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Why Maharaja – drain on public money – must go

05:40 AM May 30, 2019 |

WITH such huge debt on its books, any private airline would have been forced to close shop long ago. Kingfisher is a well known example; it had an unpaid debt of 9,000 crore. But Air India has survived on write-offs and fresh infusion of funds through equity

over the years.

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Lately Air India has been in news: not for a stellar performance but its financial woes.  All past governments have dithered on taking a decisive call on the future of the national carrier which has a huge debt, piled up over the years. All earlier attempts to infuse life into the ailing government-owned airline have failed. Air India has been running into losses primarily because of high maintenance cost and lease rent. In the past decade, it has barely made any operational profit, save FY-16, though fuel charges had fallen. Given its appalling performance and precarious financial health, Air India is a drain on public money. As a consequence, the government is actively considering divestment of the national carrier; another option before the government is privatisation.

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Recently Finance minister Arun Jaitley made a logical and compelling case for Air India’s privatisation when he said that given a choice he would sell Air India completely. He went a step further saying that the government should have exited Air India 15 years ago. Policy think-tank Niti Aayog has, in a recent report to the government, recommended strategic disinvestment of the loss-making airline by transferring the government holding to a private owner. Air India has an accumulated debt of Rs. 55,000 to 60,000 crore, which includes Rs. 21,000 crore of aircraft-related loans and Rs. 8,000 crore working capital. No wonder, the finance minister questioned the wisdom of using Rs. 60,000 crore of tax payers’ money on the national carrier that has only 14 per cent share of domestic market. Though the final call on Air India’s future will be taken by the civil aviation ministry, Jaitely is of the view that sooner the government exits, better it would be.

With such huge debt on its books, any private airline would have been forced to close shop long ago. Kingfisher is a well known example; it had an unpaid debt of 9,000 crore. But Air India has survived on write-offs and fresh infusion of funds through equity over the years. For instance, under the turnaround plan of 2011-12, the government decided to pump in Rs. 30,000 crore over 10 years to revive the ailing airline which doesn’t seem to recover despite gobbling huge public money.  In sharp contrast, private airlines are operating quite efficiently and making profits. Mismanagement is one reason for Air India’s travails. Political interference is another. Merger of Air India and Indian airlines which played havoc with its financial health is the third reason. Undue privileges extended to politicians and bureaucrats, low market share, operational inefficiency and excess manpower are some of the other reasons.

While in the past government has responded with financial package to help Air India come out of financial difficulties, it has rarely tried to fix the problem that will make the airline stand on its own feet and compete with private airlines. The problem is not of funding alone, but inability to run it professionally. It could have been managed competently by people at the helm, but it has never been allowed to be managed professionally, thanks to government’s stranglehold and interference into its working. So what is a way out for the government: disinvestment or privatisation?

Air India was first referred to the Disinvestment Commission of India in 1998; Niti Aayog’s recommendation is the latest in the series of stake sale options considered earlier. Disinvestment option was first thought of 16 years ago when the economics of the airline were quite different from what they are today. But the then government abandoned the thought because of virulent protests and concerns over private monopoly in aviation. Had the government gone ahead with its plans to put Air India on the block, it would have been much easier for the government to find a strategic buyer. While in 16 years private airlines have had healthy growth, the national carrier has gone from bad to worse. Disinvestment, though attractive from government point of view, will need a buyer. However, the government will have to recast Air India both financially and organisationally to dilute its stake.

 Terrible financial state apart, Air India lags behind private airlines on several performance indicators like load factor, higher aircraft utilisation, on-time performance and passenger satisfaction index. Given the airline’s current debt, poor track record in operations, finance and falling market share, it’s hard to imagine that it can be turned into a sustainable airline in the near future. It’s equally hard to think whether disinvestment will be a success. Making it a public sector company with government holding majority stake will not improve the current state of affairs; it will still be under government control with all kinds of ministerial and bureaucratic interference as is the case with most public sector undertakings (PSUs). Efficiency and profitability will go for a toss if there is little or no accountability.

Privatisation is a far better and sensible option. There are international precedents of airlines turning around after privatisation. One example is British Airwaves. More than stake dilution, any move to privatise Air India is sure to face strong opposition from vested interests for fear of losing privileges that they get from Air India.  But a call will have to be taken sooner than later. Peripheral and cosmetic changes will not steer Air India out of the clouds. Neither will a financial package. Aviation is a difficult business to sustain. It can only be run by efficient and professional management which will take independent decisions, not by outsourcing decisions to bureaucrats in the aviation ministry.

Profits were never a concern 50 years ago in global aviation business. Airlines were state-owned national ‘flag carriers’ that got ample state funding for the sake of national pride and international prestige.  But soon they became bloated industries because of inefficiency and losses. The liberalisation of air travel in the 1980s brought in competition from upstarts to the bloated state-owned behemoths. As a result, many airlines were privatised, partly or wholly. India opened civil aviation to private airlines 20 years ago. But Air India continues to fly on the largesse of government and aviation-related PSUs. Like many of the global airlines of Air India’s vintage, privatisation seems to be a prudent option to rescue Air India. Certainly, there is no case for the Maharaja to fly on tax payers’ money.

The author is an independent Mumbai-based senior journalist.

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