An Excellent insight into the demise and privatization of Air India, and loot by politicians!

“The story is quite telling in the ways how every stakeholder in a PSU tries to maximize the wealth, personal wealth that is, not for the country”

It is a fact, they are overstaffed. Positions were created to please political bosses. People were hired not for competence but for connections

– By Anurag Singh

Let’s start with a related story. I witnessed an interesting incident long back in Delhi when private buses were introduced and Delhi Transport Corporation (DTC) started making even more losses.

I observed an interesting pattern wherein the DTC buses were almost running empty and the private buses were over- crowded. Were the private operators running luxury or AC buses that time? Not at all. In-fact their buses were worse in quality. So why were private buses running full and DTC ones always empty?

A little probing with the ‘industry folks’ revealed the reason. A very interesting private enterprise innovation when their services were not even at par. On every route, the private operators used to pay the DTC driver every day for one job. The DTC bus should always be behind the private bus on the same route by about 5 minutes or more.

The outcome, people waiting at bus stand are likely to get on the first bus that comes along. The private guy gets all the passengers and the DTC bus follows 5 minutes later when there is hardly anyone at the bus stand. The driver earns his salary as a government servant and also earns ‘incentives’ to run late.

As a govt employee, his job is safe. He doesn’t have to earn profits or worry about running on time or customer complaints. He didn’t join DTC on those terms. Accountability is not on the job description in government jobs.

This story will help us understand the Air India situation much better as we shall see. Where should we start?

Well, to understand money, we’ll need to see where the money comes from and what it is spent on. Let’s see the balance sheet, profit & loss account of Air India. (please see the balance sheet)

Notice the highlighted sections. It adds to Rs 52,000 crores ($7.3 Billion). What is it? It is the debt, the money Air India borrowed to buy planes. In a business where all efficient carriers lease the planes and pay the lease every year, Air India chooses to have its own planes. Why? This is a lesson in economics on why socialism looks like a beautiful concept in theory, except that it doesn’t work.

The story is quite telling in the ways how every stakeholder in a PSU tries to maximize the wealth, personal wealth that is, not for the country.

Year 2005: The year Air India became a cash cow like never before.

I quote from “the statesman” article by Devendra Saksena (IRS officer):(pls see attached article dated June 13, 2018)

But why such a hurry to buy planes when nobody buys them ? Prafull Patel was the aviation minister from 2004 to 2011. He was from the “Nationalist Congress Party”. Hmm.. some nationalism this was !! May be nationalism meant different things those days.

Year 2012: Ajit Singh takes over in 2011 & stayed till 2014. The shoe started to pinch, but who cares. Restructure at the tax payers’ expense. Here is a snapshot of what he did in the drivers seat.

So firstly, government gives away the profitable international routes to private players outside India under bi-lateral arrangements (Recall the bus driver who got paid to run late on the routes!!) and then goes ahead to order 90 new planes when it could easily have leased the planes like everyone does. With a liberal agreement that had no penalties for delayed deliveries. You think such big plane orders are signed just like that, that too in government?

Looks like the “drivers of Air India” got a fairly good deal. And the press freedom was on leave, I guess. This was 2012 by the way. A policy decision that should have got a hard beating was applauded.

Look at the headlines in the papers in 2012? Turnaround? (Please see attached report of 12th April, 2012)

Does the above plan looks even close to restructuing? Govt making the PSU banks pay for the accummulated losses and then converting working capital to debentures at 11% to be used to pay the banks!! Restructuring of a kind.

So why is the debt such an issue? After all it was used to buy the planes?

Not really. First of all, the planes were bought at much “favourable prices”. Favourable to the sellers that is. But that is another debate. More importantly, what does this debt of Rs 52,000 crore do to Air India every year? See the Income statement:

Look at the section in red. Rs 4500 crores of interest cost every year. EVERY YEAR! (Please see the attached profit and loss statement of Air India 2018)

Interest payment is more than the entire employee cost of Air India. Try making a profit with that kind of interest. So here is a ‘national interest’ quite literally, which is not in national interest!

Now for those of you who argue that Air India is doing fine operationally, see the losses. At 55,000 crores, losses are more than the interest payments. Which means that even of there was zero debt, AI would still be making losses. Have you seen a business run where expenses are 103% of revenue? And all this when you own the planes !! Examine the Indigo P&L and see how it manages all expenses within 85% of revenue.

So the expenses have to be 85% range of the revenues to make profits. This inclued employee costs of 10% & finance costs as well. Air India expenses are 103% of revenue even before any interest payments. So they own the planes, no lease payments & still can’t run operations under budget. Beat that!!

Want to compare how the debts look like for other airlines? (see attached Graph)

As you must be wondering, if Jet Airways can go down with the same aircraft strength but much lower debt, the Maharaja should have been dead long back. Yes, but for the ‘restructuring packages’ by the government. We shall address this later.

This debt is like a guillotine around the neck for Air India. It is not going away and the airline can’t make a profit with such interest payments, unless everything else becomes world class. As you can imagine, the airlines is not world class even on other metrics. Let’s see one by one.

Employee strength and related costs: With 122 aircraft in its fleet (including Air India Express), the national carrier has 221 employees per aircraft compared to 127 per plane at Lufthansa (38,000 employees : 299 aircrafts) and 140 at Singapore Airlines (14,000 employees : 100 aircrafts). This is the worst employee per aircraft ratio in the world.

It is a fact that they are overstaffed. Positions were created to please political bosses. Staff was not hired according to operational requirements. “People were hired not for competence but for connections,” said captain Mohan Ranganathan, an aviation safety consultant.

Not only overstaffed but at much higher wages than necessary.

Consider this: Air India’s average employee cost in 2017 was Rs 21 lakh per annum. The average cabin attendants’ cost was even higher at Rs 24 lakh per annum.

IndiGo’s average staff cost was Rs 14 lakh and average cabin attendant cost was just Rs 6.1 lakh per annum.

So an Air India Air Hostess gets paid 4 times compared to the Indigo crew. Wow!

Now with that high staff costs, you would expect the services of a ‘Maharaja’ on air India. No sir, it actually means that the employees are the ‘Maharajas’.

Service levels. Well I have nothing more to add.

Year 2019: The brazenness continues

The airline, with total debt of around Rs 58,000 crore, has sought the govt’s approval to borrow Rs 2,400 crore from the NSSF account to meet its working capital requirements.

Explaining the justification for fresh demand, a senior Air India official told the news agency that ‘the govt is yet to give Air India financial support of Rs 2,484 crore, the balance of the bailout package extended to it by the UPA-II regime in 2012.’

Under the package, a part of a financial restructuring plan for the national carrier, the airline was to receive budgetary support of Rs 30,231 crore over a 10-year period ending March 2021.

The ailing Maharaja has thus far managed to stay afloat thanks to this bailout package but it has already devoured over Rs 27,000 crore of the allocated amount by end 2018.

So the airline would have eaten away Rs 30,000 crores in ‘restructuring package’ from the govt in last 10 years. This is aside of the Rs 58,000 crore debt that is already looking difficult to recollect.

Want to know who gave this debt in the first place? Look at the list of banks below & see the details:

Do you see any private sector bank in the list? It is all PSU banks with tax payers money again.

Still wondering why Government run organizations always run in losses? Well, because nobody cares. Just like our DTC driver above as well as people right at the top who have distorted nationalism benchmarks. Until it is time to shut down. And the time is now.

Meanwhile there are small mercies that we should be thankful to. In view of the upcoming divestment, the Maharaja has put its “expansion plans” on hold.

Thank Air India for this.

Let this be their last favour to the nation.