Air India caught in the trap of accumulated debt and losses

Lalit Shastri

Air_India_1
Air India 1 (courtesy: wikipedia)

Again the same old story of a sick Indian PSU – the dilemma over the supremacy of process over delivery, the inherent reluctance to change and too many self proclaimed advisers. And the omnipresent fear of the vigilance and audit setups even among those whose primary job is to find innovative solutions and often step into uncharted territories. Handling commerce in a sarkari (government) environment that too in a deeply sick company is definitely not an easy assignment – Ashwani Lohani, CMD Air India

Air India, which is India’s State owned national carrier, lacks a viable policy both for the domestic and the long haul sector. The airline is also devoid of a practical and commercially rewarding long-term fleet plan.

There is every indication that in coming years Air India’s annual losses would be stabilising at close to USD1 billion as for FY 2014–15, its revenue, operating loss and net loss were Rs 197.81 billion (US$ 3.0 billion), Rs 2.171 billion (US$32 million) and Rs.5.41 billion (US$81 million) compared to FY 2011–12, which were Rs. 147.13 billion (US$2.2 billion), Rs. 5.138 billion (US $77 million) and Rs. 7.55 billion (US$110 million).

Poaching of pilots by one of the private airlines is indeed a dirty game. What the poacher does not really realize is the damage it is doing to itself arising out of its unethical conduct. Unfortunately unethical conduct has become so deeply ingrained in the Indian psyche that it is treated as an acceptable behaviour though in our subconcious we always look down upon it. – Ashwani Lohani, CMD Air India

The combined losses for Air India and Indian Airlines in 2006–07 were Rs 7.7 billion (US$110 million). Following their merger, the losses went up to Rs. 72 billion (US$1.1 billion) by March 2009. In July 2009, State Bank of India was delegated the responsibility to prepare a road map for the recovery of the airline which resorted to selling three Airbus A300 and one Boeing 747-300M in March 2009 for $18.75 million to finance the debt. By March 2011, Air India had accumulated a debt of Rs.425.7 billion (US$6.4 billion) and an operating loss of Rs.220 billion (US$3.3 billion).

On the other side, we have the case of Emirates Group that operates across six continents with headquarters in Dubai with an 84,000 strong multi-national team comprised of over 160 nationalities achieved its 27th consecutive year of profit. Emirates’ revenues this year increased 7% to AED 89 billion, and profit increased 40% to AED 4.6 billion.

Similarly, an airline like Etihad Airways, the national airline of the United Arab Emirates, recorded the fourth consecutive year of net profitability and achieved its strongest financial results in 2014, posting a net profit of US$ 73 million on total revenues of US$ 7.6 billion, up 52.1 per cent and 26.7 per cent respectively over the previous year. The record performance, which marked the airline’s fourth consecutive year of net profitability.

Air India and its finances

Till 31 March 2014, Government of India had infused Rs.132,000 million by way of equity into the Company from the time the FRP was implemented. An amount of Rs.65,000 Million was provided in Union Budget for the Financial year 2014-15.

The Government infused Equity Capital of Rs 60,000 Million during 2013-14 thus brought the total paid up Capital to Rs.153,450 million. During the year 2014-15 the Government was expected to bring Equity Capital of Rs.71,060 million including the arrears of the earlier years but the Government could infuse only Rs.57,800 million.
Experts point out that apart from the cash infusion, the other cost of state ownership is that it impacts policy decisions and prevents market-based reforms to protect the national carrier. Now there is a new Organisation Structure approved by the Airliine Board and there is an Oversight Committee at the Government of India Level to ensure implementation of a Turn Around Plan (TAP) and closely monitor the actual performance.

More investments from the government side have made it harder to take decisions necessary to bail out Air India from its financial crisis. It has been noticed that the Government’s bureaucratic apparatus also lacks understanding and this has left an adverse impact on government response. For example, Along with demands for additional seats, the Union Civil Aviation Ministry receives requests for code shares and joint ventures. But in the absence of a clear-cut policy and dearth of expertise with relation to global airline commercial arrangements, the Ministry lacks the ability to respond keeping in perspective the prevailing trends.

