Air India’s Star-crossed revival11 min read . Updated: 03 Sep 2012, 09:06 PM IST
Flag carrier’s bailout could face fresh hurdles after its bid to enter the Star Alliance was rejected
Flag carrier’s bailout could face fresh hurdles after its bid to enter the Star Alliance was rejected
New Delhi: Air India Ltd’s 30,000 crore bailout, aimed at putting the state-owned carrier back on the path of profitability by 2018, could be in jeopardy after the airline failed to win entry into Star Alliance. Becoming a member of the world’s largest airline network was one of the key steps in the turnaround plan approved by the cabinet.
The infusion of funds into Air India, in installments until 2021, is contingent upon the airline’s ability to stick to the bailout script approved in April.
Air India was to join Star Alliance last year, but the airline grouping barred its entry on grounds that the flag carrier had failed to meet membership conditions. Rival Jet Airways (India) Ltd has now applied to the government to join Star, which counts US Airways Group Inc., United Air Lines Inc., Deutsche Lufthansa AG, Singapore Airlines Ltd, Scandinavian Airlines, SWISS and Air China among its members.
In a detailed noted to the aviation ministry, Air India has explained how its bid for membership of Star had come unstuck. The note slammed Star for dumping Air India and being “unethical" in not keeping its side of the bargain after extracting several benefits for Star member-airlines from the Indian government.
The airline also made a strong case for the government not to support Jet’s entry into Star Alliance.
An email sent to a Jet Airways spokeswoman seeking comment remained unanswered. Mint could not reach her on the telephone.
Joining Star Alliance would have made Air India the preferred Indian partner of other airlines grouped in the network and enabled it to increase revenue.
“Estimates of incremental revenue from Air India’s entry into Star have been included in the revenue projections for the turnaround plan approved by the government of India," said the Air India note. “Denial of entry of Air India into Star Alliance would result in a major setback to the proposed revival of Air India as supported by the government’s bailout package—particularly since the expansion plans of Air India depends to a large extent on the feed/defeed from other airlines expected from joining of AI (Air India) into Star."
Mint has reviewed a copy of the July note written by Air India to the aviation ministry, a letter by Lufthansa chief executive officer (CEO) Christoph Franz in 2011 to then aviation minister Vayalar Ravi, one by Jet Aiways in July to the aviation ministry seeking membership of Star Alliance, and a letter by Star Alliance CEO Mark Schwab to Jet Airways in March inviting it to join the network pending the approval of Star’s board.
Mint has also seen a letter written in 2005 by Air India to the aviation ministry, supporting enhanced entitlements for Lufthansa to increase flights to India and a commercial agreement of 2009 between Air India and Lufthansa to back its induction into Star Alliance. Lufthansa was mentoring Air India for membership of Star Alliance; it has now joined a strategic alliance with Jet Airways.
Importantly, the latest note also reveals that the merger of Air India and Indian Airlines was effected, at least in part, at the behest of Star Alliance. The botched merger executed in 2007 has already resulted in losses of ₹ 27,000 crore, aviation minister Ajit Singh told Parliament in August.
Retired Air India executive director Jitender Bhargava warned that losses could mount unless the government, in its capacity as Air India’s owner, intervened to ensure that the turnaround plan isn’t derailed.
“The success of the turnaround plan, which has seemingly been put into effect, needs urgent attention not only at the operational level, but (also) at the management structure level," said Bhargava, who was with the airline when it was invited to join Star, ordered $11 billion of aircraft, and merged with Indian Airlines to create what’s now Air India Ltd.
“Someone—be it the minister of civil aviation; the secretary, civil aviation; the chairman, Air India, or the entire board of directors—has to assume ownership of the turnaround plan and be accoutnable for it as too many wrong decisions have been taken, harming Air India, without anyone being held accountable for pushing AI to the brink of bankruptcy," Bhargava said.
Air India had a debt of ₹ 43,777 crore as of 31 December. It has accumulated losses of ₹ 27,000 crore in the past five fiscal years.
