SUMMER TRAINING REPORT

AIR INDIA LTD - PRE AND POST MERGER ANALYSIS

Submitted in partial fulfillment of the requirements of Post Graduate Programme

by

Meghna Khandelwal Batch 2010-12 Roll No. PG20101134 IILM Institute for Higher Education New Delhi

Meghna Khandelwal, IILM (2010-12)

ACKNOWLEDGEMENT

I express my sincere thanks to all those who have contributed significantly by sharing their knowledge and experience in the completion of this project work. I am greatly obliged to Ms. Preeti Jain, HR Head, Air India, for providing me the right kind of opportunity and facilities to complete this venture. My first word of gratitude is due to Mr. Daleep Malhotra, Asst. Finance Manager, Air India, my corporate guide, for his valuable guidance and support throughout the project. I am thankful to him for providing me with necessary insights and helping me out at every single step opportunity for the successful completion of my final report for the project titled: Air India- Pre and Post Merger Analysis I would also like to extend my heartfelt thanks to Ms. Amanjyot Kaur for her valuable guidance, suggestion and outstanding mentorship. I believe that this project will be beneficial for my future studies and career.

Meghna Khandelwal IILM, New Delhi

Meghna Khandelwal, IILM (2010-12)

TABLE OF CONTENTS
TOPIC PAGE NO.

1. Executive Summary..4 2. Industry Profile...6 3. Key Players in the Indian Aviation Sector..8 4. Air India Ltd.10 5. Corporate Social Responsibility.11 6. Air India Departments.13 7. Understanding the Financial System in Air India..13 8. Amalgamation of Air India & Indian Airlines...19 9. Motives Behind the Merger20 10. Reasons For Air Indias Precarious Financial Health...22 11. Mis-Management Issues26 12. The Merger of Air India with Indian Airlines: A Disaster.28 13. Air IndiaTurnaround Strategy..30 14. Financial Analysis.35 15. Recommendations.49 16. Conclusion51 17. References52

Meghna Khandelwal, IILM (2010-12)

EXECUTIVE SUMMARY

The aviation industry in India has seen a constant pace of growth over the past many years. With the liberalization of the Indian aviation sector, the industry had witnessed a transformation with the entry of the privately-owned full service airlines and low cost carriers. The National Carrier, Air India, was once the top industry player but is now finding it difficult to survive and is facing fierce competition from large private players. This came on the back of ill-managed merger with Indian Airlines, global recession, high prices of aviation turbine fuel (ATF), bloated workforce, inefficient operations, increased competition because of Indias open sky policy, low aircraft utilization, declining passenger revenue, increased staff costs, increasing debt and interest burden, management issues etc which further compounded matters. The main purpose of this project titled Air India Ltd - Pre and Post Merger Analysis was to understand the present financial system of Air India & to study its financial performance, pre and post its merger with Indian Airlines. A study of the Indian Aviation Industry and a comparison among the major players on financial parameters has also been done. An in-depth study of the reasons responsible for the downturn of Air India and the current issues resulting in its unstable financial health has been done. Few urgent measures which can be adopted by the Government and the management to help ailing Air India revive through this financial distress and plaguing situation has been laid down as recommendations.

Meghna Khandelwal, IILM (2010-12)

Objective of the Project

To get an insight of the aviation industry To understand the degree of competition in such a fast growing sector To acknowledge the trends and growth amongst the various airline companies To get an overview of the financial system existing in Air India To analyze the financial performance of Air India before and after merger To bring about a comparison of the major airline companies on financial parameters To understand the success and failures of the Air India merger To develop enough measures and step to save cash-strapped Air India from such a financial distress

Methodology
Secondary research was conducted for this purpose. The data used has been collected through newspapers, articles, reports, journals, magazines and internet. The data so collected was subjected to analysis using the necessary tools that are relevant and realistic.

Limitations of the Study

The study curtails comparison as it is within the purview of only one organization. The data included in the project collected from secondary or historical data such as company internal circulars, financial reports and historical records. Suggestions and findings are relevant for the present study only. Non-availability of vital information, which the company feels is internal to the organization. 100% accuracy cannot be claimed. Analysis is based only on monetary information and non monetary factors are ignored

Meghna Khandelwal, IILM (2010-12)

INDUSTRY PROFILE

Aviation Industry in India

India is one of the flourishing global aviation markets that have witnessed an impressive growth over the past so many years. India is currently the ninth largest aviation market in the world, according to a report Indian Aerospace Industry Analysis, by research firm RNCOS. Steady growth in the number of private players establishing their business in India due to liberalization and deregulation as well as the strong support given by the government has made India as one of the most attractive investment destinations. It consists of three types of players namely, Full cost carriers, Low cost carriers (LCC) and other start-up airlines. As per Airport Authority of India (AAI) statistics, there are 127 airports in India which incorporates 13 international, 80 domestic, 28 civil and 7 custom airports. Moreover India has around 1091 registered aircrafts. At present, private airlines account for around 75% portion of the domestic aviation market. According to the Economic Survey 2010-11, India is expected to be the fastest growing civil aviation market in the world by 2020 with about 420 million passengers being handled by the Indian airport system. As per the latest data released by the Directorate General of Civil Aviation (DGCA), the number of passengers carried by the domestic airlines during JanuaryFebruary 2011 was 9.51 million as against 7.95 million in the corresponding period in 2010, thereby registering a growth of 19.6 per cent. Passengers carried by domestic airlines during January - May 2011 were 24.5 million as against 21 million during the corresponding period of previous year thereby registering a growth of 17.6 per cent, according to the latest data released by the Directorate General of Civil Aviation (DGCA) Recording the strongest growth in the world, India's domestic aviation market has tripled in the past five years, according to a latest report of the International Air Transport Association (IATA)

Meghna Khandelwal, IILM (2010-12)

GOVERNMENT INITIATIVES

To create world class airports, the government has recognized the need for the involvement of private players in the development of airport infrastructure. Development of airports at Delhi and Mumbai has been taken up under Public Private Partnership (PPP) mode. The capital expenditure is funded through private equity, borrowings, and internal resources of joint venture companies. The development work of Mumbai airport is likely to be completed by 2012 whereas the work of a new terminal (Terminal 3) at Indira Gandhi International Airport at Delhi got completed in July 2010. As per the Economic Survey of 2010-11, 35 non- metro airports have been granted to Airports Authority of India (AAI) in 2006. The survey also said that modernization and development of Kolkata and Chennai airports has been taken up by the AAI spending an estimated US$ 514.6 million and US$ 446 million, respectively. Both the projects are expected to be completed between MayOctober 2011. The adoption of Open Sky Policy has resulted in the entry of several new privately owned overseas airlines and increased frequency / flights for international airlines. The GOI is gradually liberalizing air services and is seeking increased traffic rights under bilateral agreements with foreign countries such as UAE, Mexico, Thailand and Germany.

Until recently, the AAI was the only major player involved in developing and upgrading airports in the country. However, private-sector players are now becoming increasing involved in the sector. Some of the major private sector players include:

GMR infrastructure ltd GVK Power and Infrastructure Ltd Siemens Larsen & Toubro (L&T) Maytas Infrastructure Limited Unique Zurich

Meghna Khandelwal, IILM (2010-12)

KEY PLAYERS IN THE INDIAN AVIATION SECTOR

Name of the players

Market Share

Kingfisher Airlines and Kingfisher Red 20% (previously Air Deccan) Jet Airways and Jet Lite Air India IndiGo SpiceJet GoAir 26.1% 13.2% 19.9% 14.2% 6.6%

Market share statistics for May 2011 indicates the National Carrier, Air India, has now slipped to the fourth rank behind Jet Airways, Kingfisher and Indigo.

Kingfisher Airlines: Launched in May 2005 by Dr. Vijay Mallya as a part of the UB Group, kingfisher airlines is one of the seven airlines to be ranked as a 5-star airline by an independent research consultancy firm Skytrax. Deccans merger with Kingfisher Airlines has created the single largest airline in the Indian aviation industry, connecting 69 destinations and operating over 570 flights daily with a fleet of 78 aircraft.