Reflecting on the prevailing situation, Air India chief Ashwani Lohani, has observed on a social networking platform: “Again the same old story of a sick Indian PSU – the dilemma over the supremacy of process over delivery, the inherent reluctance to change and too many self proclaimed advisers. And the omnipresent fear of the vigilance and audit setups even among those whose primary job is to find innovative solutions and often step into uncharted territories. Handling commerce in a sarkari (government) environment that too in a deeply sick company is definitely not an easy assignment.” The airline chief of course expresses faith in a “supportive ministry” adding it indeed counts for a lot. He sums up the situation saying: “extremely difficult yet not an impossibility is perhaps the best way to describe the existing scenario that I find myself faced with.”

Lohani faces a huge challenge when it comes turning around the sick airline. Already USD3 billion has been invested under the turnaround plan to date (till mid-2015), while the carrier’s debt of over USD8 billion is more than twice its annual revenue, the funding required by the carrier is even greater than projected in its turnaround plan.

TAP entails both operational and financial turnaround of the Company. Based on the assumptions on TAP, a Financial Restructuring Plan (FRP) was prepared and implemented from 1 October 2011 which envisaged aligning of the debt repayments of the Company in line with the projected Cash Flows.

In tune with the TAP proposals:

  • The MRO and Ground Handling activities were hived-off and operationalised in February 2013
  • The HR Policy was reviewed across the Company and a new Organisation Structure was approved by the Board in order to right-size the position at various levels in the Organisation hierarchy.
  • An integrated IT System has been put in place for improving operational performance.
  • There has also been renewed focus on revenue generation through other services like Ground Handling Department/ Security Department by providing services to about 59 Customer Airlines at Indian Stations and Engineering Department.

Despite the stress on streamlining the HR Policy, under TAP, Air India is confronted with the problem of exodus of pilots. Reflecting on this problem the Air India chief says: “Poaching of pilots by one of the private airlines is indeed a dirty game. What the poacher does not really realize is the damage it is doing to itself arising out of its unethical conduct. Unfortunately unethical conduct has become so deeply ingrained in the indian psyche that it is treated as an acceptable behaviour though in our subconcious we always look down upon it. Yet I am sure that we would be able to beat this despicable behaviour by our sheer grit and commitment to the nation.”

Peter Harbison, Executive Chairman CAPA – Centre for Aviation has spelt out in clear terms is that the only reason the airline industry has survived is that it has paid its debts when they fell due. Servicing debt has been the key to survival. No matter how poor an airline company was as an equity investment, it almost always paid its creditors.

Besides, Harbison also points out: “Whether the equity owners were governments (“subsidy”) or private, most have effectively subsidised consumers in an increasingly competitive operating environment. Consequently, he points out that over the past year or so, some airlines have actually managed to break the brutal cycle of boom and bust.” Leaders in this conspicuous transformation have been the US majors, greatly aided by the tailwind of bankruptcy protection, followed closely by consolidation. Others too have scaled financial heights. IAG, transformed by strong and effective leadership; Qantas by a unique combination of transformative measures; and Japan Airlines, with no debt (in 2014, with a net debt to total capital ratio of -7%. This followed its bankruptcy filing in 2010 and subsequent recapitalisation in 2012, which has left it with a significant cushion against any future downturn).

Harbison goes on to emphasise, debt will always be a vital part of an industry which has to make such large capital expenditures relative to cash generated from operations. According to UBS data, between 2005 and 2014, a range of airlines tracked allocated an average of 89% of their cash inflow from operations to capital investment annually. and on the other extreme we have Air India that sells aircrafts to service debt.

In Asia Pacific, almost every major airline group is reducing its indebtedness, including Virgin Australia, Qantas, Singapore Airlines, EVA Air, Garuda, Korean, China Airlines, China Eastern, China Southern, ANA, Cathay Pacific, Cebu Air, Air China, Air New Zealand and AirAsia. Even JAL, already in a net cash position, is modestly repaying debt. These are made possible through improving earnings and in some cases, lower levels of capital expenditure (Airline Leader – Issue 31: Nurturing the piggy bank while the good times last).
financial position of Airlines in IndiaCloser home, The domestic aviation market share numbers for May 2015 showed IndiGo flew more passengers than Jet Airways and Air India combined. IndiGo in fact accounted for two-thirds of passenger growth.

