Expand fleet, improve occupancy to turn around AI, suggests Deloitte

Expand fleet, improve occupancy to turn around AI, suggests Deloitte

New Delhi: Debt-laden Air India needs to expand aggressively, adding 113 aircraft to its fleet of 135 in four years, to effect a turnaround, Deloitte Consulting India Pvt. Ltd has suggested.

The third turnaround plan in as many years comes at a time the state-owned carrier is losing about Rs19 crore a day and faces tremendous pressure on daily cash flow.

Air India had asked the consulting firm to suggest a turnaround approach from four options, two officials familiar with the matter said, requesting anonymity.

Also See Air India’s Three Turnaround Plans (PDF)

The Deloitte plan says a turnaround is possible if flight occupancy increases from 68% to 75% and 80% for low-fare division Air India Express and market share rises to 21% from 17.6% in 2010.

It has also suggested shifting part of the 30,000 personnel to engineering and ground-handling subsidiaries and using right of first refusal by the national carrier for international operations.

An industry expert expressed reservations on the plan.

For airline firms close to bankruptcy, expansion is always the last thing on the mind, according to Ernest S. Arvai, president, the Arvai Group Inc., a US-based aviation consulting.

“Normally, we would advise restructuring in bankruptcy, voiding union contracts, introducing world-class productivity requirements at reasonable wages, carefully analysing profitable routes, and working to modernize fleet and services," Arvai said.

“Expansion is virtually impossible until financial conditions improve, as aircraft cost money to lease, and lessor charge outrageously high rates to poor credit risks. Expansion also requires supporting operations while routes develop, which requires cash flow, making expansion virtually unfeasible."

The Air India board is expected to decide on the suggestions at a meeting on Wednesday in Mumbai.

The latest plan envisages increasing Air India’s fleet strength from 135 to 248 by 2015.

This will need to be met by a comprehensive debt recast plan worked by SBI Capital Markets Ltd and substantial cash infusion from the government, said one of the two officials cited above.

The government has already paid out Rs2,000 crore in two years to bail out the airline and has earmarked another Rs1,200 crore in the fiscal starting 1 April.

To be sure, it is unclear how the funding for these new aircraft will be met as airline profit margins are significantly lower, including for some of the world’s best-run carriers.

“Some established LCCs (low-cost carriers) enjoy low double-digit net margins during upturns," said Vikram Krishnan, analyst with US-based consulting firm Oliver Wyman. “Network carriers are even more exposed to business cycles, and often see single digit margins, especially in the US, even at the best of times."

In a July 2010 turnaround plan, an Air India panel sought to increase fleet size by 2014-15 to 275.

The panel included chairman and managing director Arvind Jadhav, former aviation minister Praful Patel, Ficci chief Amit Mitra, former Indian Air Force chief Fali Major, chairman of Mahindra and Mahindra Ltd, Anand Mahindra, and former Air India chief operating officer Gustav Baldauf.

A 2009 turnaround plan announced by Jadhav did not mention any fleet increase.

Air India incurred losses of Rs2,226.16 crore, Rs5,548.26 crore and Rs5,542.44 crore in the three fiscal years till March 2010, aviation minister Vayalar Ravi told Parliament this month.

For first six months of the current fiscal year, the firm has already clocked Rs3,450.57 crore in losses and is finding it difficult to pay salaries to employees every month.