Jet Airways: Jet Airways was established on May 5, 1993. It covers 50 destinations with 340 regular departures. Jet Airways has pacts with foreign airlines, such as Lufthansa, Swiss, Gulf Air, Austrian Airlines, Qantas and Thai.

Meghna Khandelwal, IILM (2010-12)

Indian Airlines: Indian Airlines was inaugurated on 1st August, 1953. Based in Mumbai, it focused primarily on domestic routes, along with several international services to neighboring countries in Asia. The airline officially merged into Air India on 27 February 2011.

Indigo: Indigo is a leading Domestic Indian Airlines based in Gurgaon, Haryana, India which offers always cheap affordable, on time and hassle free operation at the Low cost. The airline was facilitated by the Air Passengers Association of India (APAI) as the Best Low-Fare Carrier in India for the year 2007. Being a low-cost carrier, Indigo does not offer complimentary meal services to its passengers. The airline operates domestic services linking 25 destinations.

Spice Jet: Spice Jet, India's most preferred airline, offers the lowest air fares with the highest consumer value headquartered in Gurgaon, India. Spice Jet flies to 22 destinations across India, Nepal and Sri Lanka.

Air India: Air India, the oldest and the largest airline of India, was founded by J. R. D. Tata in July 1932. It operates a fleet of Airbus and Boeing aircraft serving Asia, Australia, Europe and North America. Later it collaborated with Indian Airlines and gained the reputation of being the largest airline in South Asian airline. Air India Cargo, Air India Express and Air India Regional are its subordinates in aviation market. It offers First class, Executive class and Economy class services and has code sharing pacts with companies like Air France, Austrian Airlines, Aeroflot, Air Astana, Emirates Airline, Air Mauritius, Kuwait Airways, etc.

Go Air Airlines: Like Spicejet, Go Air airline is also an Indian low-cost airline based in Mumbai, Maharashtra, owned by Jehangir Wadia. It was established in June 2005. It operates domestic passenger services to 18 cities with 131 daily flights and approximately 917 weekly flights.

Meghna Khandelwal, IILM (2010-12)

AIR INDIA LTD.

Air-India was founded as a small, private, domestic carrier which began its operations in 1932 as Tata Airlines, named after J. R. D. Tata, its founder but it is now government owned. The company was formerly known as National Aviation Company of India that was established to facilitate the merger of the two main state-owned airlines in India: Air India, with its subsidiary Air-India Express and Indian, together with its subsidiary Alliance Air (now called Air India Regional). NACIL was incorporated under the Companies Act 1956 on 30 March 2007 and was owned by the Government of India based at the Air India Building in Nariman Point, Mumbai. The company was later renamed as Air India Limited on October 26, 2010. Upon completion of the merger on 26 February 2011 there is now one primary airline, Air India with two subsidiary carriers providing regional and low-cost, point-to-point services and a third subsidiary for cargo operations: Air India Express Air India Regional Air India Cargo AIL carriers connect 93 destinations (60 domestic and 33 international) in 24 countries as of February 2011. The main bases of operation of the airline are Mumbai's Chhatrapati Shivaji International Airport and Delhi's Indira Gandhi International Airport. Air India Ltd. was a pioneer in the aviation industry before the independence of the country which after its merger with Indian Airlines attained the status of being the biggest South Asian airline. In addition, it has code-sharing arrangements with other international carriers to various destinations in Europe, the Asia Pacific, the U.S. and Canada, the Asia Pacific region, south Asia, the Gulf and Middle East region, Africa, and Australia.

10

Meghna Khandelwal, IILM (2010-12)

CORPORATE SOCIAL RESPONSIBILITY

Air India, one of the largest developing-country airlines, has become the forerunner in taking up the cause of environmental protection for which it gained several prestigious awards and recognitions Montreal Protocol Public Awareness Award presented by the United Nations Environmental Programme (UNEP) is in recognition of Air Indias efforts in protection of the ozone layer. Golden Peacock Award-for Corporate innovation for protection of environment 2007. Preferred International Airline award for travel and hospitality from Awaz Consumer Awards 2006. Gallileo Express Travel World Award for Corporate Social responsibility for 2006. Air India, Indias flagship carrier, has been awarded with the Best International West Bound Airline out of India for the second consecutive year by Galileo Express Travel World Awards 2006 in New Delhi. The Special Category Award recognizes the Most Significant Corporate Social Responsibility Initiative (CSR) taken by an organization in the areas of environmental conservation, social welfare, education and community development amongst others. Other initiativesa) In order to institutionalize the environmental initiative in the airline, Air India constituted an Environmental Core Group in Air India in June 2005 to act as a focal point for identification and assimilation of technologies and for cooperation with the potential partners.

11

Meghna Khandelwal, IILM (2010-12)

b) The company also initiated a social project called Reaching Out in 2002-2003, which provides recognition for students and teachers across India in the field of environmental protection and active citizenship.

c) It works closely with TERI (The Energy & Resources Institute) to produce films on the environment and has also created a Environmental Core group within the company. d) Incorporating social responsibility into its daily operations the company has placed orders for GEnx Engines for its fleet of B787, which are 20-25% more fuel efficient thus reducing emissions. This is a major step not only for conservation of fuel but also makes business sense for the Airline. e) Air India has become a member of the Business Council for Social Development and even Hosted international Ozone Day celebrations with press conference along with the Ministry of Environment and Forest of India.

The airline industry is not a significant contributor to the two most important global environmental issues: ozone layer protection and climate change. However, Air India would like to be in the forefront to utilize its infrastructure to spread awareness on these issues, as well as to take action within its business operations to improve energy and efficiency. As a next step, Air India is planning to launch the Air Lines Forum in India for collective action to protect the environment. Also Air India Building at Nariman Point is proposed to be converted into a Green Building with the help of the Ministry of Environment & Forests and TERI

12

Meghna Khandelwal, IILM (2010-12)

AIR INDIA DEPARTMENTS

Operations In-flight Services Materials Management Commercial Air Safety Human Resources Development Finance Engineering Internal Audit Properties & Facilities Ground Services Information Technology

UNDERSTANDING THE FINANCIAL SYSTEM IN AIR INDIA

The Management at the Center: The Airlines follows a centralized system for revenue handling and a decentralized system for booking of expenditures. The organization has two head quarters for finance. One of the head quarters deals with expenditures and is located in the Airlines House, New Delhi. The second headquarter deals with revenue and is known as the Central Revenue Accounts (CRA). The expenditure division is overseen by two general managers, while the CRA has one general Manager. Below the headquarters are the regional offices which again have similar structure. Here also there is an expenditure division which in case of the Delhi region is in Palam. The revenue part is handled by an Area Revenue Division which in case of Delhi region is in Safdarjung. Each region is further subdivided into stations which are places where Indian Airlines has an office.

13

Meghna Khandelwal, IILM (2010-12)

All revenues except for those that are incidental in nature are booked by the CRA. Incidental revenues are booked by respective ARDs. All expenses related to the aircrafts are booked by the Head Quarters (Expenditure). All administrative expenditures incurred in the regions are booked by the region. The head quarters transfer a fixed sum of money to each region at prefixed dates so that they can meet their expenses. This is called Scheduled Transfer. If due to any reason the region needs more funds the head quarters can transfer it by way of Special Transfer.

Functioning of the Finance Department in the Northern Region

[A] Area Revenue Division, Safdarjung: The basic function of Area Revenue Division (ARD) is to book "Traffic Revenue" earned by Indian Airlines in its books. The various components of Traffic Revenue are Mail Revenue, Airfreight Revenue, Excess Baggage Revenue, Passenger revenue, Pool Revenue, Charter Revenue etc. Sections at ARD: 1. Agency: Deals with the agents of Indian Airlines and maintain records of all the transaction or sales done by Agents through Reporting Forms. The Agency Section at ARD deals with all Indian Airlines agents maintains records, take disciplinary actions against defaults if any & prepare concealed summary of all transaction through agents for the Head Quarters.

