With a projected loss of Rs 3,000 crore in 2008-09, shares of Nacil, the merged entity of Air India and Indian Airlines, could be worth little more than scrap of paper in the event of a disinvestment. Since the merger in March 2007, the company hasn?t revealed its financial performance at all. FE takes a hard look at what the UPA leaves behind by scuttling disinvestment in the airlines in 2004 and pushing through a disastrous merger instead.

Civil aviation minister Praful Patel?s pet idea of merging the two companies was meant to take India?s national carriers to new heights. But two years after it was pushed through, the merger has gone horribly wrong on every count, with the two companies operating pretty much separately except for a combined loss that is three times more than their aggregate losses before the merger.

Much of the integration plans for the two airlines envisaged during the merger never took off. Touted as the biggest marriage in the Indian skies at the time, Nacil is just not a single carrier. ?It?s like living together without marriage?, quipped a member of the Nacil board, asking not to be quoted, adding that the carrier was yet to integrate IT platforms, ticketing operations, maintenance services and IC numbers of the two airlines.

Though it got a Rs 331-crore waiver on stamp duty, and tax exemption on carry forward of losses, the synergy benefits estimated at Rs 600 crore annually haven?t materialised. Worse, the airline is now seeking a fresh Rs 4,000-crore bailout.

Promising to complete the integration within two years after the Cabinet cleared the merger in March 2007, Patel had famously said: ?The government will create a mega-carrier with the precision and reliability of Lufthansa and in-flight service of Singapore Airlines.?

Nacil?s executive director Jitender Bhargava told FE that the integration process of the two airlines is ?on in full speed? and there are ?no speed-breakers on the way.? But interviews with more than 12 senior executives of Nacil and officials of the civil aviation ministry paint a different picture.

Accenture, the consultant that inked the blueprint of Air India-Indian merger in 2006, had advised the Centre to integrate 748 officials up to the level of deputy general manager (DGM) within nine months of the Cabinet clearance, to ensure that the merger pays off. Twenty-five months later, Nacil has been able to integrate 44 officials up to the level of executive director (ED), according to two board members of Nacil.

Bhargava claimed that the human resources integration had gone to the DGM level but refused to give the numbers. ?It?s not the numbers (of officials) that matter. Numbers are huge but there are no issues of merger,? he said.

Bhargava, however, conceded that timeframes set by Accenture have gone out of the window. ?This is the trouble when we say 24 (months). Nobody can stick to a certain time and say ?this is it and I can?t change.? I need to reset my priorities? Air India?s priority is to first meet the challenges of the market,? he said.

To be sure, Nacil, like other air carriers, is hit hard by the slowdown crimping passenger and cargo traffic. Air passenger traffic fell for the seventh month in a row by 11% year-on-year in January 2009. In that month, Nacil?s load factor, the number of tickets sold in proportion to the total number of available seats, was the lowest (domestically) at 60.2%.

The net worth of Air India and Indian was expected to jump almost 14 times post-merger to Rs 2,557.49 crore from the pre-merger combined net worth of Rs 185.29 crore, according to Accenture?s 2006 estimates. FE could not assess the impact of the merger on total assets and net worth of Nacil since the company?s financials are not available beyond 2006-07. Bhargava said 2007-08 figures can?t be shared since they haven?t been presented in Parliament. Total assets were also expected to rise significantly. But this is unlikely to happen now. According to a consultant who had advised the civil aviation ministry prior to the merger, the benefits were to materialise and ?ramp up? with the extent of integration. ?Since that has not happened, the synergies have remained only on the paper,? he said.

The crisis may have diverted the management?s attention to the merger process. But KPMG?s aviation analyst Mark Martin believes the government?s approach to the merger was flawed to begin with. ?Integrating the top management first and lower management and operations later in a sequenced manner, was bound to fail. The top-down approach was a disaster. Actually, the integration should have begun at the grassroots level,? Martin said .

The core cost drivers ? including line maintenance, ground handling, terminal services, flight operations/ dispatches and ticket sales ? should have been merged first for synergies to translate into actual benefits. The Kingfisher Airlines? merger with Deccan Aviation happened in this manner and

it?s been a success, Martin pointed out. Nacil?s employee-to-aircraft ratio, a gauge of efficiency, is the highest among its peers at 222:1 (the global average is 150:1), resulting in a surplus employee strength of almost 10,000.

But forget rationalising its staff strength, Nacil, which began with 32,832 employees on merger, has hired at least 800 more employees since. The wage bill of the merged company, which was 23% of total expenditure at the time of incorporation, is expected to rise sharply due to a grade re-alignment.

Accenture told FE it was still working with Nacil on the merger process but refused to share any details, citing ?client confidentiality.? FE also spoke to Nacil?s former CMD V Thulasidas, who spearheaded the merger, but he said he had no update on the company since he retired more than a year ago.

To be continued