Tag Archives: Indian airlines

Shady players, aviation scam and the boom and bust of airlines in India

Lalit Shastri

The fate of now closed Kingfisher Airline, Air India’s huge debt burden and the latest grounding of Jet Airways raises several burning questions.

The merger of Indian Airlines with Air India and the reckless acquisition of aircraft by these airlines ahead of their merger and many related issues has put the former Union Civil Aviation Minister Praful Patel and many bureaucrats connected with civil aviation under the scanner of the Central Bureau of Investigation (CBI).

The probe by the principal investigating agency will eventually lead to the prosecution of those prima facie guilty but even as the enquiry against the “unnamed accused” is on, one should not lose track of the fact that the previous Congress regime, led by Manmohan Singh, was at the centre of the huge aviation scam.

  • Sunil Arora, now Chief Election Commissioner of India, after enjoying his tenure as Chairman/Managing Director Indian Airlines, kept quiet for long and before returning to his parent cadre, apparently to save his skin, wrote a letter to the Government alleging the Civil Aviation Minister’s interference.  In his letter, he had underscored that the then Civil Aviation Minister Praful Patel was forcing the airline Board to take financially unviable decisions. Arora had alleged that he was under immense pressure to comply with the Minister’s orders.
  • Arora was CMD Indian Airlines between 2002 and 2005. He also served as a joint secretary in the Ministry of Civil Aviation from 1999 to 2002
  • Syed Nasim Ahmad Zaidi was Election Commissioner of India from 2012 to 2015 and Chief Election Commissioner of India from 2015 till 2017. Earlier, he was Secretary in the Ministry of Civil Aviation and Director General of Civil Aviation. He was also in the International Civil Aviation Organization (‘ICAO’) for four years as resident Permanent Representative of India on the ICAO Governing council.
  • Along with other directors of Jet Airways, Zaidi presided over the grounding of the cash starved airline
  • Another ex-bureaucrat also a director in Jet Airways is Ashok Chawla. He was Secretary in key ministries of the Government of India, including Finance, Economic Affairs & Civil Aviation. He also served on the Boards of the Reserve Bank of India and the Insurance Regulatory and Development Authority. He has at different points in time, been India’s Executive Director on the International Fund for Agricultural Development and Alternate Governor for India at the World Bank & Asian Development Bank.
  • Vishwapati Trivedi, former Union Secretary, was Chairman-cum-Managing Director of Indian Airlines. He became joint MD of the new company after the merger of Indian Airlines with Air India. His stint (2006-2008) was cut short in the midst of allegations of corruption linked to upgradation of the airlines’ product portfolio in 2007. Trivedi also raked in huge incentive payouts and a large number of first or business class passages. When it came to drawing huge performance linked incentives, Trivedi was in league with a couple of other bureaucrats who have headed the airline.

Indian airlines which was a state monopoly went down when VP Singh grounded all A320s for a year-and-half after the Bangalore crash. This was compounded when Praful Patel merged Indian Airlines with the profitable Air India to ensure both nose-dived and Jet and Indigo benefited. The low fares came on low cost airlines and were at break even point. Of course the unsustainable North-East routes were compulsory. Air India now sits on a debt of about Rs. 40000 crores.

To understand the genesis of the decline, one would have to zoom in and take a closer look at the controversial decision that had been taken to bypass the letter of intent that had already been issued to procure Boeing aircraft for Indian Airlines and shift the choice of aircraft leading to the A320 purchase agreement at the initiative of Prime Minister Rajiv Gandhi in June 1989.

When Indian Airlines was in utter mess with the grounding of A320s in 1990 in the wake of the Bangalore crash, Naresh Goyal took advantage of the Open Skies Policy of Government of India to set up Jet Airways to offer scheduled air services on domestic sectors in India. Jet Airways commenced commercial operations on May 5, 1993.

Goyal had taken full advantage of the Government of India policy that allowed foreign direct investment in the airline sector and when Jet Airways was at the take off stage in 1994, 60 per cent of its shares were with Goyal while the remaining 40 per cent were held equally by Gulf Air and Kuwait Airways. After establishing his airline, Goyal managed to waive off all competition obviously by pulling strings at the Government of India level to alter the policy to bar foreign airline investment in any domestic carrier. This was not difficult for him considering his close association with top Congress leaders. Consequently no airline could take the same route as Jet Airways to establish itself. It is an entirely a different matter that even Jet Airways had to offload the foreign stakeholders when the GoI policy had been changed but by this time his airline had already established itself and there was no competition on the horizon till 2012 when the Indian Government took the decision to allow 49 per cent holding in a domestic carrier by a foreign airline and 100 per cent by an NRI.