Total international traffic to/from India also grew at 9.0% in FY2015, however Indian carriers grew slightly faster at 10.2%. Jet’s growth rate was around twice that at 20.6%, with the airline accounting for close to 75% of the incremental international traffic carried on Indian airlines.

CAPA in its report – Aviation Sector in India 2015, points out that In FY2015 traffic increased and losses declined but this was largely a function of lower fuel prices. With the situation remaining constant for all Indian airlines, IndiGo saw strong growth in total revenue in FY2015 which crossed USD2.5 billion.

When a top-level bureaucrat was asked to comment on the performance of private airlines vis-a-vis Air India, he said besides professional merit what needs to be probed is whether or not those in Government had side-tracked the interests of Air India and were instrumental in doling out rewarding routes to the private players.

In a scenario that appears dismal for Air India, Lohani continues to be optimistic. Recounting the positives in Mid November, he posted on facebook: “So finally lord jagannath (our head of engg) gave us 60 planes to fly on the domestic sector today, up by almost 10 that we had 2 months back. And my head of operations has not been giving sleepless nights by ensuring smooth operations and the commercial guys trying their level best to touch 50 cr a day. Alnost everyone is putting in his best to pull AI out of the morass.The team is terrific and they shall do it I am absolutely certain and this strengthens my belief in the inherent goodness of men in general.”

Regarding the need to augment the airline fleet, this is what Lohani has to say: “So we have also decided to grow. 15 more planes shall be added to the domestic fleet in 2016, followed by another 15 that shall be replacements and would arrive in 2017. Meanwhile the international sectors would witness addition of 6 787’s and 3 777ER’s that would all arrive in 2017 and 2018. And this is just the beginning”, of course for the much awaited turn around.

WPI and Food prices still do not converge albeit WPI’s decline in Nov

Newsroom24x7 Desk

rbi2New Delhi :  Wholesale prices fell again in Nov, but food prices and indices do not appear to be moving in the same direction yet. India’s wholesale prices fell for a 13th straight month in November, but contrary to a unidirectional convergence, the country is registering a sharp pickup in food prices. Adding to this is a pending wage hike for millions of government employees, which, combined together, inches in the route of worry for policymakers regarding potential inflationary risks.

Latest government data showed that the wholesale price index (WPI) has declined an annual 1.99 percent last month, driven down by tumbling oil prices. However, wholesale food prices in November gained 5.20 percent year-on-year, compared with a provisional 2.44 percent rise in October. Waiting for the data of November figures for the consumer price index (CPI) to be released by day end, each of the indices have their own tale to tell regarding the country’s economy. Consumer prices are tipped to have gained for the fourth consecutive month in November, rising an annual 5.4 percent on the back of a jump in food costs.

Higher food prices and anticipated higher government salaries are widely expected to build up into price pressures, which is anticipated to ties the hands of regulators, making it tougher for the central bank to keep retail inflation around 5 percent by March 2017. Economists opine that Reserve Bank of India (RBI) faces a tough challenge in meeting its medium-term CPI inflation target, suggesting that the rate-cutting cycle has now come to an end.

After easing monetary policy aggressively this year, the RBI kept the key repo rate on hold at 6.75 percent earlier this month. Global commodity scenario did rub off its effect on the Indian trade calls, and, While a crash in global commodity prices has tamped down prices in India, the central bank has not been relieved of its introspective measures as it remains worried about elevated household inflationary expectations.

Adding to it, is an additional conclusion of expected Federal Reserve hike of U.S. interest rates this week, as a result of which, the expectations of aggressive rate cuts in 2016 are very low.

Typhoon Melor forces 700,000 evacuations in Phillipines

Newsroom24x7 Desk

typhoonManila : More than 700,000 people fled the central Philippines amid threats of giant waves, floods and landslides as powerful Typhoon Melor approached the archipelago nation. Typhoon Melor rubbed into northern tip of Samar, a farming island of 1.5 million people, in the early hours today, and created windy storms, with winds gusting at 185 kilometres (115 miles) per hour. The state weather bureau informed that althought the fury of wind gush was dangerously fearsome, yet, fortunately, there were no immediate reports of casualties or damages, in the ab initio stage of typhoon alarm.

