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Sinking more money or turning around a national carrier: The case of Air India

Whats in a name? A lot if you are a national Airlines carrier. However there have been
two changes in the name of the Indian National carrier- first from Air India and Indian
Airlines to National Aviation Company of India Ltd (NACIL), and later on, back to Air India
Ltd. The uncertainty in name probably captures the confusion that besets the National
Airlines. The current structure of the company is as follows. The current top management
organizational structure of Air India Ltd consists of bureaucrats from the IAS (CEO) and
the central services (JMD) and also a few officers who have growth within the airline.
Air India Limited operates a mixed fleet of Airbus, ATR, Boeing and Bombardier aircraft.
As of February 2013, Air India Limited has 127 aircraft in its fleet with an order for 24
more. The organization structure at the top is several Executive Directors (with
responsibility for key outcomes) reporting to the ED, and a Joint MD and Director of
Personnel also reporting to the MD.
Air India serves 49 domestic destinations and 26 international destinations in 19 countries
across Asia, Europe and North America. It was incorporated under the Companies Act
1956 on 30 March 2007 and is owned by the Government of India. Air India's short-haul
routes mainly include domestic cities and cities in South East Asia and South West Asia.
For short-haul routes Airbus A320 family are used. The Boeing 787 aircraft was
introduced on selected domestic routes on 19 September 2012.

The airline has long-haul destinations in East Asia, North America, and Europe which are
served using Boeing 777-200LR and -300ERaircraft. The Boeing 787 aircraft was
introduced on long-haul routes on 15 October 2012. However, Toronto was terminated
as a destination in 2012, utilizing Newark Liberty International Airport and JFK
International Airport, both in the New York City Metropolitan Area, as viable gateways
both to the eastern United States as well as Canada.
While the annual average revenue stands at about Rs 16,000 crore, the passenger load
factor of Air India ranges between 60-65 per cent. It is estimated that almost half of the
daily losses of the airline goes towards payment of interests, primarily on its borrowings
of Rs 16,000 crore from 15 banks as overdraft. This was mainly to pay off debt for its fleet
acquisition.

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Around 20062007, the airlines began showing signs of financial distress. The combined
losses for Air India and Indian Airlines in 200607 were 770 crore (US$140 million). After
the merger of the airlines, this went up to 7200 crore (US$1.3 billion) by March 2009. This
was followed by restructuring plans which are still in progress. In July 2009, SBI Capital
Markets was appointed to prepare a road map for the recovery of the airline. In 20092010, there was a decline in revenues by 77 crores, decline in operating revenues by 115
crores, and increase in costs due to increase in depreciation and amortization charges,
interest on aircraft loans, interest on working capital borrowings, handling charges. The
losses have been steadily increasing, it increased from about 55000 million in 2009 as
compared to about 22000 million in 2008.

The steps for improvement focused on route rationalization, better network planning,
increase in international services, central planning and control system using Sabre Airline
Solutions services, appointment of a COO, strategic role for the board with a new
governance structure, measures for cost reduction, financial and debt restructuring,
infusion of additional equity, new frequent flyer membership option, new marketing
initiatives, quality control program and Quality Management System, training on
engineering and security and focus on revenues from other services such as engineering,
security and cargo. The airline has tried to motivate its 29000+ employees by felicitating
those who have completed long service.
The carrier sold three Airbus A300 and one Boeing 747300M in March 2009 for $18.75
million to survive the financial crunch. By March 2011, Air India had accumulated a debt
of 42570 crore (US$7.8 billion) and an operating loss of 22000 crore (US$4.0 billion), and
was seeking 42920 crore (US$7.9 billion) crore from the government. For 3 months
(JuneAugust 2011), the carrier missed salary payments and interest payments and
Moodys Investor Service warned that missing payments by Air India to creditors, such as
Consulting and Research Undertaking at XLRI | ORION 2015