This was the period when the airline sector was being treated as the grazing ground for politicians and bureaucrats. The trend continues even to this day.

The moment Praful Patel became the Civil Aviation Minister in 2004, during UPA-I led by Manmohan Singh, he had spearheaded the decision to merge the two airlines – Air India and Indian Airlines – and gave a huge order to purchase aircraft – both to Boeing as well as Airbus.

Of the eight Boeing 777-200LR acquired by Air India after Patel took over, five of these grossly under-utilised aircraft were sold to Etihad Airways for $336.5 million in December 2013 as a part of the “financial restructuring” exercise. After the Comptroller and Auditor General of India slammed the national carrier for selling the aircraft at a loss and below the market price, Air India took the defence that the indicative sale price was not available.

The merger of the two Public sector airlines has been criticised continuously by those in knowledgeable circles as one profit making airline was merged with a loss making airline. The propelling idea behind this decision was that there would be a common infrastructure. In the end, neither the personnel policies, nor the engineering policies or the routes matrix gelled and nothing worked.

On 11 January 2006, Air India announced an order for 68 jets – 8 Boeing 777-200LR, 15 Boeing 777-300ER, 18 Boeing 737-800 and 27 Boeing 787-8 Dreamliners. After the merger in 2007, Air India inducted the biggest member of the A320 family, the A321, to operate mainly on international short haul and medium haul routes. Simultaneously, Air India also leased the Airbus A330s to operate on medium-long haul international routes (ref: wikipedia).

There is another big question: When the loss making Indian Airlines could be merged with Air India, why Kingfisher, an airline with 100 aircraft that was flying both on domestic and important international routes, was allowed to collapse? This airline was going bad mainly because of Aviation Turbine Fuel (ATF) prices and global recession. The government could have taken over Kingfisher, removed Vijay Mallya as chairman and merged it with Air India – given the fact that so many jobs and what not was involved. Air India was having only about half of the total fleet of aircraft that was at Kingfisher’s disposal.

While the previous UPA Government allowed Kingfisher to collapse, it went whole hog to save Jet Airways by closing down Air India’s lucrative international routes to favour Jet Airways. Even the time slot on the domestic sectors were allegedly approved to favour private carriers. According to insiders, all this was done at the behest of Praful Patel, known in political circles as the “Maharaja of Gondia”.

Praful Patel got Arvind Jadhav- a 1978 batch IAS officer, as CMD Air India in 2009. He was known to be a blue-eyed boy of RV Deshpande, Minister for Large and Medium Industries of Karnataka. Deshpande and Patel are related.

During the corresponding period (August 2003 to 8 June 2009), high-profile bureaucrat, Rajesh Kumar Singh was initially Director and then joint Secretary in the Civil Aviation Ministry. At the Joint secretary stage, he took premature retirement from the IAS and opted for a lucrative assignment with a commercial airline. Here one can’t help questioning how bureaucrats who have held important posts in the Civil Aviation Ministry are given waivers to join the very airlines they had official dealing with.

The dust raised by the merger of the national carriers, has led to the registration of a series of FIRs by the CBI. The first case has been registered under Section 120-B read with 420 of Indian Penal Code and Section 13(2) read with 13(1)(d) of Prevention of Corruption Act, 1988 against Air India, “unknown” officials of Union Ministry of Civil Aviation and others to investigate the allegations relating to purchase of 111 aircraft for national airlines costing about Rs. 70,000 crore to benefit foreign aircraft manufactures. Such a purchase caused an alleged financial loss to the already stressed national carriers.

The second case has been registered under Section 120-B read with 420 of PC and Section 13(2) read with 13(1)(d) of PC Act, 1988 against “unknown” officials of Ministry of Civil Aviation, NACIL, Air India and private companies and unknown others to investigate the allegations of leasing of large number of aircraft without due consideration, proper route study and marketing or price strategy. It was also alleged that the aircraft were leased even while aircraft acquisition programme was going on.

The third case has been registered under Section 120-B read with 420 of IPC and Section 13(2) read with 13(1)(d) of PC Act, 1988 against “unknown” officials of Ministry of Civil Aviation, National Aviation Company of India Ltd. (NACIL) – the entity formed by the merger of Air India and Indian, Air India and other unknown private persons and companies to investigate the allegations for giving up profit making routes and profit making timings of Air India in favour of national and international private airlines causing a huge loss to the national carrier.

