trouble.
The acquisition saga began in 1996. For eight years, until 2004, there was no movement. Then suddenly, in less than a year not only was the purchase agreement firmed, it crossed all “hurdles”: the company’s board, the Planning Commission, the ministry of civil aviation, the Union department of expenditure, an empowered group of ministers and the cabinet committee on economic affairs. All approvals came at rapid-fire pace.
Two things stand out: One the increase in the number of planes from 28 to 50 and, two, the timespan of decision making. Ordinarily, any decision in a well-run firm that involves large capital expenditure is based on a careful appraisal of the business environment. Expected revenue compared with committed expenditure is a crucial metric, one that needs careful evaluation. Not only did Air India not make that calculation carefully, it also took a big risk by funding the purchase mainly through debt instead of internal savings.
In the instant case, it was not as if there was a dramatic change in the aviation business that warranted such optimism. True, one could say the future looked bright, but that required at looking factors beyond the purchase of planes alone. As the CAG report pointed out, the assumption that increased capacity would automatically lead to an increase in market share was not borne out. It is a weak assumption to make in any business, let alone aviation. Experience shows that firms, which managed to corner a tidy market share, landed in financial trouble in later years.
The lesson is clear: even with the oversight of so many government agencies, departments and political leadership, the decision went bad. This is another example that illustrates the wisdom that governments should not run businesses and should focus on running the country.
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