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Business News/ Companies / Air India may shun more money-losing routes
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Air India may shun more money-losing routes

Air India has already discontinued flights on 12 domestic and three international routes in the past 12 months

Air India has a total debt of Rs40,000 crore and is in the midst of a Rs30,000 crore government rescue programme. Photo: Abhijit Bhatlekar/MintPremium
Air India has a total debt of Rs40,000 crore and is in the midst of a Rs30,000 crore government rescue programme. Photo: Abhijit Bhatlekar/Mint

Mumbai: State-owned Air India Ltd plans to stop operating on more money-losing routes after carrying out a rigorous analysis of flights that aren’t profitable, in line with a finance ministry diktat, two senior officials at the airline said.

Air India has already discontinued flights on 12 domestic and three international routes in the past 12 months based on the preliminary findings of the route profitability analysis. The airline did not disclose details of the money-losing routes. According to the latest public data, between April and July 2012, of 184 routes, Air India made more money than it spent on 16 routes, met the cash expenditure (but not total expenditure) it incurred on 69, and made less than it spent on 99 routes.

“Finance ministry wants us to close down the non-profitable routes," said one of the two Air India officials, both of whom requested anonymity. “We are finding out which are the flights that are not covering variable costs such as landing, parking, navigation charges and other specific costs on route publicity and certain allowances. We will be taking an yearly view on routes considering the seasonality of the business."

Air India has managed to achieve 12 performance parameters out of the 13 set by the finance ministry for it to qualify for an infusion of government equity, said the official.

The airline has met several other parameters, achieving seat occupancy rates over 75% while the target was to reach 73%. It has also achieved aircraft utilization rates as per parameters.

The lone parameter it hasn’t met is one specifying on-time performance of 93% of its flights; Air India managed 85%, which the official said was because of air traffic restrictions in West Asia, Europe and the US that also hurt the on-time performance of many other international airlines.

Because of cost-cutting measures it has already undertaken, Air India is expected to report earnings before interest, tax, depreciation and amortization (Ebitda) of 1,040 crore in the fiscal year ending 31 March. Ebitda is a measure of operating profitability.

Still, Air India has a total debt of 40,000 crore and is in the midst of a 30,000 crore government rescue programme. The bailout is subject to it meeting the 13 performance parameters set by the government.

The airline is expected to post a loss of 3,900 crore in the current fiscal year, 23.5% less than the loss of 5,100 crore in the previous fiscal year. It had posted a 7,100 crore loss in 2011-12. Air India also has to pay 28 crore a day to meet its fuel requirements alone.

Experts say that it would be a tall order for Air India to discontinue all unprofitable routes, considering the political influence that goes into deciding certain routes. They added that strict cost-cutting and revenue-enhancement measures are critical for Air India to stay afloat.

“It is better to drop loss-making routes as a part of prudent cost-saving practices. Air India should be allowed to run like a commercial enterprise," aerospace journalist Hormuz P. Mama said.

Mama said Air India was forced to serve 11 tier II and III domestic destinations while private airlines were serving the maximum five. While private airlines concentrate the least on unprofitable flights, Air India as a government-owned airline has no option but to serve on such routes.

The Air India executive cited in the first instance said the airline was seeking viability-gap funding (VGF) from the government for serving unprofitable routes. He did not disclose details. VGF is the financial support provided by the government to a project to make it commercially viable.

The second official said Air India was getting more organized in its functioning. For instance, it has almost doubled the share of seat bookings on the Internet to 17% from the 9% 18 months ago, after upgrading its website. The airline is also focused more on generating third-party revenue.

Air India has already hived off its ground handling, and aircraft maintenance, repair and overhaul (MRO) units into separate entities.

“We are getting 600 crore revenue from third-party companies in the ground handling unit and we expect that it will go up to 900 crore in two years. Similarly, Air India is giving business of 600 crore to MRO unit and we expect similar size of business from third-party companies in the next three years," the second official added.

Air India has also started preliminary work on joining Star Alliance, a global club of airlines. Air India was accepted as a future member of Star Alliance as far back as in December 2007, but the integration process was halted in July 2011 as the airline could not meet some membership requirements such as integration of IT, network integration, etc.

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Updated: 14 Jan 2014, 12:07 AM IST
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