the State Bank of India, will negatively impact the credit ratings of those banks. A report
by the Comptroller and Auditor General (CAG) blamed the decision to buy 111 new planes
as one of the major causes of the debt troubles in Air India; in addition it blamed it on the
ill-timed merger with Indian Airlines as well. On 1 March 2009, Air India had made
Frankfurt Airport as its international hub for onward connections to United States from
India; however, the airline shut down the Frankfurt hub on 30 October 2010. However on
14 July 2010, Air India chief, Arvind Jadhav announced their intention to make the new
terminal 3 at Delhi's Indira Gandhi International Airport the hub for international and
domestic operations with the plans of starting new direct flights to Chicago (USA) and
Toronto (Canada) and also taking almost all international long haul flights away from its
former Primary hub at Mumbai's Chhatrapati Shivaji International Airport due to lack of
space. This would streamline passenger movements and reduce operating costs.
However, service to Toronto was terminated in 2012. The airline also plans to open a new
hub for its international flights at UAE's Dubai International Airport. The new Chairman
and Managing director changed the order of some of the 111 planes ordered in 2006 to
get narrow-body aircraft instead of the wide-body aircraft.
In January 2013, Air India paid GMR Group a sum of 415 crore (US$76 million) towards
outstanding dues on account of charges related to the airports at Hyderabad and Delhi.
Of the amount paid, 340 crore (US$63 million) was paid to clear the user development
fee (UDF), airport development fee (ADF) and landing and parking charges at the Indira
Gandhi International Airport in Delhi. The remaining 75 crore (US$14 million) was paid to
clear similar fees at the Rajiv Gandhi International Airport in Hyderabad. Air India had
also shown improvement in its performance as its market share had grown to 20.8% from
14% in 2011. 71.7% of all Air India flights were performing on time according to the then
Central Minister of State for Civil Aviation, K.C. Venugopal.
On December 2007, Star Alliance invited Air India in an effort to expand its presence in
the Indian subcontinent. However, issues with technology and software upgrades and the
aftermath of its merger with Indian Airlines delayed its entry into the alliance for four years.
When the final deadline for joining came in July 2011, Air India's application was
suspended, and was told it failed to meet the minimum criteria to join. In response, many
of Air India's officials complained to Star Alliance about the suspension of its application,
claiming that they already met all of the requirements. Later, Air India did become a
member of the star alliance on 11th July 2014. Due to high fuel and loan costs, Indian
government pumped Rs 0.32 billion into Air India since April 2009 and in March 2012
government bailed out Air India Ltd. with a Rs 67.5 billion ($1.4 billion) which the amount
almost double of the federal government spent on new hospitals over the three years. As
of May 2012 the carrier invited offers from banks to raise up $800 million via external
commercial borrowing and bridge financing. In 2013, the Indian government planned to
delay equity infusion of 30000 crore (US $5.5 billion) that was slated to be infused into
the airline slowly over a period of eight years. Plans were changed as the government
then planned to spread it over a longer period of time as part of measures to bring down
the economy's financial deficit. The original plan was to pump in some 8500 crore (US$1.6
billion) into the airline in 2013, while less than half of that amount was mentioned in the
annual budget.

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In May 2012, the airline was fined $80,000 by the U.S Transportation Department for
failing to post customer service and tarmac delay contingency plans on its website and
adequately inform passengers about its optional fees. On 15 May, the Union Civil Aviation
Minister Ajit Singh stated that the Government was giving Air India one last chance and
that it must perform in order to qualify for a bailout. The financial restructuring plans were
hit hard when Air India pilots decided to go on a strike on 8 May 2012 in order to protest
management decisions to train Air India and former Indian Airlines pilots for the newly
inducted Boeing 787 Dreamliner fleets. In spite of the Delhi High Court ruling the strike
illegal, the strike continued for 58 days. The already reeling airline lost an additional 600
crore because of the pilot strike. In January 2013, a surprise check by a team of senior
Air India officials at the Terminal 3 of the Delhi airport where the airline operates, revealed
that only 16 of the 25 check-in counters were operational and not even a single floorwalker was present to guide passengers to the aircraft or lounge. The check revealed that
the check-in process was taking as long as eight minutes each while it should take less
than three minutes. The employees also had several grouses especially related to
disparities following the AI- IA merger, and the level of compensation as compared to
other airlines. A committee looking into this had suggested some measures. However,
there have also been allegations of mismanagement and corruption. Allegations include
deliberate delaying of repair to allow the warranty periods to expire, and disrupting
operations on profitable routes so that these could be turned over to private airlines. There
has been some positive news since.
In March 2013, the firm posted its first positive EBIDTA after almost six years. The
industry meanwhile has shown a mixed performance, with some airlines like Indigo
continuing to be profitable, while Kingfisher and Spicejet have seen their poor financial
performance impeding their operations. In late 2014 and 2015, the historic lows in
petroleum prices, and associated reduction in aircraft fuel prices have helped airlines.
The Indian government continues to help create demand through provisions for
government officials to travel on the national carrier. While it is expected that the growth
of the economy will directly result in increase in demand for the sector, the immediate
projections are stable, and predict a gradual growth in demand.

Consulting and Research Undertaking at XLRI | ORION 2015