Maharaja's Downfall- The Air India story

Published by MBA Skool Team, Published on October 19, 2011

Air India and India Airlines are merged in 2007 (NACIL was formed) in order to recover their losses and work efficiently. But due to mismanagement of authority it became a complete failure. Instead Air India right now is immersed in huge amount of debts. The problem with Air India is there is no clear ownership. The MD is frequently changed and new plans are laid. Due to poor execution of plan and improper strategy along with massive misuse of funds the net worth of Air India is right now is in negative. Thus it is high time Government take drastic step to save Air India.


On 5th March the scene in Delhi Airport was different. Confused passengers running from one terminal to another. The problem was Air India’s scheduled flights were cancelled. There was a strike by the pilots/employees of Air India.  The price of private airline’s flights tickets shot upto INR 14,000!

Air India has a glorious history. It was started by J.R.D Tata as Tata Airlines in July 1932. It became a public limited company in July 1949 when Government of India acquired 49% of the airlines, with an option to purchase additional 2%. In 1953 the latter exercised its option to purchase majority stake in the carrier and it became nationalized. The nationalization was expected to spur growth, promote economic activity, rush assistance in times of natural calamity like flood, famine, earthquake and serve as the second line of defense in the event of war with another country.

But with the open skies policy and private players entering the market both Air India and Indian Airlines were hard hit.

Background of Merger

Though operating in one of the fastest growing airline market in the world, both Air India and Indian Airlines were suffering losses before the merger in April, 2007.  The former is plagued by the ills of bloated workforce and ageing fleet, the later a largely domestic operation that has been ceded market steadily to nimbler privately owned rivals for the past decade [2]. Thus, in an attempt to revive them, the Government of India decided to merge the two entities and a new enterprise called National Aviation Company of India (NACIL) was formed.

Plans and outcome of the merger

After the merger, in the first year of its operation was planned to focus on the workforce beginning with a management team of 400 people. The plan was eventually to split the carrier into five strategic units: Passenger, cargo, ground handling, MRO and low-cost airline. Five CEO would be heading the units and would report to one group chairman and MD.

But as it turns out, the managers of the two carriers have little independence. They have to wait for Ministry of Aviation approval for taking not only major decision like buying new aircraft but also on routine business issues like new routes. According to Kapil Kaul, CEO of the Centre for Asia Pacific Aviation’s India, the government will ultimately privatize the carrier. But the ground picture was different. The management did not take any step to help in the process of privatization rather it was busy smoothing the ruffled feathers of the unions. Immediately after merger the workforce wanted clarity on their job function and prospects to be impacted by the merger. A meeting convened by the Department of Company affairs saw a strong turn-out from the unions representing a cross-section employees ranging from pilots, cabin crew to ground workers and pensioners who wanted their medical and other benefit to be continued. Thus like most merger Air India faced strong opposition from the employees. They were uncertain of their future roles and there were issues regarding wages too. Most of the wage agreements and seniority issues were cleared before the merger.  But most of the issues were not resolved by the Air India management, which led to pilot strike and huge losses.

Analysis of post merger era

The merger was done hastily without the management working on any solution of the possible problem to be encountered. Till now, no action has been taken to resolve the vital issues like integrating the human resources and flight operations. The following problems can be clearly stated for the failure of the merger.

Disparity among pilots

During the time of merger it was promised by the management that both Air India and Indian Airlines pilots would receive same amount of compensation. But in reality the picture was different. Pilots of erstwhile Indian Airlines were angry for not getting the same pay as their colleagues of Air-India for doing identical job and working in the same organization. Some top officials, including the expatriate chief operating officer Gustav Baldauf, have quit because of this reason.


Unplanned Cargo Operation

It was decided during the merger a separate division handling cargo would be formed. Thus Indian Airlines limited (IAL) signed an agreement with M/S Aeronautical Engineers Inc, Miami, US, in 2006, to convert five B737 aircraft into freighter aircraft for retail courier service at a cost Rs 41 cr. All five aircraft are now grounded. Even when they were leased out to private players in 2007 and 2009, it resulted in a loss of over Rs 29 cr. This startling revelation came after the Comptroller and Auditor General (CAG) scrutinised the National Aviation Company of India Ltd (NACIL) accounts [3].

This shows clearly the management has plans to lift Air India’s image and recover it losses. Due to improper execution it always resulted in huge losses. The management also could not answer who is responsible for all these hasty decision and why such decision has been taken.