Air India has won cabinet approval to receive 27 Boeing 787 Dreamliner planes worth about $5 billion at list price over the next few years. All the planes will be used on international routes, but will not have passenger feeds from Star member-airlines, as it had hoped.
The failure of the airline to join Star Alliance could send the entire math of the turnaround plan into a spin, said an official in the civil aviation ministry, who did not want to be identified. Air India may find it difficult to meet annual targets and convince finance minister P. Chidambaram to release funds, leading to delayed salaries, oil companies cutting off fuel supplies, and further escalation in industrial unrest, this person said.
The saga of Air India’s ill-fated dalliance with Star Alliance began in 2005, although the Indian airline was only invited to join the grouping in December 2007 after the merger of Air India and Indian Airlines was officially announced by then aviation minister Praful Patel. A key justification for the merger was the need to have a bigger airline worthy of becoming a member of Star.
The agreement between Star and Air India, according to the documents reviewed by Mint, had a non-exclusivity clause under which the flag carrier agreed to “cooperate in good faith and support entry of another Indian carrier, should the Star carriers decide to invite another Indian carrier to join Star".
After further talks between Air India and Star, it was finally decided that the entry of a second Indian carrier would be considered only after Air India actually joined the network and established commercial cooperation with key Star carriers including Lufthansa, Singapore Airlines and Turkish Airlines.
To join Star, Air India was asked to comply with 87 conditions, ranging from common service standards to technology integration. The Indian airline was allowed several extended deadlines as a result of the ongoing merger process that delayed technology integration. A final deadline of July 2011 was set for its entry, but sometime in late 2010, the Air India note claims, Star changed its stance.
Mint could not independently verify all the claims made by
At a meeting of the board of Star Alliance in December 2010, the grouping decided that it should work towards inducting Jet Airways without waiting for approval from the Indian government.
Air India immediately asked the civil aviation ministry to remind Star that any announcement of a second Indian carrier could only be made after Air India joined the alliance—terms that had been agreed by the ministry, Air India and Star on various occasions, including at a meeting held by then civil aviation minister Patel with Star CEO Jaan Albrecht and Air India’s chairman and managing director at the time, Arvind Jadhav, in April 2010.
By 2011, however, the alliance had begun to push for Jet’s induction.
Star Alliance wrote in a letter dated 16 February 2011 to Air India that “the ministry’s position was very clear that it supported the entry of Jet in Star, but Air India should have first-mover advantage and, therefore, an announcement of Jet’s future membership in Star was only to be made after the official joining of Air India".
In another letter dated 21 March 2011, Star said its member carriers would vote in support of Air India’s induction if the alliance received an unambiguous assurance from Air India in support of inducting Jet Airways into the network. Air India was asked to support a “common plan to push" this matter with the Indian government.
At a meeting on 18 April 2011 between the German government officials and then aviation minister Ravi, the visiting minister raised the issue of Jet’s entry into Star. Christoph Franz, chairman CEO of Lufthansa (who was a part of the German delegation), mentioned that the Star carriers wanted to link the induction of Air India with the government’s willingness to approve Jet Airways’ entry into the grouping.
Ravi told the delegation that the Indian government would not accept any conditions, Air India’s note to the ministry said, adding that Franz confirmed in that meeting that Air India would join Star first.
Yet, in a 10 June 2011 letter addressed to then aviation secretary Nasim Zaidi, Star wrote that “it is essential that Star receives a decision from the government of India that it will approve the membership of Jet Airways in Star in the event that it applies for such membership, and that it will support other possible areas of cooperation that Jet may wish to have with other Star carriers".
Star explicity linked its members’ willingness to vote for Air India’s induction to the government’s permission for Jet to join the alliance, the note adds.
Then, in a meeting with secretary Zaidi on 18 July 2011, Star insisted on a written assurance from the Indian government on Jet Airways, again emphasizing the point that in the absence of such an assurance, Air India may not be admitted into the alliance. The alliance also wanted a written assurance from the ministry of civial aviation that all code-sharing agreements between Jet and Star carriers would be approved by the government.
