If there is one phrase to describe Air India’s fresh turnaround plan till 2014-15, it is the triumph of hope over experience. Encouraged by the 28 per cent growth in passenger traffic in the first quarter of this year, the state-owned national carrier has eschewed its earlier focus on cost-cutting in favour of expansion. For most corporations, it makes sense to maximise growth impulses in the businesses in which they operate. But Air India isn’t in the same place as most corporations, let alone other airlines. It’s reeling from accumulated losses of Rs 14,000 crore — losses that were built up even before the 2008-2009 slowdown, when the airline business was flying high — and debt of Rs 18,000 crore. Despite this, the airline’s management — endorsed by independent directors, several of whom function in the hard-nosed world of competitive businesses — has approved a plan that appears to defy logic. First, in a business in which competitive advantage increasingly lies in acute cost efficiency, Air India is adding cost with grand plans to buy — rather than follow the industry practice of leasing — a staggering 127 more aircraft over the next five years. This despite the fact that a 2005 government decision to buy 111 aircraft for Rs 55,000 crore played a significant role in raising the airline’s borrowings. The red signals were evident in the airline’s Q1 results. Higher fuel costs and, importantly, depreciation costs as a result of new fleet induction pinched the bottom line despite higher passenger growth. It is unclear how much good selling assets and leasing its offices will bring when the airline is struggling to meet revenue costs and now needs to come up with fresh funds for aircraft purchases.
The new blueprint marks a U-turn from Chairman and Managing Director Arvind Jhadav and new Chief Operating Officer Gustav Balduf’s statements, till recently this year, that the airline needed to cut costs and improve passenger services. As an aside, it is worth noting that the new plan contains little mention of the latter intent, a strange omission for what is essentially a service organisation. But as importantly, there is no template to do what Air India needs most: reduce its 33,000-strong employee base (it is not surprising that the airline’s 13 combative unions have extended an exceptional welcome to this latest blueprint). At 214 employees per aircraft, Air India has one of the worst efficiency ratios in the world. The claim that the airline will reduce headcount by spinning off maintenance and ground-handling as separate subsidiaries is little more than a strategic sleight of hand. These functions are not overstaffed; the airline is suffering a surfeit of administrative deadwood that spinning off subsidiaries does not address.
Although it is unexceptionable to try and ride a rising market, Air India’s challenge at the moment is survival. It is telling that there is some degree of doubt in this fresh strategy with caveats that none of it will work unless the government pumps in Rs 5,000 crore as capital — money the government can ill afford. Overall, it is difficult to avoid the suspicion that this is a cop-out from implementing hard decisions such as job cuts since that would have instantly invited the wrath of the airline’s politically powerful unions. Mr Jhadav told reporters that this plan would be subject to review in three months. It would be interesting to see whether these expansionary impulses will survive the resurgence of competition in the airline space.