2. Screening: Performs the sequential screening of all the Reporting Forms and execute Interline Billing. The basic function of the Screening Section is to screen: a. Reporting Forms b. Sales Records (JVs) c. Interline Billing d. Mail Statements recovered from outstations

14

Meghna Khandelwal, IILM (2010-12)

3. Bills Receivables (B/R): It maintains the records of all the credit parties of Indian Airlines and raise bill or debit notes to such parties for services rendered to them by Indian Airlines. Bills Receivable Section deals with two kinds of recovery: Recovery from internal parties: Internal parties refer to the stations Recovery from the external parties: External parties refer to the credit parties Two sub-sections under Bills Receivable Section are: a. Computer cell: It deals with the external parties like Government Departments and big business houses who initially approach to the commercial department for the authorization. Once the terms & conditions are signed a permanent credit code is allotted to the party. Now with the authorization letter and the credit party code Indian Airlines services can be availed on credit and the bills are sent to the party directly. However if the party fails to clear the bills within the stipulated time period the authority is suspended. b. Non-Computer Cell: It deals with the internal parties. , that is, the employees. The collections from internal parties can be on account of the following: Credit Cargo: It is when consignor agrees to pay a booking amount and consignee is supposed to pay the cargo/freight charges at the destination on point of receiving the cargo. Thus, it is duty of station manager to recover such amount. Issuing Recovery Section: The Screening Section identifies some short collections on account of booking amount on cargo or packs at the stations and it either asks the EDP or itself raises the bill on Station. The Station manager follows it up and recovers the amount. Staff Clearance: Bills Receivable Section also recovers the pending clearances from the staff and raise the bills on staff accordingly which are further dispatched to the payroll Section so as to be recovered from the salary of the employee
15 Meghna Khandelwal, IILM (2010-12)

Foreign transactions: For the Indian Airlines agents abroad, all the transactions are carried through BSP with the help of IATA agent. Sale of tickets, transfer of revenue and payment of commission to agents, everything is done through IATA agents. [B]Expenditure Division, Palam: Expenditure Division is responsible for accounting for the expenses made in the region. This includes expenses on salary bills, purchase of stationery and any other administrative expenses. The division however does not book any expenditure that is related to the aircraft in any way. 1. Bill Passing-Local All the goods, products and equipment that are required for the day-to-day operations by the supporting departments are purchased in bulk to be stored in anticipation of future requirement. The Bill Passing-Local passes all the bills regarding purchases like centralized purchasing of uniform, catering, stationary etc. for all 5 regions. The major functions of this section are: a. Purchasing b. Deductions c. Security Deposits

2. Bill Passing-Outstation Bill Passing-Outstation is the controlling authority for these outstations. They issue advance imprested cheques of a predetermined value to all the stations on weekly basis. These cheques are always in name of Station Manager & he is the designated person who has the authority to encash it. The major expenses for outstations are: a) b) c) d) Hotel Bills Catering Bills Medical Bills Rent

16

Meghna Khandelwal, IILM (2010-12)

3. Provident Fund The facility for provident fund is available to any employee only after the completion of one complete year service. A 9% p.a. rate of interest is payable to employee on the amount in Provident Fund.

4. Payroll This section is responsible for making the salary slips of the employees. The section issues the person a Staff Number by which he/she is recognized. The salary slip of the person includes basic data about the employee like the Staff Number, Name, Designation Code, Designation, Station Code, Department Code, Date of Birth (DOB), Date of Joining (DOJ), Bank Account number. Other than these details it includes Basic Pay, Dearness Allowance (DA) and other allowances, Statuary Deductions like Provident Fund, Income Tax and Employee State Insurance (ESI). Salary slip also includes annual salary, taxable salary, tax and rebates etc.

5. Cash & Bank Section Cash and Bank section controls all payment and receipts relating to the particulars region. Bank Book maintains the records of disbursement accounts at the outstations. Cash Section deals with and maintains all the records concerning the cash payments and Bank Section provides the concerned Banking treatment. It receives an advance sum of Rs. 1.2 crores per month from the Head Quarters to meet all expenses in the region. They are engaged in the following: a. b. c. d. Payment of vouchers: Salary Distribution Advances for employees Miscellaneous Items

17

Meghna Khandelwal, IILM (2010-12)

6. Bill Raising & Realization Indian Airlines provides infrastructure facilities and ground handling to other airlines on a predetermined charge. Thus the main job of the Section is to raise bills on other airlines for the services provided and maintaining records for the same. The Bureau of Civil Aviation Security under Indian Airlines provides security to other airlines on charge basis for which similar billing is done by Bill Raising & Realization Section. Whenever any service is provided, corresponding handling forms like Ground Handling Form, Security Handling Form etc. are to be filled and on basis of these handling forms bills are raised on other airlines. All the bills to foreign Airlines are raised and settled through IATA clearance house. Billing for all private VIP flights i.e. chartered flights for President, Prime Minister, Vice President, is also done by Bill Raising & Realization Section. Bills are raised to the concerned ministries and settlement is done thereafter.

7. Finance & Budget Finance &Budget Section is responsible for maintaining the Journal, Subsidiary Books and General Ledger for facilitating reconciliation of the inter-region accounts, maintaining a record of assets, providing deprecation thereon and keeping record of deposits revived from contractor and supplier etc. The section also compiles budget estimates and annual accounts relating to the region, which are submitted to the Head Quarters.

18

Meghna Khandelwal, IILM (2010-12)

AMALGAMATION OF AIR INDIA & INDIAN AIRLINES

The Government of India, on 1 March 2007, approved the merger of Air India and Indian Airlines. Consequent to the above, a new Company viz National Aviation Company of India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March 2007 with its Registered Office at Airlines House, New Delhi. The Certificate to Commence Business was obtained on 14 May 2007. The Scheme of Amalgamation of Air India Limited and Indian Airlines Limited with National Aviation Company of India Limited was approved by the Board of Directors of all the three Companies. The merged entity will operate on the domestic and as well as international sectors. The most important development with respect to the company Indian Airlines has been the merger of both the Public Sector carriers of India namely Indian Airlines Ltd. And Air India Ltd which will enable the new company to generate further momentum, as the combined strength of two companies will give various synergy benefits resulting into financial benefits to NACIL.

Some of the benefits which will accrue to NACIL are: Route Rationalization Fuel Procurement Engineering Stores & Inventory Purchase both aircraft and non aircraft Insurance benefits Handling of flights Employee Productivity

This amalgamation results to transfer of all the assets, loans raised and liabilities incurred by both the companies are transferred to the NACIL. As well as all the Subsidiary companies Of Indian Airlines (i.e. Airlines Allied Services Ltd., Vayoodoot Ltd, IAL Airports Services Ltd) and of Air India (i.e. Air India Engineering Services Ltd, Air India Air Transport Services Ltd, Hotel Corporation Of India Ltd, Air India Charters Ltd) Shall become the subsidiaries of NACIL.

19

Meghna Khandelwal, IILM (2010-12)

After merger all the employees of both the company will become the employee of NACIL. Both the Companies shall be deemed to have been carrying on and to be carrying on all business and activities relating to both Indian Airlines and Air India, for and on behalf of NACIL. The profit or losses earned by both the companies are treated as a profit and loss NACIL.

MOTIVES BEHIND THE MERGER

The merger of both the companies with the NATIONAL AVIATION COMPANY OF INDIA LIMITED, along with a comprehensive transformation program, is imperative to improve competitiveness. It will provide an opportunity to leverage combined assets and capital better and build a stronger sustainable business, the merger will Create the largest airline in India and comparable to other airline in Asia Provide an integrated international/ domestic footprint which will significantly enhance customer proposition and allow easy entry into one of the three global airline alliances. To avoid overlapping routes and many aircrafts and employees would be free to be engaged for alternative courses and also for the low cost version of Air India Air India Express To reduce cost by limiting the resources- labour, material etc. Enable optimal utilization of existing resources through improvement in load factor and yields on commonly serviced routes as well as deploy freed up aircraft capacity on alternative routes. Provide an opportunity to fully leverage strong assets, capabilities and infrastructure. economies of scale in a whole series of areas: maintenance, ground operations, the use of landing slots and parking rights Provide an opportunity to leverage skilled and experienced manpower available with both the companies to the optimum potential. Provide a larger and growth oriented company for the people and same shall be in large public interest. Potential to launch high growth & profitability businesses (ground handling services, maintenance repair and overhaul etc.).