Reasons for increasing losses and debts

Around July 2011, the cumulative loss and debt burden of state-owned airlines stood around whopping Rs 67,270 crore. Its debt burden stood at Rs 46,950 crore - Rs 20,185 crore worth of aircraft loans, Rs 22,165 crore working capital loans and over-dues of Rs 4,600 crore. The national carrier has to repay a whopping Rs 20,415 crore worth of loans before the end of this fiscal year. High aviation oil prices, rise in wages and competition from other airlines are causing state-run Air India to incur Rs 600 crore monthly, as income is around Rs 1,100 crore and expenses at Rs 1,700 crore, Civil Aviation Minister Vayalar Ravi said on Thursday. Besides, the Government is paying interest on working capital and procurement of aircrafts.

The series of government infusion

Against the backdrop of the state-owned airline's massive cumulative loss and debt burden of about Rs 67,000 crore in July 2011, the Group of Ministers(GoM) headed by Finance Minister Pranab Mukherjee granted approval for the Rs 1,200 crore equity infusion.
The GoM has also granted approval for payment of Rs 532 crore for operating VVIP and rescue flights for the government and formation of strategic business units for groundhandling. The Government on July 18th released Rs 265 crore to Air India to partially clear the interest burden to banks. Air India has borrowed loans from a consortium of 22 banks led by SBI. Bank of Baroda, Punjab National Bank and Bank of India are the three biggest lender of the airline. Central Bank and HDFC are the other key lenders. Air India has defaulted interest dues on the working capital debt which is Rs 22,100 crore. Apart from 256 Cr. Government has provided cash-strapped Air India with an advance equity infusion of Rs 500 crore during the current year.

Misuse of funds

The government on August 3rd said that an amount of over Rs 350 crore is due towards Air India for operation of VVIPs and other special flights. A report by the Comptroller and the Auditor General has said that the then Finance Minister P. Chidambaram, as the head of an empowered group of ministers, forced Air India to buy 50 aircraft from Boeing in 2006. Air India did not need the aircraft but Chidambaram negotiated with the manufacturers and arrived on the decision to "place a firm order of 50 aircrafts". Air India had suggested that the order to Boeing should include 15 long-haul aircraft at the cost of $3 billion, that is around Rs 13,300 cr today. However, an empowered group of ministers (eGOM) talked with the manufacturer and decided to buy 50 aircraft as it was a "good" deal. The CAG report criticises the airline for borrowing money at a high rate of 11.75% interest from IDBI Bank when it had the option of back stop financing at 4% interest with Airbus. Back stop financing is an arrangement where the airline makes a small down payment and the manufacturer covers the rest. "Due to this the national carrier suffered a loss of Rs. 314.66 crores till March 2010, and the losses which will be incurred in future will amount to Rs. 2,459.79 crores," the report says. The CAG report also states that because of loans taken by the airline, the exchequer had to bear a loss of Rs 199.37 cr.

Routes Discrepancies

The CAG report in May complains that Air India kept various routes operational despite suffering heavy losses: "Despite its critical financial position, the national carrier continued with routes which were rendering cash losses in domestic and international sectors." The report refers to the India-US sector where Air India operated 10 international routes during 2005-09. By 2008-09, these routes were incurring losses. "Air India Ltd. was consistently making losses on the USA route and this was the single biggest sector impacting its revenue. Its operating losses on the New York sub route jumped from Rs. 73.84 crores in 2005-06 to Rs. 1499.71 crores in 2008-09 due to increase in number of flights from 725 to 2,183," the report says. One route of Chennai to Bangkok with 95% passenger load capacity was cancelled and Thai Airways got the major pie of this shocking decision. Air India has not been able to inform the ministry and pilots why such a decision was taken. Another profitable route in the Middle East was reduced to just one flight a week. "For instance, Chennai-Colombo IC573/574, one of the oldest and most strategic linkages between the island nation and India, this flight has been operational for over 30 years. SpiceJet started flights to Colombo recently and it clearly shows that AI management is purely withdrawing its operation to favour private players," said an industry insider


Unanswered questions

During the recent strikes by the pilots of Air India they raised the following questions. These questions are still not answered by the management.

  • Who is responsible for the step-by-step destruction of Air India and wasteful expenditure of our taxes?
  • Why their profitable routes, which had more than 85% occupancy rates, were either shut down or given away in bilateral to domestic and foreign carriers?
  • Why an airline that had a turnover of Rs7, 000 crore per year placed orders for 68 aircraft worth Rs35,000 crore?
  • Why the airline was forced to form a joint venture with a Singapore-based company and share 40% of its annual earnings of Rs50-60 crore in ground handling? [10.02]
  • Why land in Delhi and Mumbai has been sold to private companies below market price?
    • Why there is duplication of expenses for Air India and India Airlines?


Every tax-payer in this country has the right to know why Air India is not able to recover from its losses. The government infusion is actually the money we pay as taxes. The net worth of Air India right now is negative. The government of India should take serious actions to help the carrier to compete with the private players.


This article has been authored by Arpita Bhattacharya from T. A. Pai Management Institute (Marketing, Systems)

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