Despite Air India meeting all the admission requirements before the extended timeline of 31 July 2011, on 1 August Star issued a press statement saying the integration of Air India into the global airline alliance had been suspended for not meeting “minimum joining conditions that were contractually agreed in December 2007".
It refused to divulge what the unmet conditions were.
In reply to a query from Air India, according to the airline’s note, Star “advised that the ‘good faith cooperation’ required from Air India in support of Jet Airways joining the alliance was missing.
Ravi told Parliament in August that the new conditions put forward by Star were unacceptable.
In a letter dated 2 August 2011, addressed to Ravi, Franz of Lufthansa said Air India could not “clear the last hurdle and it did not meet the obligations under the conditional agreement".
Air India said in the note that the correspondence between Star and Air India “established that Air India was not admitted into Star Alliance because it did not facilitate the entry of Jet into the alliance".
“This utter disregard for the government of India and the national carrier goes way beyond the agreement between Air India and Star," the airline said. “Further ‘insult to injury’ was Star’s decision to invite Jet on 8 March 2012 to join its network and then advising Air India on 19 July 2012 that it would not be considered for Star membership," the airline said.
Star Alliance spokesperson Markus Ruediger did not address specific questions emailed to him on Air India’s failed membership bid. “At present, there is nothing to add to official public comments made by Star Alliance on this topic," Ruediger said in an email.
“Lufthansa regrets that AI could not join Star Alliance," the German carrier said in an emailed comment in response to a Mint questionnaire. It did not address specific queries on its mentoring of Air India.
Asked about the likelihood of Jet Airways joining Star, the alliance’s spokesman Ruediger replied, “Future new members are only announced once the necessary preparatory work has duly been completed."
Air India chairman and managing director Rohit Nandan wrote to civil aviation secretary K.N. Srivastava in August protesting Jet’s entry into Star Alliance pending Air India’s admission, said a person with knowledge of the matter. Nandan was replying to a letter from the ministry, which sought his comments on Jet’s application for entering Star Alliance.
The civil aviation ministry, however, in August approved the strategic alliance between Jet Airways and Lufthansa that will help them sell seats on each other’s flights, Mint reported on 29 August.
Jet Airways gaining entry into Star ahead of Air India could bring other problems for the national carrier. “Jet may veto Air India’s entry into Star," said a government official who requested anonymity.
Throughout Air India’s extended flirtation with Star, members of the alliance benefitted. Air India said in its note that it had supported enhanced aviation ties with Germany because Lufthansa had agreed to mentor Air India for its entry into Star.
Subsequent to the 2005 takeover of Swiss International Air Lines Ltd by Lufthansa, Air India supported operations by Swiss although the airline is not owned by Swiss nationals as required under an India-Switzerland bilateral agreement. Opportunities to fly to India were enhanced for other Star carriers such as Singapore Airlines.
Air India, in line with the agreement signed with Star Alliance, offered member-
airlines of the network commercial concessions, in the process losing revenue, which it had expected to make good through benefits it anticipated by winning entry into Star. “These decisions may be questioned by" auditors, Air India writes in its note, in a likely reference to the Comptroller and Auditor General, the government auditor.
“It is unethical for Star carriers to corner the benefits with Air India’s support and then dump Air India after it puts in lots of effort/resources in meeting the minimum joining requirements," the Air India note said.
It urged the government to ask Star Alliance to restart the process of Air India’s admission into the network and keep Jet’s membership pending.
It may be too late for that, said an executive at a foreign airline, who didn’t want to be identified. Jet has blanket approval for its code-sharing arrangement with Lufthansa that covers almost the entire network of the German carrier in Europe and North America; teaming up with Lufthansa may ease Jet’s entry into Star Alliance.
“Lufthansa is too big to fail. Jet needs to develop into a network airline from a point-to-point carrier, but Air India is the weakest of them," the executive said. “I see Air India down-sizing a lot, if it has to survive."