20

Meghna Khandelwal, IILM (2010-12)

 Provide maximum flexibility to achieve financial and capital restructuring through revaluation of assets Provide an increased thrust and focus on airline support businesses.

Revenue synergy will be driven by integration of the complementary networks of both Indian airlines and air India. Cost and capital productivity synergies will be driven by opportunities for leveraging economies of scale and opportunities for rationalizing overlapping facilities and infrastructure. The synergy benefit will be over Rs 800 crores and will be realized once the integration is completed. In addition to these synergies, the amalgamation will also provide an opportunity to initiate a comprehensive transformation program to improve the overall competitiveness of the merged airline i.e., Indian Airlines and Air India. This while improving the financial position would help position and equip the merged entity to better face the current and future challenges arising out of intense competition and declining industry profitability.

21

Meghna Khandelwal, IILM (2010-12)

REASONS FOR AIR INDIAS PRECARIOUS FINANCIAL HEALTH

Unprecedented liquidity crunch, high oil prices, widespread economic gloom, declining passenger traffic, skills shortage, and overcapacity are squeezing the life out of India's state-run flagship airline

1. PRODUCTIVITY LINKED BONUSES TO EMPLOYEES AIR INDIA pilots went on a 10-day long strike to demand further PLI hike. Today PLI is paid on achieving 19,000 passengers and more, but in fact the company does not break even at 40,000 passenger load. There is an absence of a business plan of how to break even with lower revenue and more passengers, increased overhead costs, increased aviation turbine fuel (ATF) costs and intensified competition. As a result the companys financial health took a tailspin in 2006-2007. There was a failure to understand that Increasing performance and paying for it is not productivity, but increasing performance by decreasing costs is productivity.

FLIGHT DATA These numbers are proof enough of the troubles at Air India 40,000 cr Amount of debt the countrys flag carrier is saddled with 5,551 cr Air Indias financial losses for 2009-10, the worst figure in the carriers 79-year history. 2,100 cr Amount of annual interest that Air India has to pay. It works out to about Rs. 7 crores per day $10,000 The average salary of an Air India pilot. Their counterparts at private carriers make $8,000 17 percent Air Indias market share, which makes it fourth on Indian chart 9-10 Number of hours Air India planes are airborne every day. Private airlines clock as much as 16 hours per day

22

Meghna Khandelwal, IILM (2010-12)

2.

AIRCRAFT DEAL

Air India has the largest fleet in India and its debt is also the largest. The CAG report says that the ambitious aircraft order was placed at the behest of the Ministry of Civil Aviation against the wishes of Air India or Indian Airlines. The problem was that Air Indias ability to accept a new fleet was not gauged as well as Air Indias financial position was ignored that did not allow acquisition of such a large fleet all at once. As of now the fleet of 158 aircraft fleet is the largest in India and so is the debt on the aircraft deal i.e. Rs 50,000 crores.

3. DEBT TRAP Air India has landed itself into a vicious debt trap where Air India survives to pay back only interest payments. Banks are now refusing loans required by Air India to pull on and pay salaries. Together Air Indias working capital loan has become 22,000 crores. Because of the precarious financial health, banks charge high interest rates i.e.12-15% interest. Debt servicing alone on the aircraft deal of Rs 50,000 crores stands at 10 to 12% per year i.e. around Rs. 5,000 crores a year. Add to that Rs 3,000 crores debt servicing of working capital loans, and a wage bill of nearly Rs 3,400 crores, with roughly Rs 5,000 crores of bills from the oil companies and around Rs 5,500 crores on operations. With total revenues of roughly Rs 14,000 crores, the net loss per day is around Rs 20 crores a day. 4. SABOTAGE MERGER OR MURDER Year 2006 was surrounded with intensified competition from low cost carriers and rising ATF costs, along with inherent problems of both the airlinesthe pre-merger Air India bled by Rs. 400 crores and the erstwhile Indian Airlines by Rs 280crores. The government then in its wisdom and on the dubious advice of consultancy major Accenture decided to merge Indian Airlines and Air India. The report submitted by Accenture suggested that the integration of operational synergies alone would benefit Air India Rs. 832 crores.
23 Meghna Khandelwal, IILM (2010-12)

As a result of that enlightened decision the former CMD did not allow decisions to take shape and the integration process went haywire. What could have been done in the first three months could not be done even in four years. In the meantime, the government changed four CMDs and the integration and merger process became directionless. This sabotage cost Air India a whopping Rs. 20,000crores. Many trade unions have openly criticized this former director and complained to the government against him but because of his political backing no enquiry has been instituted against him. As a result, both Air India and Indian Airlines continued to operate separately on similar routes, maintained separate city offices at similar stations on heavy rents, could not synergize their existing computerized reservations system, maintained two balance sheets, two sets of employees at any one station governed by two separate sets of service rules, service conditions, shift timings with separate canteen, medical, transport, uniform, facilities. Staff unions have been demanding the government to nail the former director who systematically sabotaged the process of integration so that synergies could not materialize and Air India was bled to near death. 5. STRIKES WHO BENEFITS FROM THEM?

Air Indias human resource policies are boon for many private airlines struggling to get passengers. Today 99 per cent of the airline employees are aggrieved by the HR department and its policies in one way or another which prompts private airlines to use the opportunity to double their airfare and make big business. The last pilots strike to protest working conditions and wage parity with the Air India counter-parts went on for 10 days. It is also surprising to draw a correlation between the summer tourist rush starting in May every year when invariably Air India touches 50,000 passengers a day, and Air Indias bookings are at an all time high for the ensuing two full months and the flash
24 Meghna Khandelwal, IILM (2010-12)

strikes. Flash strikes were held in May 2007, May 2010 and May 2011. The Competition Commission of India (CCI) has taken cognizance of cartelization to probe the conduct of private airlines as well as strike fixing. in Air India. Interestingly all passenger data of Air India became the property of the private airline which probably has benefited and enhanced its market share considerably. The strike is resulting in Air India losing out on carrying 22,500 passengers a day, amounting to a revenue loss of Rs. 20 crores daily. The national carrier's daily seat offerings have come down to 9,500, against 30,00032,000 on normal days. A large chunk of the balance is being picked up by the private airlines. Private airlines are carrying anything 15,000-16,000 of Air India's domestic passengers resulting in an increase in the passenger load factor by up to 7 per cent, according to Civil Aviation Ministry officials.

6. PR issue Air India pilots numbering about 800 have gone on a strike for full 10 days demanding pay parity and better working conditions with their counterparts in the international sector who make some 50%-70% more. The immediate impact of the strike will be on domestic flights since the striking pilots belong to the domestic wing of the merged Air India. The ICPA has claimed that there are differences in salaries and working conditions of pilots of Indian Airlines and Air India and that the management has violated the memorandum of settlement signed in November 2009 on implementing the Sixth Pay Commission recommendations. The 400 pilots, who operate international flights, belong to the Indian Pilots Guild. The ICPA claims that while the Air India pilots enjoy a big fixed salary component, the same is almost minuscule for the former IA pilots.

25

Meghna Khandelwal, IILM (2010-12)

MIS-MANAGEMENT ISSUES
The current crisis in Air India is often ascribed to the management's plan of turning it into a private airline and the alleged mismanagement in the running of the national carrier. According to BJP spokesperson Rajiv Pratap Rudy, the Air India management led by Arvind Jadhav has messed up the entire system, which was clueless about the aviation industry and took decisions that would kill the prospects of the national carrier.

