Comprehensive Case
MARRIAGE OF TWO INCOMPATIBLE INDIVIDUALS: AIR INDIA & INDIAN AIRLINES
Eleven years ago, on March 19, 2007, then Union Minister of State for Civil Aviation Praful Patel, announced his mega plan of being a game changer in the Indian skies by merging the state-owned Indian Airlines (then a profitable venture) and the perennial loss-making Air India.
The consulting firm Accenture recommended the merger with the plan to create a monolith and spread its dragnet under the cloak of the ubiquitous Maharajah, the mascot of a hospitable Indian king, across the nation and the world. But March 19, 2009—ironically on the same date—a parliamentary panel declared the merger a big failure, saying it had only messed the state carriers. It added that it would be difficult to sustain the controlling company NACIL (National Aviation Company of India Limited).1
NACIL’s balance sheet rings the alarm. Losses for Air India stood at a whopping Rs. 7,200 crore in 2009–10, more than double the Rs. 2,226 crore for 2007–2008. The Committee on Public Undertakings (COPU) of Parliament, which prepared the study, has already called the amalgamation “ill-conceived, whimsical and a marriage of two incompatible individuals” and wondered whether Patel and his ministry ever had a blueprint for the future. Worse, it has called for an inquiry into the mess.2
Air India is the flag carrier of India. It operates a fleet of Airbus and Boeing aircraft serving Asia, Europe, and North America. It is India’s oldest and largest airline. It is the 16th largest airline in Asia.3
Indian Airlines or Indian is a major Indian airline and focuses primarily on domestic routes, along with several international services to neighbouring countries in Asia. Indian Airlines is state-owned and is administered by the Ministry of Civil Aviation.
History4
Air India was founded by J. R. D. Tata in July 1932 as Tata Airlines, a division of Tata Sons Ltd. (now Tata Group).
Following the end of World War II, regular commercial service was restored in India and Tata Airlines became a public limited company on 29th July, 1946 under the name Air India. In 1948, after the Independence of India, 49% of the airline was acquired by the Government of India, with an option to purchase an additional 2% stake. In return, the airline was granted status to operate international services from India as the designated flag carrier under the name Air India International.
On 1st August, 1953, the Government of India exercised its option to purchase a majority stake in the carrier and Air India International Limited was born as one of the fruits of the Air Corporations Act that nationalised the air transportation industry. At the same time, all domestic services were transferred to Indian Airlines. In 1994 the airline was registered as Air India Ltd.
Re-privatisation plans
In 2001, Air India was put up for sale by the then NDA government. However, the re-privatisation plans were shelved because of the global economic slump.5
Merger with Indian Airlines
In 2007, the Government of India announced that Air India would be merged with Indian Airlines. As part of the merger process, a new company called the National Aviation Company of India Limited (NACIL) was established, into which both Air India (along with Air India Expressa) and Indian Airlines (along with Alliance Airb) were merged.
