Deloitte picks holes in Air Indias revival plan

Written by Sunny Verma | New Delhi | Updated: May 10 2011, 05:40am hrs
Casting doubts on Air Indias turnaround plan, Deloitte Touche Tohmatsu India said that the airline has overplayed its revenue, yield and market share growth projections while understating a likely increase in fuel and staff expenses. The consultancy criticised Air Indias assumption that fuel costs, which account for nearly 40% of an airlines operating expenses, will not rise.

In December 2010, Deloitte was appointed to review the turnaround plan drafted by SBI Caps and Air India.

The underlying theme of the Deloitte report is that the turnaround plan is not feasible and is riddled with wrong assumptions leading to ambitious projections and realisations. In short, it is not realistic and workable.

Deloitte has also questioned Air Indias fleet acquisition plan, indicating that such a strategy could actually lower yields and have adverse financial implications.

Aviation consultancy Simat Helliesen & Eichner, which carried out a detailed route planning and capacity exercise, has suggested 87 narrow-body aircraft for Air India by 2015, but the carrier has proposed 143, according to Deloittes report dated February 11, 2011.

The only justification that one can have for going in for such capacity expansion can, therefore, be the adoption of a strategy of buying market share through deploying high capacity into the market (with corresponding lower yields and consequent financial implications), Deloitte said.

On Air Indias plan to increase wide-body aircraft to 54 by 201415 from 30 at present, Deloitte says that before buying these planes, the airlines priority should be to increase the passenger load factor (PLF) on existing routes.

PLF is an efficiency parameter indicating how much of an airlines passenger-carrying capacity is used. Air Indias proposal on wide-body capacity expansion for acquiring market on new routes can be considered as reasonable, while capacity expansion for existing routes needs to be considered after looking at strategies to increase PLF substantially, it said.

Yields and land sale

Air India, which witnessed almost constant flat yields over the last five years, expects yields from wide-body aircraft to grow at roughly 5% per annum and at 3% per annum from narrow-body aircraft. In effect, therefore, Air India has assumed that all three factors capacity, PLF and yields will witness simultaneous increase. In a competitive scenario, this assumption seems ambitious and reflects the best-case scenario, Deloitte said.

The consultancy also suggested Air India make a detailed assessment of net realisable revenue from leasing and sale of surplus land, which the carrier has pegged at R10,000 crore over the next 10 years. Air India has projected earnings of R5,000 crore by March 31, 2020 from sale or monetisation of its land assets including building at Nariman Point in Mumbai and land parcels at Nerul in Navi Mumbai, Baba Kharak Singh Marg and Vasant Vihar in New Delhi. Deloitte said the tax implications of such transactions have not be factored in.

Market growth & business model

In its 79-page report accessed by FE, Deloitte said the market growth targets set by Air India are ambitious, and assume that competing airlines would be growing significantly below Air India's rate of growth. Air India has proposed to more than double its domestic passengers to 170 lakh in 2014-15 from 76 lakh in 2009-10, assuming an annual growth of 22%, as compared to 12-13% market growth and just 10% growth for competing airlines.

Challenging this key assumption, Deloitte noted: However, given the past trends in growth of competition and their future plans in terms of capacity addition, the market growth targets set by Air India seem to be ambitious and reflect the best case scenario, subject to Air India implementing all the proposed other management improvement plans.

Deloitte has also raised alert over the operational complexities that would arise from the business model being proposed. Air India's proposals would introduce multiple entities targeting low-cost operations within the group, while its critical integrated network planning and scheduling function could be further complicated on account of complexities associated with operationalising a hub-and-spoke network, Deloitte said.

Fuel and staff costs

The turnaround plan has not considered any escalation in the price of fuel over the projection period on account of the inability to predict the same. Air India has already incurred fuel expenses in the financial year 2010-11 in excess of the budgeted amount by Rs 700 crore. In the above context, while projecting an increase in fuel price may not be possible for Air India in the turnaround plan, the uncertainty in fuel prices needs to be factored in as a key business risk, Deloitte has said. This assumes significance as a complete pass-through of the hike in aviation turbine fuel (ATF) is not possible without adversely affecting demand and PLF.

On staff costs, the report said it would be a challenging to achieve the extent of reduction envisaged by Air India and a thorough exercise is needed to arrive at more realistic estimates. The report does not mention anything about Air India's debt burden and requirement of capital infusion. The carrier has a debt of about R40,000 crore including R18,000 crore of working capital loans.