No reason to believe the revamped Air India will be profitable
The government’s reported plan to transfer over 60% of Air India’s debt to an SPV, and to give it another 2-3 years to become profitable under another turnaround plan represents the triumph of hope over experience. If the airline has not been able to turnaround after Rs 28,175 crore of government money, it is not clear how the debt-reduction will make it more efficient, though, for a few years, the reduction in the interest burden will make it look like a turnaround story. While AI’s losses have averaged around Rs 5,400 crore over FY13-17, this number will probably balloon given how oil prices have shot up; indeed, it is surprising that, half-way into FY19, the airline’s losses for FY18 are still not public.
The fact that the information memorandum (IM) put out for the airline’s privatisation said 37.6% of its 11,000+ permanent staff would retire over the next five years means the government realised this is a problem area—while the staff can potentially be asked to leave after a VRS, if this was easy, the government would have done it prior to the sale process. And, for all the talk of the debt-light AI being run by a truly professional board, the IL&FS example makes it clear even a heavy-duty board can’t do much to change organisational culture. And for all the talk of the discipline of listing—under the plan, AI is to be listed—the fact that an ONGC should be forced to buy GSPC’s expensive assets or even HPCL makes it clear the government will continue to call the shots.
With Air India’s staff costs at least 30% higher than those of rivals like Indigo and its other expenses around 2.4 times those of rivals, it is obvious the airline cannot turn around without getting rid of a large number of employees and a complete change in management operations. Theoretically, this can always happen under, say, a professional CEO with a completely free hand, but if this hasn’t happened in any other PSU, it is difficult to believe this will happen in AI’s case. Indeed, AI’s IM makes it clear the government remains quite clueless about how organisations are to be run. So, the IM said AI had to be run as on “a going-concern basis” and on an “arms-length basis” from the new buyer’s business—any new buyer would want to extract economies of scale by merging the operational areas of AI with its airline, but the government firmly ruled this out. Indeed, if the government is willing to take away 60% of AI’s debt now, it is not clear why it was not prepared to take all its debt—instead of 50%—at the time a sale was being contemplated. This would have made AI profitable overnight, and the extra debt would equal just 3-4 years of future losses—may be even less—without the prospect of having to continue to fund losses endlessly into the future.