Air India has been successfully bid for by the Tatas. Soon commentary and debates will start pouring in. Because the story is indeed a saga. A saga of a crown jewel being taken away and finding its way back 68 years later to the same owner. Of a brand that occupies mindshare of most Indians. And, of an airline that has become the national punching bag of sorts. Yet what was missed in all of this is that the acquisition is actually the easiest part. The real work begins post acquisition.
Having Skin in the Game
A turnaround at Air India requires all stakeholders to be aligned towards a single outcome. That outcome is: a profitable airline. Unfortunately, in spite of key assets and advantages, this has simply not happened. Rather, the airline has continued to bleed with a sense of general malaise.
Given the continued government support in terms of equity infusions coupled with the lack of progress seen over the years, it throws up an interesting question. Namely: Why? And, this is best answered by a quote from the famous author and statistician Nassim Nicholas Taleb where he states, “Being wrong, when it is not costly, doesn’t count …”
While it is simple to dismiss Air India’s challenges as mismanagement or the lack of management, at a deeper level what the numbers indicate is that there is no skin in the game. That is, the incentives are not aligned. And they haven’t been aligned for several years. An acquisition solves this once and for all.
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The Burden of Funding Shifts
Over the last decade, by conservative estimates, the government invested more than Rs 30,000 crore in the airline. And there is not much to show for it. The fleet is crying for upgrade, the route network has gaping holes and on metrics that matter including operational reliability, return on capital and the culture, the airline is found wanting. With a change of ownership, all of these elements will need to be addressed. And addressed together and all at once. It is a challenge that can consume even the most talented managers.
With fleet strength of 127-odd airplanes, Air India lost ~Rs 25 crore a day in the most recent financial year. This during a period when international flights were suspended and only Air India had the capability to mount long-haul flights. Even so, the numbers didn’t add up. Because the margins are out of sync.
As far as debt levels go, the government has hived off significant portion of the debt via their special purpose vehicle. Yet, the debt was so large to begin with that even if a buyer assumes Rs 15,000 to Rs 20,000 crore of debt, this comes with interest costs that have to be managed and have to be serviced by cash-flows. And for the cash to flow, it requires a targeted and focused approach. Again, conservative estimates indicate that stabilizing the airline in its current form (as opposed to shrinking it drastically) will require access to credit of up to Rs 10,0000 crore annually. This figure does not include working capital shortfalls and provisions.
Due to the cash-flow situation at the airline, the on-board product has not been upgraded and is waiting for additional investment. This investment would be over and above the cost savings and balance sheet restructuring and assuming the product upgrade only happens on aircraft flying international routes, the amount is north of Rs 950 crore at the very least. It is also likely that the airline will have to replace a significant portion of the fleet, given variations in weight and economics of the aircraft.
The Reality of a Cutthroat Marketplace
As the Tatas start to revive the airline post acquisition, Air India faces the dual challenge of intense competition in the domestic market, which also includes possibly two new airlines; and even more intense competition with foreign carriers on international routes. But to even come close to competing, it needs to attack its cost per available seat kilometre (CASK) which is the key measure of success for airlines. Its current CASK is 18-22 per cent higher than competitors. As such, they can simply offer discount and take traffic from Air India or match prices and be profitable while Air India bleeds. In either case, the unpleasant reality of costs not being competitive has to be attacked.
And this reduction will require taking a hacksaw approach as opposed to a scalpel. The wherewithal to effect such a reduction remains in question. Especially as Air India continues to creep into the national narrative.
There is also the curse of complexity. Air India is currently flying a fleet mix of 127 aircraft powered by five different engine types (excluding sub-types). Approximately 65 per cent is narrow-body aircraft with the balance being wide-body aircraft. And of this, 75 per cent of the fleet is already leased with lease terms that are not quite competitive. Add to that, the fact that the fleet is not mission specific, which is presumably a result of how the fleet orders were placed. All of this requires renegotiation that will come with its own set of costs.
The network redesign requires talent that is empowered and can deliver on a core network strategy. That is, talent that understands market dynamics, that understands network dynamics and is empowered with a clear mandate. And talent that is not afraid to call a spade a spade but that also must manage soaring expectations while balancing the economic and political challenges of the acquisition.
The Real Work Begins Now
Because Air India has been in the national news multiple times and because its sale speaks to the government’s broader agenda of disinvestment, the narrative at times overtakes the complexity and challenges. It cannot be overlooked that the sale attracted only two bidders; that the sale process took well over two decades (the NDA government first pushed for this in 2001); and that even the most recent transaction has seen multiple delays and decisions, the pandemic notwithstanding.
For Air India, the acquisition is the easiest part. The real work begins post acquisition.
Satyendra Pandey is the Managing Partner at the aviation services firm AT-TV. The views expressed in this article are those of the author and do not represent the stand of this publication.