Mumbai: Air India, the national flag carrier that has accumulated thousands of crores of rupees in losses, is set to fly over uncharted territory hoping to reverse its fortunes in the new year.

Arvind Jadhav, head of the National Aviation Co. of India Ltd (Nacil) that runs Air India, says he will use a combination of cost cuts, outsourcing, restructuring and spinning off under-utilized divisions into separate businesses to rewrite the account books of India’s oldest airline.

But aviation experts are sceptical, claiming some of Jadhav’s ideas are unlikely to succeed and others are unlikely to be implemented because of Air India’s state ownership.

Jadhav, however, is undaunted. “Howard Roark is hammered from all sides, still he is there," he said in an interview, comparing himself with the individualistic protagonist of Ayn Rand’s novel The Fountainhead, who struggled against established norms all his life.

As chairman and managing director of the beleaguered Nacil, Jadhav has the unenviable task of salvaging an airline that saw losses of Rs7,226 crore in fiscals 2008 and 2009.

Air India’s outstanding debt stands at Rs16,000 crore, of which Rs11,000 crore is high-cost. It also runs a monthly cash deficit of Rs400 crore.

But it’s not the end of the road for the airline, insists Jadhav, 54, who joined the Indian Administrative Service in 1978. Nacil has asked the government for a loan and equity infusion of nearly Rs15,000 crore, and is already showing signs of revival, he said at a news conference in Mumbai on 2 January.

Flight to safety: Air India is also toning up its fleet as part of the state-owned airline’s reorganization efforts. Abhijit Bhatlekar/Mint

To begin with, Jadhav plans to turn two of Air India’s divisions into independent profit-making ventures: engineering, which will become a full-fledged maintenance, repair and overhaul (MRO) firm; and cargo handling, which will become an integrated end-to-end logistics firm.

“By April, we would be spinning off our engineering business unit into a different company," Jadhav said. “This will straightaway take around 20,000 employees out of Air India’s books and Rs1,200-1,500 crore salary bill (with it)." Air India’s annual wage bill for 31,500 employees stands at Rs3,300 crore.

Branching out

The engineering division currently services 100 planes a year, or just half its capacity. It is also unable to attract much business from rival carriers, and earns about Rs100 crore annually. But once turned into a separate business, it could make as much as Rs3,000 crore annually, Jadhav said on the sidelines of the conference.

Air India has already entered a strategic alliance with Sharjah-based Aerostar Asset Management FZC for marketing its aircraft engine overhaul facility. The two have created an engine MRO brand called The A Team, which already provides engine repair and management solutions to West Asian airlines.

Air India is also in talks with logistics firms to build the support infrastructure for “door-to-door" logistics. “The idea is (to) spin off our cargo airline division into a separate entity and convert that into a complete logistics company that offers door-to-door services," said Jadhav.

Nacil has also entered into an equal joint venture with Singapore Airport Terminal Services Ltd to handle ground services at various airports in India.

“If the subsidiaries are hived off and start earning the projected revenue, we will be getting Rs360 crore a month," Jadhav predicted.

But a full-fledged logistics firm is an unexplored venture for an airline. G.R. Gopinath, who pioneered low-fare aviation in India with Air Deccan, floated a cargo airline venture called Deccan Cargo and Express Logistics Pvt. Ltd in 2003. The firm is in the process of developing airport infrastructure, but is outsourcing end-to-end logistics infrastructure to franchisees.

Tushar Jani, chairman of freight forwarding and logistics firm SCA Group and a former promoter of Blue Dart Courier, says it would be “difficult" for an airline to set up a nationwide logistics infrastructure.

Cutting costs

In a market where airlines are selling tickets below cost, Jadhav agreed it was tough to enhance revenues. “You cannot cut salaries, airport charges or catering charges overnight. So one will have to look at cost savings," he said.

He is already attempting this through network restructuring, rationalizing routes and aircraft deployment, and shifting a good number of employees based in US and European cities to India.

“These measures have (also) helped in increasing revenues," Jadhav said, adding that the company was expecting a net benefit of Rs378 crore in terms of cost reduction during the winter schedule of 2009 and Rs563 crore for the entire year.

He hoped the merger of Air India with other state-run carriers Indian Airlines, Air India Express and Alliance Air will bring down costs further. The government gave its nod to the merger nearly three years ago, but operational delays have hobbled the move. Air India now runs its aircraft on all four operating licences.

Jadhav pointed out a merger of such a large scale was not an overnight process. He was, hence, prioritizing the “front end merger", which will mean the customers will deal with a single airline for all practical purposes, while the merger of books, workforce and so forth—the back end—would happen over time.

“In the next three months, we will complete the front end merger," he said, implying that customers would then get the same airline code on their tickets and be able to reach Air India through the phone numbers of any of the four units.

In India and abroad, the carrier has combined booking offices of Air India and Indian Airlines to save on establishment costs. The office at the Jeevan Bharti building in central New Delhi, a prime location, has also been surrendered, saving approximately Rs5 crore annually.

Air India has also withdrawn from some sectors on India–Gulf routes and has transferred them to Air India Express, as part of route rationalization.

Wage worries

The merger could give the airline a fillip, said an industry analyst who did not want to be identified. But he added: “One will have to see how much can Jadhav do, considering the constraints of a government-owned airline. In the past, he had to drop several ideas, including wage cut." Slashing the massive wage bill has been Jadhav’s toughest task.

Aviation expert and aerospace journalist Hormuz P. Mama is more sanguine. “The fact that Air India is a state-run airline does not mean that nothing can be done about it. There needs to be a compromise from the unions regarding salary cuts, a very inconvenient point that has been put on the backburner," he said.

Mama also warned that unless unions were willing to accept realistic concessions now, they could have to settle for a lot less in the near future. He suggested “manpower rationalization", saying the biggest single source of expenditure was the “grossly bloated staff strength".

But such a measure is not on Jadhav’s radar, given what he calls are the airline’s “social commitments". Instead, he is looking to outsource some functions.

“Since we are an aviation company, we may not be able to give career progression to IT people. Therefore, we may identify certain services for outsourcing to other company after reaching an agreement on terms and conditions," Jadhav said.

But for Mama, such measures “merely amount to nibbling away the fringes".

Equity boost

Even if they are not substantial in themselves, the cost cuts have had a ripple effect. The government has agreed to infuse Rs800 crore as equity based on various cost-cutting measures. The airline currently has an equity base of Rs145 crore.

“Bankers are confident on Air India but have some pre-conditions for restructuring the loan," Jadhav said. “If the shareholder, that is the government, is willing to infuse additional equity, I could convince the bankers to restructure my high cost loans." 

Jadhav is also toning up his fleet. Air India has phased out 11 medium-sized and six wide-body planes from its system in the current fiscal while inducting 29 new aircraft, said a statement from the company on 2 January.

“We have operated winter schedule with 56 planes against 67 aircraft in summer schedule without losing passengers," Jadhav said, adding that better utilization of aircraft had resulted in substantial savings of Rs200 crore.

By March 2010, three more Boeing 777-200s, two Airbus A310s and eight Airbus A320s will be returned or retired from the fleet, allowing Air India to induct brand new aircraft.

Airlines worldwide are projected to post $5.6 billion (Rs26,152 crore) in losses in fiscal 2011, according to industry body International Air Transport Association, or Iata.

Jadhav said he expected Air India won’t contribute to that figure. He agreed both organizational and financial restructuring was difficult, particularly so for a government-run company. “But we are hopeful of both," he added.