Air India pilots allege that management tried to help the private airlines by withdrawing from 32 profitable routes in 2010. Many of these routes were considered commercially very viable and lucrative. Eg- One route of Chennai to Bangkok with 95% passenger load capacity was cancelled and Thai Airways got the major pie of this shocking decision. Jadhav quashed the appointment of 700-800 cabin crew recruited during Raghu Menon's tenure, and almost 1,000 flights were cancelled in the last two years because of the lack of cabin crew. He has been issuing arbitrary orders transferring captains to different locations, which has not gone down well with the staff. As a result, another eight months were spent hiring cabin crew. During this period hundreds of flights had to be either cancelled or were delayed, not because of a lack of pilots or planes but because of a lack of crew. The Parliament committee report also reveals that the Air India management was slammed for the under utilisation of aircraft at a low of nine hours per day while private airlines operate an aircraft for nearly 16 hours every day. The sloppy process of integration between Air India and Indian Airlines is considered to be the main reason for the national carrier's downfall. Air India lost Rs 10,000 crores because it was forced into buying 111 aircrafts, it did not need and the deal was despite the fact that same would push Air India into a deeper financial crisis. There was no rationale, no financial planning, no business plan for the induction of such a big fleet, especially when the stateowned carrier had proved incapable of making optimal use of the existing midsized fleet.

26

Meghna Khandelwal, IILM (2010-12)

 Against the industry norm of 120 employees per aircraft, Air India has nearly 240. Even its aircraft have a lower passenger load factor than the average in the private sector. The airline employs one in three people working in Indias aviation sector and has 210 employees for each of its 147 aircraft. In comparison, British Airways has 175 workers for each of its 228 aircraft. but as Air India itself admits, overstaffing results in limited scope to boost productivity and accountability

The strike by the pilots is an outcome of the hasty merger and unkept promises of the management CAGs latest report as revealed in a section of media, reaffirms that the present financial crisis of the national carrier is because of the willful acts of omission and commission by the then Civil Aviation Minister.

27

Meghna Khandelwal, IILM (2010-12)

THE MERGER OF AIR INDIA WITH INDIAN AIRLINES: A DISASTER

"The root cause of the ills plaguing NACIL (National Aviation Company of India Limited) is the 'merger' which was flawed at its very inception and which never really took off." Around 2006-2007, the airlines began showing signs of financial distress. Before the merger, Air India had losses of Rs.447.93 crores and Indian Airlines Rs.240.93 crores. To make matters worse, the merger which was engineered between the two national carriers soon after Indian Airlines went through a tedious and rather expensive make over process and became Indian. The motive was to arrest the two airlines' loss of market share over the years and to yield benefits as a single airline which actually resulted in heavy losses. Air India has now accumulated Rs.13,300 crores in losses since its merger with Indian Airlines in 2007. Escalating fuel prices was another reason why the merger was in vogue among the aviation officials. Both the companies i.e., Indian Airlines and Air India, which were operating in a largely protected environment, are now faced with the fierce competition from domestic private and global airline companies. Market shares have declined substantially for both airlines. ''A combined Air India-Indian Airlines has the potential to become a major global player if the merger is completed quickly. Fleet renewal and expansion are imperative from a business perspective but the same will add further pressure on account of interest dues and depreciation expenses. However, It must have known that both airlines were in heavy debts and that the resultant airline i.e. Air India, will have to wave off losses incurred by Indian Airlines (along with its own) not to mention that Air India is now over-staffed (having 140 employees per aircraft as opposed to 100, prescribed by aviation regulations). It was estimated that the merger will roll out Rs. 1200 crores in profits by 2010.

28

Meghna Khandelwal, IILM (2010-12)

Each time, the management of the airline blamed the losses either on high fuel prices or intense competition or some other factor. The inescapable fact is that the airline today has accumulated losses of Rs 16,000 crores. And now after Air India has been begging for bailout from the Government, the opposition. Both Air India and Indian Airlines were better off as competitors despite the fact that they were facing financial difficulties. The cumulative loss of both the carriers before the tie up was not nearly as much as it is now. The situation has been worsened at present. The airline had been curtailing and combining about 15% of its 320 daily flights for several weeks in the past months due to the shortage in fuel supplies by oil companies like ONGC and Bharat Petroleum. There is little doubt that the merger of the two airlines, done in 2006-07, has turned out to be a nightmare. But it is hard to ascribe the mounting losses to the merger per se. Merger may not be the cause of the situation but it has made it more difficult for Air India to respond to the situation it is in. "The so-called merger is a kind of marriage between two incompatible individuals having wide variances with hardly any meeting ground

29

Meghna Khandelwal, IILM (2010-12)

AIR INDIA TURNAROUND STRATEGY

Restructuring Plan of Air India

From a monopoly position in the 1990s, Air India is today fourth by way of market share (17 percent), has a debt burden of a whopping Rs. 40,000 crores and financial losses amounting to Rs. 5,551 crores in 2009-10. This is the worst it has ever been in its 79-year history.

Crises ridden Air India seeks to boost revenues by Rs 5,000 crores by capacity expansion and reducing costs by Rs 4,000 crores per annum, making the airline operationally profitable by 2015 through its modified financial restructuring plan. The plan will include more equity infusion by the government, conversion of short-term loans to long-term ones, reduction of interest rates, resolving merger issues, and spinning off its groundhandling and aircraft maintenance businesses. The strategy also looks to increase the number of passengers to 17 million in 2015 and lift the passenger load factor to about 75%. The cash-strapped airline expects to turn profitable by 2014 with help from a third financial restructuring plan in as many years. The plan was prepared by SBI Capital Markets Ltd and vetted by consulting firm Deloitte Consulting India Pvt. Ltd. Some of the measures include rationalization of manpower and productivity- linked incentives, integration of the erstwhile Indian Airlines and Air India, review of all agreements on technical and operational matters, return of the leased aircraft at the earliest, large-scale redeployment to curb infructuous expenditure, and closure of all overseas offices where the NACIL does not operate.

30

Meghna Khandelwal, IILM (2010-12)

 Shifting Mumbai hub to Delhi's T3 in order to cut costs by a third: Air India has signed a deal with Delhi International Airport (DIAL), a consortium that operates New Delhis Indira Gandhi International Airport, to designate T3 as its hub. Air India will bring passengers from all over the country to Delhi to fly them to overseas destinations. The company will get discounts on airport charges (such as takeoffs, landing, and parking, use of aerobridges and terminal charges) depending on the volume of passengers. As such DIAL will benefit from its association with the carrier that operates the largest number of international flights into and out of the country. The savings will be vital for loss-making Air India, which plans to build a hub and spoke model befitting a national carrier that will have over 150 aircraft in a few years.

SAP- ERP implementation for greater effectiveness and efficiency The Air India board (NACIL) has approved the implementation of the SAP-Enterprise Resource Planning (ERP) Project, in line with the business objectives and strategy of the company for effecting a turn around. SAP solutions support the core business of airlines in Passenger Services Planning and Development and also MRO functions. Implementation of the ERP project would benefit AIR INDIA immensely in areas of strategic decision making, monitoring and control systems. SAP is the largest provider of ERP solutions worldwide and has been preferred by more than 115 airlines. As per the company board, SAP system would be implemented by 1st April, 2012. The SAP implementation would enable the company to Automate its business processes of line and heavy maintenance, component and engine maintenance, quality assurance, production, planning and control, material procurement, inventory, payments and accounting functions. Improve the turnaround time of business processes, leading to increased aircraft availability, a reduced float requirement and a consequent reduction in inventory. It will also help increased productivity of all resources. Integrate the key business function in the erstwhile NACIL (Air India) and NACIL (Indian Airlines) and seamless integration with other systems and ensuring availability and consolidation of critical data and information.

31

Meghna Khandelwal, IILM (2010-12)

 Improve profitability by availability of real time information on route network and profitability and result in better reliability in revenue accounting besides reducing costs, especially in inventories across various areas Improve revenue generation through more third-party MRO (maintenance, repair and overhaul) jobs.