A Preliminary Enquiry has also been registered against unknown officials of Ministry of Civil Aviation and unknown others to enquire into the allegations relating to the issue of merger of the two national carriers -Air India and Indian Airlines – causing loss to the national exchequer.

Corporate lobbyist Deepak Talwar, who was extradited from Dubai on 30 January 2019 along with Dubai-based businessman Rajeev Saxena, was brokering aviation sector deals for his foreign clients during the UPA regime. It is alleged that he received kickbacks in his Singapore based company Asiafield Limited from Emirates, Qatar Airways and Air Arabia. During investigation into cases registered by the CBI, he may spill the beans that would expose the role of bureaucrats and politicians in the aviation scam that has plagued the airlines in India.

On the grounding of Jet Airways, AIR India CMD Ashwini Lohani has said:

“The closure of Jet even if temporarily is definitely a setback to Indian aviation. It is indeed a sad day for all those in the business of flying in the country to witness a fine airline closing shop. While sustained mismanagement definitely contributed, the fact remains that in the entire aviation eco-system, it is the airline that invariably remains at the receiving end while all other stakeholders make money. We have in the past witnessed many airlines shutting shop and it is time to appreciate that the razor thin margins which airlines are forced to operate with in a competitive environment, results in a scenario that encourages unsustainability. The issue has no easy solutions, yet a solution would need to be found.”

Lohani is right in saying “Airline operations world over is a razor thin business”. Riding piggy back on this razor thin business is the Government, especially through GST, the oil marketing companies, the airport authority, service providers and the airline honchos, they all stand to gain.

In order to make an airline a successful business proposition, you have to work with cost cutting, aviation Turbine Fuel should be declared as goods and airlines allowed to import ATF. What needs to be noted is that ATF is not under GST and each state levies huge taxes, cess etc in addition to central excise duties, making it very costly. User development fees should be rationalized, operational slots and routes given equitably and rationally.

Lohani, despite his close links at the top government level that has helped him get a second stint as CMD Air India, too has not done anything for policy. As far as mismanagement goes, private and government airlines’ management has had great perks, it siphoned off money into promoter or politicians’ pockets while letting airlines collapse. Air India is no exception to this rule. It gave up lucrative routes, operated politically sponsored routes, bungled in fleet acquisition etc. Air India could have become asset light and nimble which it did not. Jet operated in shady back rooms and milked the banks much like Kingfisher but Naresh Goyal got away giving controls into the hands of the SBI Chairman and the consortium of lenders to seal the bidding process for Jet Airways. Goel rejected offers from Tatas, Delta and Indigo that entailed his stepping down. His not doing so and his mismanagement led to jet’s downfall.

Also read: Audit reveals how the aviation sector has been mismanaged and exploited in India

Why Madhya Pradesh lacks good air connectivity

Lalit Shastri

Gwalior doesn’t offer any traffic, still due to Madhavrao Scindia, I had to connect it by air although it was a loss making circuit – PC Sen, when he was heading the national carrier in the 90s of the last century

There has been a trail of comments on a facebook post today with everyone tagged expressing concern about Madhya Pradesh, especially the two cities Gwalior and Jabalpur, lacking good air connectivity.

Air connectivity is a barometer of economic progress that has to be across the board… One can’t think of airlines, including the national carrier, to stick their neck out and serve a sector that’s uneconomical and beyond redemption. The adverse situation has only got precipitated over time since we have allowed the creation of an environment in which only politicians, crony capitalists and their cronies prosper while industries crumble and investment becomes a mirage due to soaring production costs, extreme corruption and a warped and complicated system of enforcement and tax collection. It is rather sad that most people, who are in the unorganized sector, suffer drudgery and receive less than economic wages. We have to change the political narrative and break the politician-bureaucrat-crony capitalist nexus to think big and look forward to a robust aviation sector.

Now coming to the point about Gwalior and Jabalpur lacking good air connectivity…I recall when PC Sen was CMD Indian Airlines and Air India between 1995 and 1998, I had interviewed him as Principal Correspondent of The Hindu. Sen had told me that Gwalior offera hardly any traffic, still due to Madhavrao Scindia, he had to connect it by air although it was a loss making circuit.

Development and progress, more than two decades after what the CMD of Air India had observed regarding Gwalior, remains a mirage. Now what’s being flaunted by the present political leadership and those in the government as infrastructure for growth is grossly inadequate and it’s only in pockets that stand out as oasis in a vast desert that needs focussed attention.

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.