For the Tata Group, which successfully runs businesses ranging from retail and software to steel and automobiles, extending its track record to Air India as well may take more than just financial investment into the loss-making airline. While experts analysing Tata Group’s acquisition of 100 per cent of Air India from the government indicate the need for an equity infusion of over $1 billion in the airline over the next few years, they also underscore a call to transform the airline’s culture.
On Friday, the government announced that the Tata Group was the highest bidder in the airline’s disinvestment process, having placed a bid of Rs 18,000 crore, of which Rs 2,700 crore will be paid to the Centre in cash and the remaining will be absorbed as debt from the airline.
Even as the airline comes with a set of valuable assets including prime slots, landing rights and a huge fleet, it also brings with itself a set of pitfalls that the Tata Group may look to address. These include higher than industry standard aircraft lease rentals, burdensome maintenance contracts, and far better than industry average of crew salaries.
“Historically, at least since the merger of Air India and Indian Airlines, there has been a culture within the airline that the government will continue to fund its losses. So there was hardly ever a focus on running an efficient airline. Compare this with other state-funded carriers like Emirates or Qatar Airways, where optimal utilisation of resources has resulted in airlines that are among the best in the world. Things changed in the last four to five years, but there’s still a long way to go,” a retired Air India official told The Sunday Express.
One of the most significant points to be resolved over the years is the size of Air India’s payroll when compared to its fleet.
In 2012, the airline had an employee per aircraft ratio of 221 with 27,000 employees over 122 aircraft in its fleet. This includes the numbers for its low-cost arm Air India Express.
As per data furnished by the government on Friday, Air India and Air India Express had 13,500 employees and a fleet of 141 aircraft, and the resultant employee-per-aircraft ratio has fallen by more than half to 95.
“What Air India really suffers from is too frequent changes in the chief executives, when compared with private airlines. When you don’t have a leadership with a vision and a sense of commitment, you naturally lose out, and this results in the morale of the company suffering. In the service industry, morale is very important,” former Air India executive director Jitender Bhargava said, adding that rationalisation of manpower is imminent after the takeover.
The government has mandated that the Tata Group retain the airline’s employees for a period of one year from the close of transaction and any retrenchment after that be done by the way of a voluntary retirement scheme (VRS). This will be one of the added burdens on the Tata Group, particularly given the unionised nature of Air India’s workforce.
In addition to dealing with manpower, experts have pointed out the need for qualitative changes in the airline — something that was effectively put on the back burner by the Central government once it made up its mind to sell the airline.
This includes upgrades to the airline’s fleet to derive higher fuel savings, changes to aircraft interiors, particularly on Air India’s 49 wide-bodied planes.
“Tata is a global brand and I have a feeling that the Air India brand will get revived. Half the battle has been won with the financial re-engineering and it itself could lead to savings on interest payments of around Rs 4,500 crore in a year. Tatas could bring in operational efficiency synergy by combining the back-end operations of their existing airlines and also in buying and leasing of airplanes. Not only can they use the group’s strength on automation, engineering, technology for improving Air India, the misuse and leakages will also reduce,” said Rashesh Shah, chairman and CEO, Edelweiss Group.
The CEO of a leading mutual fund also said that while Tata’s bid to acquire Air India is a big emotional decision, the fact that they had entered the aviation business through Vistara, Air India provides them the best option to scale and thus it is a big opportunity for both Air India and the Tata Group.
“While there are challenges to the deal and lot of money will have to be infused, only Tata Group could revive it and in that sense it is good for Air India,” said the mutual fund CEO.
He further pointed that sale of Air India is a big burden off the government’s expenditure list. “A timely sale of Air India (when it had a higher market share and lesser debt) could have provided government with a better realisation and also saved money over the years that could have been diverted for better use. While the government has infused Rs 1.1 lakh crore in Air India over the last 10-11 years, it also has a huge opportunity cost. If the sale could have concluded 10 years back, this money could have been utilised in education and healthcare infrastructure.”
Payroll size to be a major point
One of the most significant points to be resolved over the years is the size of Air India’s payroll when compared to its fleet. In 2012, the airline had an employee per aircraft ratio of 221 with 27,000 employees over 122 aircraft in its fleet. This includes the numbers for its low-cost arm Air India Express.