How UPA clipped Air India's wings

  • Acquisition of more aircraft than required, a badly planned merger, and massive increase in bilateral air traffic rights to Gulf nations took Air India to the ICU.

It took five years of the Modi government for the Enforcement Directorate to summon former civil aviation minister Praful Patel for questioning “over an alleged aviation scam”.

While law will take its own course, this article jogs your memory with what happened then—Air India/Indian Airlines merger, acquisition of aircraft and bilateral traffic rights.

One, have you heard of a company that makes a financial commitment of about `67,000 crore for purchase of 111 (AI 68, IA 43) aircraft on an equity base of `586 crore (AI `153.84 crores, IA `432.13 crore) and carry-forward losses of `776 crore (Indian Airlines brought forward loss of `957 crore less Air India profit reserves `181 crore) as on March 31, 2006?

According to a 2011 India Today report, it is clear that Air India’s financial problems began in 2004, when Praful Patel chaired a meeting of the board, in which, the airline suddenly inflated its order for new aircraft from 28 to 68 without a revenue plan, or even a route-map for their deployment.

This is substantiated by the former executive director of Air India and author of The Descent of Air India, Jitender Bhargava: “The Air India Board-approved purchase of 28 aircraft in November 2003 includes 10 medium-capacity long haul aircraft. During UPA, the number of long-haul aircraft was increased from 10 to 50,” and, “despite the recommendations of the techno-economic committee and the AI board that two-third of the 50 aircraft should be ordered on a ‘firm basis’ and the rest on ‘option,’ the empowered group of ministers decided to order the entire lot on a firm basis.”

Two, one does not need to be a qualified accountant to know that making huge financial commitments on a low equity base is a precursor to bankruptcy or a government bailout.baseline'>It can be argued, fairly, that aircraft orders were placed because IA had not purchased any new aircraft since 1990. However, financial commitments must be based on the ability to repay debt.

Three, the UPA presented the merger of Air India with Indian Airlines as a solution to their problems. Before the merger proposal, UPA changed the name of Indian Airlines to ‘Indian’ accompanied by a smartly designed logo.

Even before all the IA aircraft sported the new logo, the Ministry of Civil Aviation, in a letter dated April 20, 2006, asked the Air India board to work towards a merger with Indian Airlines.

Further, Bhargava wrote, “It took more than two years for the ministry to initiate action on a merger, and then the matter moved with uncharacteristic haste. What makes the timing suspect is that it was done barely months after both airlines had placed their orders for large number of aircraft IA 43 and AI 68. If merger was on the cards the orders could have been placed together and NACIL could have gotten a far better deal.”

The merger of AI with IA was to give scale and integrate operations, but many issues, including human resources, were left unresolved.

With this, the ‘Indian Airlines’ brand, as much a part of our lives as Colgate, was now dead.

Four, in a July 18, 2009, Business Standard article, Surajeet Dasgupta says, “Within the overall west Asian pie, Emirates has seen its capacity rise four-fold, from 12,400 seats per week in 2004 to 48,600 in 2008; Etihad Airways from 1,600 to 8,500, even tiny Air Arabia’s capacity is more than that of British Airways and is quickly closing in on Lufthansa.”

Further, a January 21, 2013, Business Standard report states, “The Comptroller and Auditor General (CAG) on Thursday criticised the civil aviation ministry for granting “massive increases” in bilateral air traffic rights to Gulf nations in 2004-05, despite Air India’s (AI) “strong reservations,” as this was its most profitable international sector. Between May 2007 and March 2010, the Dubai sector saw the number of seats per week rise from 18,400 to 54,200.”

Five, the same report also tells how 6th Freedom rights, under which foreign carriers can fly passengers from one country to another while stopping in their own country, choked AI: “Airlines like Emirates, Lufthansa, British Airways, Qatar, Gulf Air and Singapore Airlines—which operate large hubs (like Emirates in Dubai) and offer passengers onward flights to the US and Europe—have used it (the sixth freedom) effectively to increase their Indian market share at the expense of Air India (AI).” It further states, “the percentage of sixth freedom carriage in 2009-10 in the total passengers carried was as high as 59% for Emirates, 78% for Qatar Airlines, 87% for Lufthansa, 49% for Singapore Airlines and 61% for British Airways, among others. Nearly one-fourth of the sixth freedom carriage was done by Emirates alone, which has been one of the chief beneficiaries.”

Acquisition of more aircraft than required, a badly planned merger, massive increase in bilateral air traffic rights to Gulf nations and grant of sixth freedom rights to foreign carriers took Air India to the ICU.

Since then, the national airline has received thousands of crores of taxpayer money as a bailout, as it continues to be on life support.

It is possible that this policy resulted in substantial foreign policy gains. Fair point, but can UPA publicly state such gains for India?

The first key beneficiary of UPA’s actions was Emirates. Now, it was time to help Etihad.

Perhaps with good reason, the ministry felt the Etihad deal was critical for the survival of India’s second-largest airline by passengers: its debt, then, stood at $2.6 billion. A Mint editorial, dated April 25, 2013, wrote, “Jet Airways had sought additional rights for the next three years to fly 41,600 seats a week to Abu Dhabi, ahead of the deal to sell a stake to United Arab Emirates’ national airline, Etihad Airways PJSC. Following the announcements on the Jet-Etihad deal, the Indian government said late on Wednesday that seats would increase by 36,670 until 2015.”

In a response in Business Standard, Bhargava wrote, “Was the grant of additional seats factored in for Jet Airways to obtain a higher valuation compared to what was being discussed in January 2013? Given that the two announcements—stake sale and grant of additional seats—came within hours of each other, was an assurance on additional seats demanded by the airlines and given by the government before the pronouncement of stake sale?”

Indians are forever defensive about dependence on oil and remittances from Gulf countries. Has anyone tabulated how India has contributed to the prosperity of select Gulf-based airlines?

The people of India would be grateful if the government pursues the current round of investigations and takes them to a logical conclusion. We hope it is not intended to pressurise formidable political opponents ahead of the crucial Maharashtra Assembly Polls. 

Utmost care has been taken whilst culling out extracts for this article. Errors if any are inadvertent and not with malafide intent.

First published in Financial Express and here

Author is a Chartered Accountant and founder  

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