Equity Infusion In Air India Air India is passing through a severe liquidity crunch and the government needs to support it to enlarge its equity base so that its creditworthiness goes up and there is more liquidity at hand. The government has injected Rs 1,200 crores and Rs 800 crores in two tranches in 200910, raising the national carriers equity base to Rs 2,145 crores. Air India, which has accumulated losses over Rs 5,500 crores since its merger with Indian Airlines in 2007, is likely to seek another Rs 2,000 crores worth of equity infusion in the next financial year.

Till now, Air India is saddled with a debt of about Rs 40,000 crores, of which Rs 18,000 crores are working capital loans taken from a consortium of banks and the remaining amount of loans is towards payment of new aircraft ordered. The working capital debt of Rs 21,000 crores was borrowed at an interest rate of 12 per cent. The airlines annual interest payment was Rs 1,800 crores on a total accumulated debt of Rs 40,000 crores. The airline has accumulated losses of over Rs 15,000 crores. The carrier lost Rs 2,226 crores in 2007-08, Rs 7,189 crores in 2008-09 and Rs 5,551 crores in 2009-10. The ailing carrier is planning to infuse additional equity as a measure of financial restructuring. It got Rs 800 crores in 2009-10 and Rs 1,200 crores in 2010-11 from the government. Another proposed infusion of Rs 1,200 crores in this financial year will take its equity base to Rs 3,345 crores.

32

Meghna Khandelwal, IILM (2010-12)

 Restructuring Of Loans Ailing Air India's turnaround plan also included restructuring of its massive debt that is conversion of short-term loans to long-term ones. It has proposed a deep restructuring of Air Indias working capital and other short-term loans. This includes converting Rs. 20,000 crores of loans into term loans of 10-20 years at a reduced interest rate. Aviation minister Vayalar Ravi told Parliament, The banks will form a joint committee to rework Air Indias loan strategy. Proposal has been laid down for conversion of 60% loans into long-term debt and balance in preference shares with 15 year duration. Lenders will convert short term loans to the long term loans, while approximately 2530% short term loans will be converted to equity. Moreover, the government will need to bring in more money. The debt restructuring plan would help in reducing the airline's debt to equity ratio to 1:5 as well as reducing the airline's yearly debt repayment burden by Rs 1,400 crores. The airline has total loans of Rs 40,000 crores including Rs 22,000 short term loans. The annual interest cost of these loans is Rs 2,400 crores for the short term loans and Rs 1,000 crores for the long-term loans, according to airline officials. Air India is looking at converting 60% of its working capital into 10 or 15-year loans with an interest rate of 10.5%. The remaining loan will be converted into 15-year cumulative redeemable preference shares with a fixed coupon of 8.5 per cent along with a government buy-back guarantee

Lowering of interest rates The working capital debt of Rs 21,000 crores was borrowed at an interest rate of 12%. The airlines annual interest payment was Rs 1,800 crores on a total accumulated debt of Rs 40,000 crores. Air India has been trying to find ways to lower interest rate on this loan by at least two per cent by securing government guaranteed convertible bonds. Apart from proposing an increase in revenue by Rs 5,000 crores and reduction in expenses, AI has also proposed a debt restructuring exercise. It has a working capital debt of Rs 18,000 crores and annual interest burden of Rs 3,200 crores.
33 Meghna Khandelwal, IILM (2010-12)

The airline has proposed conversion of 60 per cent loans to long-term debt and balance into preference shares. This will help the airline cut down interest costs. The restructuring is likely to result in a saving of Rs 600 crores as interest on working capital. Air India is also refinancing its rupee loan of Rs 5,500 crores taken from IDBI Bank in 2009, through a bond issue to be managed by the ICICI Bank which will reduce interest cost by Rs 180 crores per annum. If the Reserve Bank agrees to the proposal, Air India will be able to reduce the interest rate on its working capital loans to 6-6.5 per cent from the present 12 per cent, thereby considerably reducing its debt servicing burden.

Steps have been taken in making the airline's Strategic Business Units functional. The SBUs would be separate profit centers which would independently handle activities like ground handling, maintenance, repair and overhaul, and engineering. The new MRO and Ground Handling SBUs of Air India will allow greater focus on these aviation service areas that have a huge potential for growth in the fast growing Indian aviation scenario and bring in new revenue streams for the airline.

Air India has been working on details for a revival package, which would have to be vetted by the Board for Reconstruction of Public Sector Enterprises (BRPSE), which recommends steps to the government and the concerned loss- making state-run unit on ways in which it could strengthen, modernize and review itself. According to its modified financial restructuring plan, Air India will begin reporting operating profit from 2012 and start making cash profit from fiscal year 2013. The plan proposes increasing Air Indias fleet to 248 aircraft by 2015-16 from 145 now, fewer than the 275 planes as envisaged in the original plan. The airline will seek to take more planes on lease than purchase them. The new fleet brings in a product and service level that is the best in class, and will now include in-flight entertainment, better seats and enhanced in-flight service. A combined schedule now means better connectivity to the largest international airline in India as well as improved service to various domestic points in India. An improved frequent flier program is in the pipeline along with a dedicated holiday packages website with new offerings to various global destinations. The consumer is a clear winner in the merger, having a much-improved product and superior service quality.

34

Meghna Khandelwal, IILM (2010-12)

FINANCIAL ANALYSIS

Analysis of the financial Performance

I. Revenue:

Revenue Breakdown 2009-10

0.90% 1.30% 2.20% 5.20% 8.80% Ex Bag and Mail Other Receipts 10.20% 68.30% Revenue sharing- AICL Freight Charter and Code Share 3.20% Pool

A complete breakdown of the revenue has been shown in the pie-chart. Maximum % of the revenue comes from Passenger and only 0.9% is from the Pool.

Total revenue declined from Rs.134,793.8 million (2008-09) to Rs.134022.7 million (2009-10) that is a reduction of Rs.771.1 million Operating Revenue for the year ending Mar 2010 was Rs.131086.2 million against OR for the year ending Mar 2009 of Rs.132,245.2 million that is reduction of Rs.1159 million. This reduction was on account of a. Drop in yields coupled with global recession b. Reduction in other revenue due to policy on bi-lateral and ground handling.

35

Meghna Khandelwal, IILM (2010-12)

II.

Expenditure:

Expenditure Breakdown 2009-10

0.50% 2.50% 2.10% 3.20% 5.60% 6.20% 6.50% 7.40% 17.60% 9.20% 12.80% Hire of Aircraft Material Consumed & Outside Repairs Depreciation, Obsolescence & Amortisation Other Expenses Interest Insurance Commission Pax Ammenities Handling Landing/Navigation

26.30%

Fuel makes up a significant portion of an airline's total costs. There has been a reduction of Rs.16,321.8 million in the total expenditure in the year 2009-10 as compared to the year 2008-09. Total Expenditure decreased by 8 per cent from Rs 20668 crores to Rs 19035 cr. Operating Expenses declined by Rs.23,157.8 million mainly due to the following: a. Reduction in aircraft maintenance cost by Rs.177.1 million b. Savings on account of fuel gap efficiency analysis by Rs.1100 million c. Reduction in leasing charges due to return of leased fleet by Rs.2072.9 million i.e. 15% d. Reduction in booking agency commission cost by Rs.177.1 million. However, the above reduction in expenditure was offset by increase in other costs viz.: a. Increase in interest on aircraft loans by Rs.2420.4 million i.e. by 63% due to induction of new aircraft. b. Increase in interest on working capital borrowings by Rs.5220.3 million i.e. by 43% due to increase in borrowing rates and working capital limit. c. Increase in handling charges by Rs.754.9 million due to cost opterations via Frankfurt. d. Increase in depreciation, obsolescence and amortization charges by Rs1115.9 million i.e. 9%.
36 Meghna Khandelwal, IILM (2010-12)

III.

