The Air India Situation
Updated: Feb 6, 2022
In this article, I explain in detail what is going on with Air India, the Tata Sons takeover and the path forward. This is an extensive article so feel free to skip around using these links:
27th January 2022 marked the date of the official handover of Air India to the Tata Group, putting an end to a 3-month long process that included countless meeting and negotiations. The airline was first started by JRD Tata in 1932. JRD
was India’s first commercial pilot and his fascination with airplanes combined with his shrewd business mindset led to India’s first carrier. Later, in 1949, the government bought a 49% stake in the airline, and later nationalised it by 1953. Over the next few decades, the Maharaja dominated Indian skies with a lavish on board product combined with authentic, Indian hospitality. However, in the 80’s and 90’s, the growing presence of private players in the market, the Air India dominance was put into question. By the mid 2000’s, as a result of a string of poor decisions and mediocre management, Air India’s reputation began to decline. Customers complained about the quality of the seats and the old airplanes had sustained significant damage. The airline even had to ground some of Boeing 787 Dreamliners to use for spare parts. As a desperate move to restore their place in the market, Air India merged with the domestic carrier Air India Express, and the group has failed to make a profit since then.
Since 2009, the government of India has invested over Rs.110,276 crore into the airline to either directly make up the losses or raise the money to pay back loans. Every day the airline stays into operation, they make a loss of Rs. 20 crores, amounting to Rs 7300 crore per year. As of March 2021, the accumulated losses amounted to Rs. 83,916 crores. Apart from the monetary aspect, even the in-flight product suffered. Over the past decade, Air India has reported the lowest number of on time flights amongst all Indian carriers. The staff and suppliers are not paid on time, and the airline makes a loss on 94% (319 out of 340) of their routes. However, since they are the national carrier, they are forced to continue operations. An Air India staff member outlines the reason for this, “Domestic routes show losses but these routes feed connections to major locations so they cannot be withdrawn or replaced with smaller aircraft. Non-profitability of any single route is not taken in isolation solely based on financial performance. Without the feed from smaller markets, some of the larger, more successful routes will slip from that status.” Overall, there are three primary reasons for the loss of money on routes
1. Low demand
2. Cheaper fares than competitors
3. Higher operating costs the competitors
Now that we have established the current situation of Air India, let us see the details of the handover. The Tata Sons winning bid came in at Rs. 18000 crores, Rs. 2900 crore more than that of the SpiceJet owner. However, all of this is not paid in cash. Rs. 2700 crore is paid upfront and Tata will take over Rs. 15300 crores worth of Air India’s debt, approximately 25% of the total. The rest, Rs. 46,262 crores of debt will be transferred to a special holding company, AIAHL and will be taken care of by the government. Before the completion of the deal, the government paid off most of Air India’s lessors and suppliers, and ended onerous contracts such as the sale and leaseback agreements on 21 Boeing 787 Dreamliners. The government had to pay the complete rentals throughout its tenure, essentially buying them. All of this allows Tata to take over Air India on a much cleaner slate. Some other details are:
1. Tata has to retain 12000 employees for a year, and they can be retrenched only through a voluntary retirement scheme. 5000 employees will automatically retire over the next 5 years.
2. Business continuity clause for 3 years.
3. The brand has to be retained for 5 years. Even after that, it cannot be sold to a foreign entity
Brokering the deal was the easy part of the process. The challenges that ahead, to make Air India great again, are far more challenging. They have put together a 100-day plan to improve the operational and service standards, centred around punctuality and customer service. They have also started an enhanced meal service on 3 routes, Mumbai-Delhi, Mumbai-Bengaluru and Mumbai-Abu Dhabi. However, the carrier cannot become world class in 3 months, and over the next 5 years, the plan is to invest Rs. 37,500 crores to turn the airline around. This includes completely paying off the Rs. 15,000 crore debt. The largest costs will be plane refurbishment, improving the seats, ripping out the gallies and lavatories. Tata will also have to start being cost effective, starting with the removal of loss-making routes. After a year, when the employees are free to go, Tata will have to rationalise the workforce. Over $300 million will be needed to retrain staff and improve operations and service. Additionally, the biggest part of this project will be to bring in an experienced CEO to spearhead this, stay for half a decade and fix the problems. Right now, at the top of the list of former Delta president, Fred Reid, an established industry expert. An expat CEO is necessary since one of the Air India’s biggest goals is to improve their international product. They will also have to jack up prices by 15% to help cover costs and get rid of old, below industry standard airplanes.
Currently, for international traffic to and from India, Air India holds a 19.3% market share and the rest belongs to foreign carriers. To become profitable, all they need is the extra 0.7%. The biggest advantage the Maharaja has over other Indian carriers I the lucrative timeslots. They have over 4400 domestic 1800 international landing and parking spots. Tata groups has 3 airlines under its control now, Air India, Vistara and Air Asia. This puts them in a strong bargaining position with aircraft manufacturers, engine makers and operators. This can play a major part in cutting costs and gaining the competitive edge. The experience of Tata in the hospitality sector, namely the Taj Hotel chain can help with staff training and service to restore the iconic soft product aboard Air India. Currently, however, the Indian skies are dominated by the likes of Indigo and SpiceJet, as shown in the graph above. Over the long term, experts agree that merging the 3 Tata airlines into one single entity will be the best way forward.
In conclusion, Air India is currently in abysmal state but if anyone can make them great again, it is the Tata group. Apart from being a very emotional regaining of control for the group, over the next few decades, Air India has been given the opportunity to restore its prestigious name across international skies. Only time will tell how the situation will play out. As a board member aptly said, “Chandra (the chairman of Tata) will either have egg on his face or he will have a crown on his head.”