The national carrier Air India, operated by the National Aviation Company of India (NACIL) is in a fix. Just eight months ago, this merger was operationalised with the backing of the civil aviation minister Praful Patel. But given the financial position of the carrier, the minister may find it increasingly difficult to justify his decision. And handing out bailout packages when the rest of the aviation industry is scrambling to cut costs is perhaps not a sensible option.
Even though it?s still early days for the merger, mounting losses and high operational costs have become a major source of worry. NACIL incurred a loss of Rs 2,144 crore in 2007-08, a fifth of which was contributed by the increase in interest burden on loans to buy new airplanes. The fuel bill, which accounted for around 45% of the total costs, grew by around Rs 410 crore in 2007-08. While capacity on offer by the airline moved up by around 1.5 % over 2006-07, passenger revenue has actually fallen by more than Rs 90 crore.
While Air India?s average passenger load factors increased from 65.6% in 2006-07 to 66.8% in 2007-08, its yields in terms of returns per kilometre (RPKM) decreased from Rs 3.25/RPKM to Rs 3.13/RPKM in 2007-08, a decrease of 3.9%. Moreover, if the fuel surcharge was excluded, passenger revenue fell even more sharply from Rs 2.80/RPKM to Rs 2.53 in 2007-08, a decrease of almost 10%.
Air India is not a case in isolation. The cumulative losses of Indian carriers are expected to be in the range of $2 billion in 2008-09. However, private carriers do not have the luxury of a ready bail-out package. Given Patel?s support for the merger, the government of India is, however, more than willing to help NACIL by coughing up huge amounts as working capital as well as loans.
NACIL and the civil aviation ministry have asked for a Rs 2,300 crore package to bail out the airline. The proposed bail-out package will be in the form of Rs 1,300 crore equity and Rs 1,000 crore in soft loans. Compare this to just Rs 650 crore allocated by the government to set up about 6,000 model schools in the country. It may be the shareholder?s prerogative to finance a company in trouble, but how fair is it to justify a decision through pumping in tax-payers? money? Not very fair.
The working capital of NACIL has seen continuous increase since the company came into being. The company?s working capital limit at the time of merger was Rs 6,500 crore. Subsequently, the same was raised to Rs 8,000 crore, and now to Rs 9,500 crore. The main concern about the financial health of the company is its high operating cost, which is important as the government plans to take the carrier to the capital markets any time.
Top on NACIL?s agenda should be to prune loss-making routes, which it has been operating as social obligation routes. Rough analysis shows that cutting the capacity by about 10% would result in a saving of about Rs 500 crore, almost half of the cost pruning it has planned over the next 12 months.
Cutting loss-making routes and redeploying aircraft on other routes would help, as it would be able to deploy these aircraft in much busier routes. But, to get the government?s approval to cut these routes would be a major task for CMD Raghu Menon.
Most of the private sector airlines, hit by higher fuel costs and a fall in passenger numbers, have reduced the number of routes by as much as 10%, resulting in massive savings. Air India is yet to exercise this option, pending government approval.
Air India should also look at additional sources of revenue. One option, being exercised by carriers around the world is to dry lease its airplanes to other airlines. For Air India, with additional capacity, this would be a major commercial blessing.
Operational autonomy is another issue. Being a government-owned enterprise, the carrier is not able to react to the market requirements well in time, hurting its commercial interests. For example, it has to get the government?s nod before hiking the amount of fuel surcharge.
Much reform is needed if Air India is to take-off in the near future.
bipin.chandran@expressindia.com