Air India international vs. domestic capacity share (Jul 2011)

Capacity Share
32.50% International Domestic

67.50%

Air India is primarily serving the international sector i.e. 67.5% of its capacity share goes to international sector as compared to only 32.5% domestic capacity share. Domestic air traffic trends and analyses, India: July 2010 29.87 million domestic passengers were carried by domestic airlines in the first seven months of 2010(Jan-Jul) against 24.748 million in the corresponding period of year 2009 thereby registering a growth of 20.7%. The total domestic passengers carried by the Scheduled Airlines of India in the second quarter of 2010 April to June 2010 - was 13.477 million against 11.853 million carried in the first quarter of 2010 January March 2010.

The total domestic passengers carried by the Scheduled Airlines of India in the month of July,2010 were 4.084 million against 4.504 million in June 2009.

37

Meghna Khandelwal, IILM (2010-12)

IV.

Airline-wise break of Scheduled Domestic Pax carried

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10

As per the statistics and the graph above, we can observe that Air India (domestic) has shown a negative trend in terms of carrying Domestic Passengers over a period of first seven months of the year 2010. Whereas, on the other hand, Jet lite has grown by 11.19% and Indigo by 10.56% in carrying Domestic Passengers. Also the number of Domestic passengers carried by Paramount Airlines has significantly dropped.

38

Meghna Khandelwal, IILM (2010-12)

V.

Year-on Year growth in Domestic PAX carried

% Y-O-Y growth
60 40 20 0 -20 -40 -60 -80 -100 -83.78 21.65 14.83 15.79 20.81 13.43 13.44 36.88

-1.69 % Y-O-Y growth

A study of the Scheduled Air traffic for July 2010 shows that overall domestic passenger numbers in India increased by 13.5% to 4.1 million. Among the LCCs, Indigo handled 691,000 passengers with a 38% year-on-year increase (to witness the fastest growth among the carriers) while Spice Jet passenger numbers increased 20.81% to 540,000. Indigo is now just a small margin behind third position i.e. currently state-owned Air India with 708,000 domestic passengers and growth of 21.65%. Kingfisher remained the largest stand-alone carrier (by domestic passenger numbers) in Jul-2010, handling 815,000 passengers (a 1.69% year-on-year reduction). Jet Airways, meanwhile, reported a 14.83% increase in domestic passenger levels, to be the secondlargest single carrier in the market, although the combined Jet Airways-JetLite grouping handled 1.1 million passengers in the month. On the other hand, Paramounts domestic passenger levels slumped to only 12,000(a 83.78% y-o-y reduction) in the month due to the grounding of most of its aircraft and suspension of its license by the Indian Directorate General of Civil Aviation

39

Meghna Khandelwal, IILM (2010-12)

VI.

Airline wise break up of market share (%) (July 2010 vs. 2009)

25 20 15 10 5 19.1 18.9 20

23

17.3 16.2

16.9 13.2 12.5 7.5 13.6

7.4 2 0.3

5.6 2

July-10 July-09

Air Indias market share for Domestic Passengers increased from 16.2% in Jul 2009 to 17.3% in Jul 2010. While Go Airs market share increased from 2% to 5.6 %, Paramount on other hand, fell from 2% to 0.3% in July 2010. Jet Airways and JetLite also continue to be the largest passenger airline group with a leading market share of 26.6% for the month of July 2010.

40

Meghna Khandelwal, IILM (2010-12)

VII.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Revenue Passenger Kilometers

2005-06 2006-07 2007-08 2008-09 2009-10

Revenue passenger kilometers (RPKM) of Air India increased from 25950 millions in FY 2008-09 to 28965 millions in FY 2009-10. It accounted an increase of 12 (Twelve) per cent. Indigo has significantly high revenue passenger kilometers as compared to airlines such as Air India, Jet Airway etc.

41

Meghna Khandelwal, IILM (2010-12)

VIII.

Air India Fleet (as on July 4, 2011)

Airline Air India Air India Express Jet Airways

Current 127 21 90

On Order 30 0 42 130 56 10

On Option 1 0 42 25 0 0

Kingfisher 65 Indigo 39 Go Air 10

A careful look at the above graph and the table can help us understand about the fleet size of different airlines. Air India with 127 aircrafts currently heads in terms of the number of aircrafts in service. Go Air with only 10 aircrafts has now placed 10 more on order. Whereas, Jet Airways operates a fleet of 90 aircrafts and 42 are on order. The latest Directorate General of Civil Aviation (DGCA) figures reveal that while all Indian carriers jointly operated a total of 5,25,504 flights on the domestic network during 2010, Jet Airways and its subsidiary JetLite operated 1,42,101 flights and Kingfisher Airlines operated 1,20,362 flights, leaving Air India at the fourth spot with only 1,01,352 flights.

IX.

Pre and Post-Merger Profit and Loss of the Airlines

42

Meghna Khandelwal, IILM (2010-12)

Before the merger in 2006-07, the losses reported by erstwhile Air India and Indian Airlines were Rs 447.93 crores and Rs 240.29 crores, respectively. National carrier Air India has incurred a cumulative loss of over Rs 15,000 crores since its merger with Indian Airlines in 2007. Losses for Air India stood at a whopping Rs 7,200 crores in 2008-09, more than double the Rs 2,226 crores for 2007-08. Net loss decreased by 23 per cent i.e. from Rs 7189 cr. in 2008-09 to Rs 5551 cr. in 200910. However, The Comptroller and Auditor General (CAG) has found discrepancies in Air Indias accounts which show that the airline under-reported its losses in 2009-10 by over Rs. 3,000 crores and that the figure should have been Rs 8,589.1 crores - 54.7% higher than the stated figure of Rs 5,551 crores. The national carrier has stated that the figure of losses was arrived at after accounting for deferred tax assets (DTA) of Rs. 2842.52 crores and not showing Rs. 195.58 crores as expenditure in the books as maintenance cost for leased planes. X. On-time performance of Airlines: July 2010

43

Meghna Khandelwal, IILM (2010-12)

The overall On-Time Performance (OTP) of scheduled domestic airlines for the month of July 2010 has been 82.7%.

100 90 80 70 60 50 40 30 20 10 0

86.5

89.1

90 74.6

85.4 69.9

90.3 80.5

% of Total 23.8 20.4 7.1 22.1 12.4 9.6 4.2 0.5 OTP %

A proper Airlinewise break of On-time performance (Arrivals/ Departures on time) has been depicted by the graph above. Jet Airways & Jet Lite rated best on time performers amongst scheduled domestic airline for the second consecutive month in July 2010. As per statistics released by the Director General of Civil Aviation, Jet Airways and Jet Lite posted 89.1% and 90% respectively on the critical service parameter of On Time Performance. Nacil (Air India) also achieved a good On time performance of 74.6%.

XI.

Ratio Analysis

44

Meghna Khandelwal, IILM (2010-12)

 Net Profit Margin- Air Indias balance sheet showed a continuous decline in its profitability. Air Indias NPR fell from 0.16% (Mar06) before the merger to a negative figure i.e. -4.85% (Mar08) after its merger. Incurring a loss of Rs7200 crores in 2008-09, its ratio reached to -41.16%. This is a clear indicator of Managements inefficiency. The ratio has declined sharply due to increasing operating expenses and firms inability to withstand economic adversities and hence, convert each rupees sale into net profit. Return on long term funds (%) - ROL has sharply declined due to decline in EBIT, after 2005-06. From 29.49% ROL in 2005-06, it came down to -8.61% (for the year ending 2007) and then furthermore to 10.71% in 2008-09. It shows that the investment is not yielding a satisfactory return due to increase in expenses and decline in EBIT. Return on long term funds for NACIL is also negative, which shows that investing in NACIL is not beneficial. Debt-Equity Ratio- It indicates what proportion of equity and debt the company is using to finance its assets. Air Indias debt/equity ratio has touched its peak i.e. 148.35 in 2008-09 which implies that the company has been aggressive in financing its growth with debt. This has resulted in huge interest burden. Currently, with equity base of Rs9450 crores and total accumulated debt of Rs 40,000 crores, Air India has fallen into a massive debt trap. Current Ratio- The current ratio of NACIL (AIR INDIA) meets the bare minimum of 1.66, which is considered by banks as the minimum acceptable level for providing working capital finance. Air India is facing a great financial crunch and hence, unable to even meet its immediate debts.

