RESEARCH METHODOLOGY

Privatization Of Air India

By Group 10 MBA Pharm Tech, 4th year Batch A SPTM Kaushik Nagarajan 21 Neeti Nair 29 Pranav Bankda 37 Priyanka Shah 40 Shilpa Khadilkar 43

Research Methodology

Privatization of Air India

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INDEX
Sr. No.
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Topic
Introduction

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Statistics and Comparisons to Private Airlines in India Comparison to an International Airline British Airways Regression Analysis

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Other Options Available Conclusion and Bibliography

Privatization of Air India

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Introduction:
Air India is the flag carrier of India. It is part of the government of India owned Air India Limited (AIL). The airline operates a fleet of Airbus and Boeing aircrafts serving Asia, Australia, Europe and North America. Air India has the fourth largest share in India's domestic air travel market, behind Jet Airways, Kingfisher and IndiGo.

Current Scenario:
Air India is currently in a pretty nasty state: the national carrier has over Rs. 10,000 cr in debt, fuel prices are rising, consumers are avoiding it, its service is terrible and its employees are going on strike! Can it get worse? As a matter of fact, it can. The worst case scenario would be if the Government of India bails out the company using taxpayers' money. Its debt burden stood at Rs. 46,950 croreRs. 20,185 crore worth of aircraft loans, Rs. 22,165 crore working capital loans and over-dues of Rs. 4,600 crore. Its cumulative loss and debt burden comes to a whopping Rs. 67,270 crore To overcome this financial rut, Air India is seeking an upfront equity infusion of Rs. 6,600 crore from the government for immediate relief and another Rs.5,736 crore to fund cash deficits plus the financial restructuring plan also calls for another equity infusion of Rs. 30,584 crore through funding of principal and interest repayments for guaranteed aircraft loans up to FY 2021. This, along with the upfront equity infusion and money to fund cash deficits, would take the total equity infusion till FY 2021 to Rs. 49,920 crore.

Research Question:
How did a company, a Nationalized company, having dominated the skies for more than half a century could come to such a financial turmoil? Can something be done about it? How? Will Privatization help? Cost cutting, Route merging, airplane optimum utilization, can the MAHARAJA once again claim HIS DOMINANCE?

Privatization of Air India

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Proposed Plan Of Study/Research is to assess the following parameters with respect to the existing competitive private airlines:
Revenue Fleet and Passenger comparison Market Share Passengers Carried On Time Performance Cancellations

Privatization of Air India

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Statistics and Comparisons to Private Airlines:

1) Comparison of Fleet and Passengers

The airline with the largest fleet in the domestic market is Air India, but its market share of the number of passengers is low, and therefore results in a low fleet hare to passenger share ratio of 0.62. Kingfisher leads the full service carrier segment with a fleet to market share ratio of 0.95, but this also includes figures from their low cost Kingfisher Red service. Passenger market share leader Jet Airways is at 0.82 and this includes their low fare service Jet Konnect. Expectedly, the low fare carrier side, shows much higher ratios, due to their higher usage of aircraft and also the higher number of seats offered per flight due to an all-economy configuration.
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Privatization of Air India

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2) Revenue Of Air India Since 2006

The above graph indicates the massive decline in the revenue of Air India from FY2006-2010. It is very evident from the above data, that the company faced, from the beginning of the year 2006 (indicating 0% change) a declining period, which in 2010 dropped to a massive -40%.

3) Market Share
This statistic refers to the percentage of the market dominated by the various airlines in India. The data was collected for Oct 2010, Jan 2011, April 2011 and July 2011. When looking at the data collected on the marker share, we can see the over the year 2010 11 the market share of Air India had steadily been dropping. This is compared to the private sector airlines like Kingfisher or IndiGo, which are constantly increasing.

Privatization of Air India

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In the most recent data as shown in the chart below, of August 2011 the market share of Air India is in fact in the same range as the low cost carrier, Spice Jet, and much lower than Kingfisher and IndiGo which are dominant in the market.

Privatization of Air India

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4) Passengers Carried

As we can see from the graph, for the past 18 months, the number of passengers who travel by Air India range from between 6 and 8 lac. This is much higher than the private and low cost carriers but is less than the superior airlines like Kingfisher and Jet. Another factor to note is that IndiGo has recently increased its passenger base. Many findings suggest, that even if the prices of Air India tickets are lowered, a majority of the population would still not prefer the national carrier. This is due to the current damage that has caused the brand image of the airline to suffer as well as all the negative media and problems that they are facing.

5) On Time Performance
In transportation schedule adherence or on-time performance refers to the level of success of the service remaining on the published schedule. The graph shown gives us data of on time performance for the various Indian airlines in 2010.

Privatization of Air India

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Even though Air India is a national carrier and enjoys a large number of benefits from the government, it still fails where on time performance is concerned. Not just superior private airlines, but even the smaller and low cost carriers have better statistics than Air India, which sits at merely 71.7%.

6) Cancellation
This refers to the percentage of flights, which have been cancelled or removed from the schedule of the airlines. There are many reasons for cancellations, which include technical, operational as well as commercial issues.

From the data collected, it is evident that Air India has one of the highest cancellation rates, of 1.7% of its voyages being terminated in the past year. This is considerably high when compared to private carriers and is one of the major reasons that the airline is suffering such a loss.