Samar has been an area prone to typhoon trouble and carries with itself, a history of such calamities even in the past. It was one of those areas which got devastated in 2013 by Typhoon Haiyan, when giant waves wiped out entire communities, leaving 7,350 people dead or missing.

Authorities today have warned that Melor’s powerful winds bear the potential to whip up four-metre (13-feet) high waves, blow off tin roofs and uproot trees. Additionally, the Met department is not ruling out heavy rains causing havoc within its 300-kilometre diameter, and weather bulletins are anticipating floods and landslides.

The update on Typhoon Melor released by National Disaster monitoring office spoke of parallel evacuations in other sensitive zones in vicinity — like, in Albay province alone, almost 600,000 people were evacuated due to fears that heavy rains could cause mudslides on the slopes of nearby Mayon Volcano. A detail report of Albay evac showed images of residents carrying bags of clothes and water jugs clambered onto army trucks in Albay’s Legazpi City ever since authorities sounded an evacuation alarm. The alarms were supported by factual catastrophe when huge waves crashed into the city’s deserted boulevard rendering the high rise palm trees swaying like tendrils amid strong winds.

Same was the state of affairs in the region of Sorsogon. An additional 130,000 people were also evacuated in nearby Sorsogon as the latest typhoon is expected to cut across the country’s central heartlands in the early hours of Tuesday before heading out to the South China Sea in the west. The government had prepared more than 200,000 food packs and other emergency items ahead of the storm’s landfall, as confirmed by social welfare secretary Corazon Soliman.

The Philippines is unfortunately a favored address for typhoon and contains a large history sheet which reveals that this region gets battered by an average of 20 typhoons annually. Typhoon Koppu, the last deadly storm to hit the country, had killed 54 people and had forced tens of thousands to flee their homes after it pummeled the northern Philippines in the recent month of October.

Sushma Swaraj – Indo-Pak talks will mark a new beginning for peace and development

Newsroom24x7 Desk

Parliamentarians of  India by Anoop SwaroopNew Delhi : External affairs Minister Sushma Swaraj made a suo motu statement in the Parliament and shared her experience with legislators in the house. While addressing the MPs (Members of Parliament) in Rajya Sabha, Swaraj expressed hope that re-engaging with Pakistan under a ‘Comprehensive Bilateral Dialogue’ would mark beginning of peace and development. Recapitulating her last week’s visit to Islamabad, and the recent developments relating to ties between the two neighbors, the Minister said, Prime Minister Narendra Modi had discussed with his Pakistani counterpart Nawaz Sharif on the sidelines of the environment conference in Paris and had taken an initiative of ‘again re-engaging with each other.’

Swaraj said — The underlying sentiment, on which I am confident that this House concurs fully, was that the continued estrangement of two neighbors was a hurdle to the realization of our shared vision of a peaceful and prosperous region. She elaborated on the principal obstacles which posed deterrant to the growth of ties, and bringing the house’s attention directly on the matter of militancy, Swaraj stated that the matter of terrorism would have to be clearly and directly addressed, for which the PM had laid a discussion carpet earlier, which was spread further by the respective country’s NSAs recently, thereby, which Swaraj herself took forward and weaved into discussions with Pakistani counterparts during her recent tour.

She read out her statement amidst protests from the usual suspects — the members of several opposition parties, who, dug into the well and vociferously raised slogans on several issues. Swaraj said, the comprehensive ‘Bilateral Dialogue’ with Pakistan is aimed at removing hurdles in the path of a constructive engagement by addressing issues of concern. Also, it focused on avenues for exploring and establishing cooperative ties. She stated, initiatives on trade and connectivity, people-to-people exchanges and humanitarian issues would all, together, contribute to welfare of the entire region and promote better understanding and mutual trust. In her exact words — The new Dialogue, we sincerely hope, marks a new beginning also for peace and development in the whole region.