It is now a fact established beyond any doubt: Nacil, the merged entity comprising Air India and Indian Airlines, is in very deep financial trouble bordering on an existential crisis. With losses running into thousands of crore and a massive debt burden that exceeds operating revenue, Nacil would have been dead and buried had it been operating in the private sector.
The first and immediate question that then comes up in this context is whether Nacil should be simply folded up? Perhaps. There are, after all, plenty of other airlines (and hence alternatives) plying the same routes within India and abroad that Nacil does. And let?s not even give the slightest credence to the purely political (and pass?) argument for a state-owned ?national carrier?. Nacil will clearly not be missed in substantive economic terms if it disappears tomorrow. Still, closing it down would be unfair to a firm (and its many stakeholders) that hasn?t ever been allowed to function in an autonomous, market-oriented manner. Plainly put, Nacil deserves one chance at competing freely in the open market before one writes it off.
This brings us to the second question. How does one give it a second chance? The worst option would be to pump in a huge amount of government money without changing the way the airline functions (this includes issues of ownership, management and manpower). The airline will get back into trouble fairly soon. The best option is to free the airline of government ownership, and all the problems associated with it, but unfortunately privatisation isn?t a viable option at the moment. With all its many problems, no strategic investor will want any part of Nacil as it exists today. Alitalia, which has many problems in common with Nacil (particularly excessive manpower) hasn?t found a buyer.
Divesting a minority stake will neither make money for the government or the airline, nor bring the necessary changes.
There is a third ?middle path? option: restructure the airline in phases with the medium-term aim of privatising it completely. This will require some government money at the initial stages, which can hopefully be earned back at the time of final sale. This was the strategy famously adopted by British Airways (BA) in the early 1980s as it converted itself from a pathetic loss-making, debt-burdened, state-owned airline (BA was popularly known as bloody awful in the late 1970s) to what is today ?the world?s favourite airline?.
The first step in the process has to be the appointment of a professional manager right at the top. A globally competitive airline cannot simply be run by a career IAS officer, which has been the basic profile of most of the recent chiefs of Nacil and, before that, of Indian Airlines and even Air India. Career bureaucrats do not have the savvy or the training to run a giant corporate entity. The government would do well to take a leaf out of its Satyam book where it appointed non-government people with experience in the corporate world, rather than sundry bureaucrats, to the board of the stricken company. The successful process of rescuing Satyam, viewed as a doomed firm at the time of Ramalinga Raju?s confession, should give the government confidence to adopt a radical and fast-track approach with Nacil. For Nacil, a start can be made by appointing an outsider as executive chairman. Margaret Thatcher did the same for BA when she appointed John King from private industry as chairman of the public sector BA in 1980. If giving a big salary to attract talent is a problem in the PSU framework, then give the person cabinet minister rank and status, a la Nandan Nilekani.
The second step after the appointment of a new chief should be to begin an immediate re-branding and marketing exercise. John King insisted on ?American style? marketing for BA?something abhorred by the old-fashioned British public sector?and outsourced the job to a professional company. Many of Air India?s troubles have to do with its very poor image in the eyes of customers. In a highly competitive market, Air India/Indian Airlines is rarely the airline of choice for anyone.
The third step, and this must be done in league with step two, is downsizing of workforce. This really is the root of Nacil?s problems. The industry optimum of aircraft to employee ratio is 1:140. Nacil clocks in at 1:210. The company needs to lay off around 10,000 of its 31,000 permanent employees before it reaches industry best standards on aircraft-employees ratios. Now airline unions are very strong and laying off one-third of a company?s workforce isn?t easy anywhere in the world. But it can be done, as the BA example proved. Between 1980 and 1983, the employee strength of BA was reduced from 60,000 to 38,000 with no major strike. What is required is hard bargaining. The government will likely have to incur a substantial cost in offering a generous (but perhaps compulsory) voluntary retirement scheme to the employees. If the employees resist, as they likely will, the management will have to force the issue by announcing withdrawal of several additional benefits that employees get. In BA?s case, workers were faced with suspended pay, withdrawal of travel concessions and loss of shop stewards? rights. They finally agreed on a compromise. It is important to remember that two-thirds (a big majority) of employees will still retain their jobs even in a trimmed-down outfit. So it is in their interest to settle and not lose out.
The fourth big step is fleet modernisation. It would be wise for Nacil to get its house in order before it spends huge amounts of money acquiring new planes. It cannot possibly hope to make profits from new planes given the organisational problems?it will just exacerbate costs. Unfortunately, Nacil has already taken more than a few steps down this path. Of course, old planes do need to be phased out?customers aren?t likely to pay for seats in a plane that doesn?t have flat beds in business class or individual TV screens in economy, standard services in major airlines flying international routes. But for an airline in financial turmoil, dry leasing aircraft is a better, cheaper alternative. New purchases should be delayed till after privatisation or at least till a return to profitability. That was the BA strategy.
Of course, all this will take time. BA was finally privatised in 1987, some seven years after it began restructuring. But if Nacil is turned around, then there may be no need for a strategic divestment?it can just be floated on the stock market. BA was over subscribed 11 times over when it was listed in the summer of 1987. So, the horror story of Nacil can still have a happy ending but the government needs to act fast and smart.