CAG criticizes Air India aircraft buy

CAG criticizes Air India aircraft buy

New Delhi: The Comptroller and Auditor General (CAG) has found that the erstwhile Air India Ltd (AIL) “hastily reworked" its earlier acquisition plan and expanded requirement. The initial plan was to acquire 18 small capacity short-range aircraft, 10 medium capacity long-range aircraft, but the revised plan saw a “dramatic" increase in the number of planes between January and November 2004.

“This increase in number does not withstand audit scrutiny considering the market requirements obtaining then or forecast for the future as also the commercial viability projected to justify the acquisition," the CAG report tabled in the Lok Sabha on Thursday said.

AIL’s decision to buy 68 Boeing planes in 2004-05, a move which was approved by the government, imposed an “undue long term financial burden on the carrier", the auditor said.

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“The acquisition appears to be supply driven," it said. The audit body also criticized the “speed" at which acquisition process was proceeded. While the proposals were formulated by AIL, approved by its board, examined and approved by ministry of company affairs, the plan panel, the department of expenditure, empowered group of ministers (EGoM) and the Cabinet between August 2004 and December 2005. The government conveyed its approval on 30 December and the contract was signed by AIL with Boeing on the same day.

The auditor also questioned the effectiveness of and efficiency of negotiations as there was no benchmark for the cost of the aircraft was set before negotiations were initiated with the manufacturers at various levels. It also pointed out that the entire acquisition for both Air India and Indian Airlines was to be funded through debt, except for a small equity infusion of Rs325 crore for IAL. “This was a recipe for disaster ab initio and should have raised alarm signals in ministry of company affairs, PIB and the Planning Commission,"

“This sector on which American/Canadian airlines were already operating non-stop flights and based on which fact AIL was made to reconsider its fleet requirement, turned out to be a loss making sector right from the date of commencement and continued to be so," the report said.

The single largest loss-making routes for the airline were the India/ USA route, which contributed between 41 to 90% of Air India’s total operating losses during the period 2005-06 to 2009-10, the report said. All international routes of the carrier were loss-making by 2009-10, the report added.

Air India is expected to post a pre-tax loss of Rs7,000 crore for the fiscal year ended March 2011, as per government estimates, hit by a bloated cost structure and stiff competition from nimbler rivals in a crowded aviation market.

The carrier, which recently appointed a new chairman, is in talks with banks to restructure $4 billion of working capital debt and is in the midst of implementing a turnaround plan which would focus on a hub-and-spoke route model, cut costs by redeploying staff and unload non-core real estate.

The firm has total loans of $9.5 billion, including $4.76 billion of long-term loans on fleet acquisition.

The airline has not posted a profit since merging with former state-owned partner Indian Airlines in 2007 and relies on handouts from New Delhi to survive.

The auditor said it was unable to ascertain the detailed justification for the in principle approval of the government for the merger.

It said that the merged entity’s financial position has been “abysmally poor", from 2004-05 to 2009-10.

“The potential benefits for the merger would have been far higher, had this been undertaken before finalization of the massive and separate fleet acquisition exercises undertaken by AIL and IAL (Indian Airlines Ltd.)."

Indian Airlines had in 2006 placed a separate order for 43 Airbus aircraft worth Rs8,399 crore.

The report said that merged entity has been heavily dependent on debt and the government should promptly infuse more equity in a timely fashion to bring down the debt-equity level to industry standards.

The Cabinet last month approved an equity infusion of $112 million into the ailing carrier.

Reuters contributed to this story.