Air India’s shuffle up

There is a new air of optimism at Air India.

Air India’s recent plan to shift around 19,000 of its employees to its ground handling and engineering subsidiaries hinged on the decision of its employee unions. That fact alone speaks volumes. In all, seven unions were involved in the talks in April; and whilst negotiations were difficult, a decision was finally made.

It has taken a long time for the carrier to realise that splitting up the employee body and creating a separate entity for the ground handling function would be ultimately to its advantage. Analysts believe that such a trimming of the workforce to service the carrier’s needs ought to bear fruit. This step, though, is only part of the approach that will see it try and rid itself of the reputed US$4bn level of debt that is hanging around its neck. Other actions will include the delivery of several B787 Dreamliners, the first of which should start service next year. Their acclaimed frugality should help the airline to the tune of a 20% operational saving. Finally, debt restructuring, courtesy of the country’s banks, will assist in keeping the carrier aloft – and hopefully put it on course for a profitable future.

 

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Nagpur – Future Aviation Hub

The passenger airline business is booming in India. The number of commercial aircraft is estimated to grow to more than 500 from the current 270 over the next five years. New airlines like Kingfisher, Indigo, Spice Jet, Go Air and Air Deccan are expanding their fleet.

A few months ago, American aircraft manufacturer Boeing decided to set up a maintenance, repair and overhaul facility in Nagpur with a $100 million investment. Now, it’s the turn of European Airbus Industrie to follow suit. It has approached the state government to set up a similar facility near Nagpur.

Boeing had earlier said its investment in Nagpur would come on the back of a joint venture with Air India. It is seen as Boeing’s commitment to plough back part of the money it makes by selling 68 aircraft to AI.

The rush to invest in Nagpur was triggered by civil aviation minister Praful Patel’s plan to convert the Orange City, the geographic centre of India, into an international cargo hub. As a first step, he initiated a plan to build an airport for cargo operations.

Cargo carriers are expected to get another shot in the arm when the many special economic zones (SEZs) that have been proposed go on stream. It is expected that aircrafts dedicated exclusively to cargo will go up to 550 in the near future from the current 10-15.

Besides, big business houses have announced their plans to enter the organised retail business where logistics are crucial and cargo crafts will be in demand. It is believed that this is the reason Reliance is in the market for anywhere between 50 and 100 aircrafts to power its retail business.

Aid to Air India

The recent decision taken by U.S. Exim Bank to support Air India (AI) financially has been received with mixed feelings. Most American carriers have labeled AI as “one of the most poorly-run airlines in the world,” and have strongly opposed the $3.4 billion loan to it to buy Boeing 787 Dreamliners.

Air India has pending orders for 27 Boeing Dreamliners, the deliveries of which are expected to begin by the end of this year. These are part of the 68-aircraft order placed by the national carrier with the U.S. plane manufacturer.

Personally, I think that AI has caught a huge break. With no financial backing and dipping commercial value, this was possibly one of the last resorts. I’m not really sure but the kudos probably need to be directed towards Rohit Nandan, who recently replaced Arvind Jadhav (no relation to me) as Chairman.

The opposition by American carriers has resulted in the Air Transport Association (ATA), a trade group representing America’s biggest carriers, shooting off a letter to U.S. Export-Import Bank Chairman Fred Hochberg opposing the decision, saying Air India’s financial ill-health should disqualify it from getting American help.

The U.S. Exim Bank had last month decided to give loan guarantees of $1.3 billion to support Air India’s fleet acquisition from Boeing and another $2.1 billion preliminary commitment to support future deliveries of the U.S. aerospace company’s planes to the Indian national carrier.

From a business perspective, I have always believed that financial stability is the key to a successful airline. Profit margin, commercial (face) value, etc follow. The murky waters in the Indian Aviation Market today have made most airlines (read: Kingfisher Airlines) adapt to the oncoming wave.

Wasted potential

If you approached any air transportation expert and asked about the regional market forecast for the next decade, you would most definitely get an answer that included India and China leading the “rate of growth” category. Although the USA has the most domestic travellers per year, given the population of India and China, they would have surpassed that number had it been for efficient infrastructure and better regulatory efforts. The figure below (courtesy Prof John Hansman at MIT), one of my favourites, gives a good example of an air transportation model and its interactions with the economy.

I really can’t comment on what’s happening in China, but India’s system is miles away from exemplary. Firstly, it is unacceptable that the economic flow is disrupted by an external beneficiary agent. Not only does that agent not belong to the industry, but there also is no paper trail. Secondly, the figure above involves a feedback loop, which in the case of today’s market doesn’t exist in India. Some might argue that things are changing, but I don’t believe the rate of growth is justified. Thirdly, the infrastructure and regulatory framework is virtually zero, unless intervened by a private agency looking for a profit. That is exactly what is happening with the airport development in India today. It’s being privatized. My question is: Do we even need any government overlooking the industry when all it is going to do is either withdraw support of the national carrier in its darkest times and ensure smooth transition into privatization?

It was the IATA director general who recently visited India and reminded them of the potential boom that is possible by saying, “If Indians flew as much as Americans, it would be a 4 billion dollar market“.

Another figure (courtesy Prof John Hansman of MIT) shows that this potential has been visible since 2005, yet almost 6 years later, we are still discussing about prospective targets while the wasted opportunities prove the existence of the Doppler Effect.

Again, arguments like the successful construction of new terminals at hub airports in India can be made, coupled with the progress made in increasing traffic. According to me, way below par. A simple illustration is the fact that projections of traffic passing through Mumbai airport a few years ago have not been fulfilled. The reasons lie in a very bureaucratic, politically (read money-making) driven process to approve a new airport at the Navi Mumbai site. Meanwhile, Delhi has overtaken Mumbai in traffic by constructing a new terminal. Airlines want to target profits the minute they are in sight, and rightly so, as there is a thin line between profit and loss. Hence, they will not wait for Mumbai to realize its potential, rather just move on to the next best option.

Whether it is the work culture, the organizational hierarchy or the industrial illiteracy that is causing this reversal of fortune is yet to be determined and fixed. Promises are still being made as we discuss this, but the infrastructure is not even in place to try to keep them. For an industry that can create jobs, provide a solid financial influx, the transportation ministry of India needs to reevaluate their position on the situation and understand its gravity. That would be job one.