XII.

Passenger load factor- It measures of how much airlines passenger carrying capacity is used.

45

Meghna Khandelwal, IILM (2010-12)

Load Factor(%): Jul 2010

100.00% 86.90% 90.00% 79.30% 80.20% 76.60% 80.00% 73.80% 76.80% 71.30% 70.00% 62.50% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

Load Factor(%)

Jet Airways had a load factor of 73.8 per cent, while its subsidiary Jet Lite, had a load factor of 76.6 per cent for the month of Jul. The numbers are likely to go up further on account of the pilots strike in Air India by anything up to 4-5 per cent. Low cost carriers, GoAir and IndiGo have by far outperformed Air India in terms of load factors. GoAir load factor was 71.3 per cent in Jul while for IndiGo it was 80.2 per cent. At the other end of the spectrum, Kingfisher, along with Paramount, witnessed passenger reductions in Jul-2010 with load factors as 79.30% and 86.9% respectively. However, the Jul-2010 load factors lagged Jun-2010 levels, with this attributed to reduced travel due to the onset of the monsoon season.

46

Meghna Khandelwal, IILM (2010-12)

Passenger load factor (Air India)

68.00% 66.00% 64.00% 62.00% 60.00% 58.00% 56.00% 54.00% 52.00% 2005 2006 2007 2008 2009 2010 59.97% 57.15% 66.24% 63.81% 61.26% Passenger load factor 64.80%

Most load factors above 70%, with the exception of Air India Though Passenger Load Factor in Air India improved from 57.15 % in 2008-09 to 64.8 % in 2009-10- an increase of 9 (Nine) per cent but it has been unsatisfactory. Most domestic carriers reported load factors of above 70% for the month, with the exception of Air India, with a load factor of 62.5% in the month. The carrier is currently conducting a route rationalization programme, involving the redeployment of capacity from nonprofitable to profitable routes. As a whole, Indian carriers have generally been careful in adding capacity back into the market which is likely to increase to double-digit growth in the future. This capacity discipline has provided a much-needed boost to load factors and yields, which will in turn have a flow-on effect into profitability.

47

Meghna Khandelwal, IILM (2010-12)

XIII.

Financial Results : 2010-11

Air Indias latest loss estimate overshoots targets set on 31 March 2010 for fiscal 2011. The airline projected a net loss after tax of Rs. 4,164 crores, a 16.81% increase in revenue to Rs. 15,655.49 crores and expenses limited to Rs. 19,819.49 crores, from the previous year. Apart from registering a loss of Rs. 6,994 crores, revenue is now seen at Rs. 13,963.93 crores and expenses at Rs. 21,159.68 crores, Net loss before tax is seen at Rs. 7,195.75 crores compared with Rs. 5,633.56 crores in the previous year. State-owned Air India Ltd is estimated to have posted a record loss of Rs.7,000 crores for the year ended March, thereby, undermining the carriers turnaround plan.

48

Meghna Khandelwal, IILM (2010-12)

RECOMMENDATIONS

Small changes in the schedule, operations and management can yield bigger results Effective and strong measures are required to be taken on the part of the government and the management to help ailing Air India to revive, gain maximum synergy out of the merger and come out of its debt-ridden situation. Few steps that can be taken have been listed below Re-open the profitable routes that were closed to favor Private Airliners. Bring down the one-way Airfares in the range of Rs.4500-8000, for most profitable sectors like Chennai-Port Blair-Chennai and Kolkata-Port Blair-Kolkata. As such Air India flights will surely fly with all its seats filled up and losses will be recovered. Provide transparency and remove corrupted and ill-behaved staffs of Air India. It should run as a business unit and not like a government department. Focus more on the PR issue and undertake measures to resolve the growing employee-management conflicts. There is a need to bring about a change in the incentive model for employees for the combined carriers turnaround. Retrenchment policies need to be adopted- The national carrier needs to take a few drastic steps and retrench employees above 55 years old and do away with contract labourers. This would enable Air India in saving up cost. Heavy downsizing is required in terms of aircraft and people, employee productivity has to be increased and the current employee-aircraft ratio of Air India has to be reduced. Effect a change in the management by inducting a team of professionals, with a guaranteed term of five years. The team must include marketing and HR personnel, the two hugely weak areas currently. Re-establishing the leadership

49

Meghna Khandelwal, IILM (2010-12)

team of Air India by incubating the best private managers who can demonstrate better capabilities to run an airline in an important measure. Operationalising the ground handling subsidiary, securing business aggressively and keeping 51% in MRO is important from a market capitalisation and valuation perspective. This will also enable Air India to enhance its revenues in the current downturn. Operational aspects with respect to fleet size, route network, induction of B787s etc should be given a fresh look by experts keeping Air Indias interests and capacity to bear in mind. For example- Reviewing its aircraft acquisition plan and initiate heavy cost-cutting. Apart from having a clear and strong mandate from the government to transform the carrier, the government must extend a financial bailout package to tide over the difficult financial problem and help air India in its revival plan. Improvement in sectors where even now the capacity is not adequate, for example smaller aircrafts operate where larger ones need to operate as well as in sectors where older aircraft operate burning more fuel where perhaps the more modern fleet can operate, save money and attract more passengers. New network and new fleet- Realigning of flights will help in better utilization of planes and ground assets, apart from load factor. For instance, instead of all flights to key metros starting at 9am from Mumbai, Air India can spread the timings with 10 minutes gap. This will ensure better utilization of airport gates, counters and staff efficiency.

50

Meghna Khandelwal, IILM (2010-12)

CONCLUSION

The root cause of the ills plaguing NACIL (National Aviation Company of India Limited) is the merger which was flawed at its very inception and which never really took off.

Air India, once an iconic airline enjoying monopoly position in the 1990s, is today fourth by way of market share (17 percent), has a debt burden of a whopping Rs. 40,000 crores and financial losses amounting to Rs. 5,551 crores in 2009-10. This is the worst it has ever been in its 79-year history. The bulk of Air Indias woes intensified after its merger with Indian Airlines in 2007. Escalating fuel prices, fierce competition from private players, ill-managed and unplanned merger, massive debt, accumulated losses, public relations issues, Interest dues, mis-management, irrational induction plan, widespread economic gloom, declining passenger traffic, strikes etc. has worsened the situation and resulted in a huge liquidity crunch. The financial ill-health of Air India is attributed to a systematic failure of the political and bureaucratic masters who have run the airline like their own principalities for years now. And the merger of Air India and erstwhile Indian Airlines in March 2007 under Patels directives has led to an unmitigated disaster A number of initiatives have already been taken, including financial restructuring, government support, strict monitoring, improvement of on-time performance and passenger service, as well as rationalisation of routes. Along with this, serious corrective measures by the Management and multiplicity of strict government actions are required urgently instead of doling out inadequate financial aid in installments to help Air India to revive.

51

Meghna Khandelwal, IILM (2010-12)

REFERENCES

http://www.airlineberg.com/ http://business.outlookindia.com/printarticle.aspx?271534 http://www.tehelka.com/story_main49.asp?filename=Ne190311EXCLUSIVE.asp http://www.centreforaviation.com/news/2010/08/31/indian-airline-traffic-continues-growthmomentum-in-jul-2010/page1 http://www.airlinenewsindia.com/2011/05/opinion-plan-to-save-air-india.html http://www.tehelka.com/story_main49.asp?filename=Ne190311EXCLUSIVE.asp http://www.thehindubusinessline.com/industry-andeconomy/logistics/article1994138.ece?homepage=true http://www.tehelka.com/story_main44.asp?filename=Ne030410air_india.asp http://www.ibef.org/download/Airports_270111.pdf

52

Meghna Khandelwal, IILM (2010-12)