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Comparison to an International Airline British Airways

British Airways, is the flag carrier airline of the United Kingdom. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations. The British Airways Board was established in 1971 to control the two nationalized airline corporations. After almost 13 years as a nationalized company, British Airways was privatized in February 1987 as part of the privatization plan by the Conservative Government of the time. The carrier soon expanded with the acquisition of British Caledonian in 1987 and Dan-Air in 1992. With a fleet size of 236 planes operational and another 40 planes in order, it serves over 150 destinations without counting the subsidiaries. BA has 4 subsidiaries. BA is a member of OneWorld Alliance and also has code share agreements with 7 International Carriers. Thus, BA has one of the most extensive network with its subsidiaries and codeshare agreements, and now also boasts of being the most profitable airline at one point. It Is one of the few State Owned Enterprise (SOE) which was successfully privatized all round the world. The various problems that forced the Government to privatize it were: Dipping Profits Piling Debts Over Staffed No professional management The aim of the company being a SOE was not to Maximize Profit. This ideology hampered the growth of the company. The efficiency, profitability, and debts are not so important criterion for government managers. This incentive leads huge losses in the future, which is usually offset by the governments. Also being a public enterprise opens the company to the politicians. When a political part became a government, they will probably employ their supporters to the public owned enterprises. BAs productivity was very low compared to its competitors. Besides the low productivity, the cost of employees was also a problem, because the earnings of BA were declining.

Changes Made:
Thousands of jobs were cut in a bid to remove flab from the organizational structure, chopping more than a third of BAs managers and halving the number of senior managers. Thus laying of the staff after privatization caused less labour problems. Also it allowed the newly made corporation to have a more professional approach with professionals at the top. With it the new managers appointed were because of the experience and background rather than a ministers courtesy. After privatization BAs profits boomed.

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The rivals were expecting a stronger British Airways after it has been privatized. In addition to this research, they pointed out that closer rivals of British Airways experienced a greater drop in stock prices than more distant rivals. And also, airfares in markets served by BA fell significantly 14.3% relative to those on other transatlantic routes upon privatization. Thus a change from government to private ownership improves economic efficiency. Before the privatization, there was no performance-based incentive scheme. Now the employees are offered ESOS at top management level and also various incentives at all levels upon their performance. Hence the motivation to continue work stays there. There was a 40.77% improvement in available seat miles of British Airways after privatization. When we looked the industry, the three-year average after privatization is still higher than BA. This shows us that, the privatization helped to close the gap between the industry and the British Airways.

Air India Outlook

Air-India the flagship carrier of India is also a legacy carrier similar to BA. During its course it has also faced problems similar to BA and now the turmoil is quite the replication of the BA financial in 1980s. Hence one possible solution can be the privatization after studying the successful application of BA. AI also is suffering over staffing, no option of layoffs, no professional management, huge debts to oil companies, AAI etc, increasing competition, pending orders, delay in delivery of new planes, defunct and old planes being used and thus more and more technical snags occurring, pilots attrition for a better package with private airlines, political interferences etc. Thus with a more professional management such hurdles can be overcome. The major problem with AI is its dependency on the Ministry. AI chief does not have sufficient powers which other private airlines CEOs do. Also AIs chiefs for the past many years have come from the Indian Administrative Service, have little or no professional experience of what is now a highly specialized field and owe their appointment more to the ministers whims and fancies than to any proven competence for the job. BA has emerged successfully from its woes but AI will continue to flounder provided the management takes critical steps. Air India can either be closed down or privatized to save the country further financial waste and avoidable future embarrassments. It is time that the Exchequer and the Indian taxpayer are rid of this unnecessary burden of incompetently run organization by the government. Privatization will also eliminate major distortions that are generated in the industry when a dominant player with a market share of 18% is allowed to operate without a hard budget constraint. This is anathema to competition. The Competition Commission of India should take up this case up on a suo moto basis and direct the government out of its present predicament.

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Other Options Available for Air India

Now the discussion again boils down to privatizing the firm. Rest of the things aside; will privatizing any public firm do any good? It definitely has its own pros and cons. Nonetheless considering the heat of the situation, the more resounding choice of most of the people would be privatize the airline. Privatization can be an ideology (for those who oppose government and seek to reduce its size, role, and costs, or for those who wish to encourage diversity, decentralization, and choice) or a tool of government (for those who see the private sector as more efficient, more flexible, and more innovative than the public sector. Although privatization in the most general sense involves a reduction in the role of government, the process carries different implications depending on which function(s) of government are assigned to the private sector: financing; production or delivery of services; and monitoring or regulation. Privatization may take many forms: Elimination of a public function and its reassignment to the private sector for financial support as well as delivery.

1) Deregulation
That is, the elimination of government responsibility for setting standards and rules concerning a good or service asset sales, that is, the selling of a public asset to a private firm; Vouchers, that is, government-provided or financed cards or slips of paper that permit private individuals to purchase a good or service from a private provider.

2) Franchising
That is, the establishment of a model by the public sector that is funded by a government agency, but implemented by approved private providers.

3) Contracting
That is, government financing of services, choice of service provider, and specification of various aspects of the services, laid out in a contract with a private-sector organization that produces or delivers the services. As we see it, the government doesnt have to control the operations of the airline or eliminate itself completely from the firm either. The airline can still be a public owned enterprise with an effectiveness and efficiency of a private firm.

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