The AI-IA merger was expected to create one of the biggest airlines in the world in terms of the fleet size. As of May 2007, the two airlines had a combined fleet of 122 aircraft and 34,000 employees including 1,315 pilots.6
The combined fleet size placed the merged entity among the top 10 airlines in Asia and the top 30 in the world. It would also be India’s first airline with more than 100 aircraft.7
Financial Crisis
The cash-strapped national carrier posted a loss of Rs. 7,200 crore last fiscal. The airline, which has been incurring losses since 2004–2005, had problems paying salaries to 31,500 employees last year.8
Around 2006–2007, the airlines began showing signs of financial distress. The combined losses for Air India and Indian Airlines in 2006–2007 were Rs. 770 crores. After the merger of the airlines, this went up to Rs. 7,200 crores by March 2009.9
This was followed by restructuring plans which are still in progress. In July 2009, SBI Capital Markets Ltd was appointed to prepare a roadmap for the recovery of the airline. The carrier sold three Airbus A300 and one Boeing 747–300M in March 2009 for $18.75 million to survive the financial crunch.10
Why merger
India was the fastest growing aviation market in the world, ahead of China, Indonesia, and Thailand, as of early 2007.11 The number of people travelling by air had been increasing rapidly in the country. The main reason for this was thought to be the advent of low-cost airlines like Air Deccan and Spice Jet in the country in 2003–2004, which brought air travel within reach of India’s large middle class. The airlines in the domestic sector flew 25.5 million passengers in 2006 which was 27.9% more than in 2005. Similarly, the number of international passengers was 22.4 million in 2006 which was 15.1% more than in 2005.12
According to IA’s website, the increasingly intense competition faced by AI and IA from private and global airline companies was the main reason for the merger of the two airlines. In addition to helping AI and IA tackle competition, the merger was expected to result in considerable synergies by integrating routes and streamlining overlapping facilities and infrastructure.13 Accenture, the consultant hired for the merger process, had identified significant potential synergies between the two airlines in the areas of sales and distribution network, fuel procurement, material procurement, passenger amenities, ground handling and parking facilities. According to a report submitted by Accenture in late 2006, the merger could result in a 3–4 percent reduction in costs, and lead to a revenue increase of around Rs. 6 billion initially.14
Opposition to Merger
However, the proposed merger was not without its share of critics. Initially, there was opposition from the employees of the two airlines as they feared that the merger would result in layoffs. The Aviation Minister, Praful Patel, had allayed their fears and assured the employees’ unions of the two airlines that employment conditions, wages, seniority and career progression, would largely remain unchanged. He also said that a grievance redressal mechanism would be set up to protect employee interests. The government also indicated that there would be no layoffs.15
Despite this, analysts warned that the merger might pose a serious challenge in terms of integrating the employees of the two airlines, especially as they had followed completely different operational methods before the merger. The two airlines also had different fleet compositions, which might create complications in inventory management, maintenance and repair establishments, and pilot training.
Analysts also felt that the merger should be followed by a thorough overhaul of the operations of the airline. Kapil Kaul, Chief Executive (South Asia) of the Centre for Asia Pacific Aviation, an airline industry consultancy, had suggested: “a partial sale of equity through an initial public offer to begin with to help induce professionalism and market dynamics, followed by privatisation over the next 5 years or so.”16
The Parliamentary Standing Committee on Transport, Tourism and Culture on January 21 in its report had slammed the government for the merger of Air India and Indian Airlines and said that the decision in this regard was taken in haste.
“The decision was taken in haste, without required homework and consultations. As a result, the entire process has, in fact, been unduly delayed, if not derailed,” the Committee had said.
The committee further stated that the merger had given rise to many problems concerning financial, administrative and operational aspects, which could not be foreseen by the people who took this decision.
“The two have inherent contradictions in terms of their human resource and the types of aircraft, which prevented the merged entity from attaining the desired economy of scale,” it observed.17
DISCONTENTMENT BEFORE MERGER
The national carriers’ staffers put forth 10-point demand charter and warned that the merger will have to wait until their demand charter was not implemented. With this, the brains behind the merger and the government are sensing trouble as the employees are gearing up for a stir.
The Air Corporation Employees Union (ACEU) has termed the merger movement of the government as unilateral. The Air Corporation Employees Union has reiterated that it would not accept the merger if problems like pay structure, seniority, career progression and other issues, faced by the employees of both airlines were not sorted out first.
ACEU office-bearers have come out with a statement which says the Indian staffers of the airlines would strongly oppose the merger if it was carried out without implementing the demands.
According to the Union, the demands include wage revision that has been pending since January 1997, parity between career progression and wages of the two airlines, pension scheme pending since 1994, parity in placement and redeployment of staff, equal opportunity to the workforce, formulation of future policies and rules for wages, incentives, promotions, and other matters. The demands also include consultations with ACEU during the merger process and making it part of the decision-making process.18
The Kishore Chandra Deo committee’s fourth report has observed that the root cause of the ills plaguing the National Aviation Company India (NACIL) was the ‘merger’ of Indian Airlines and Air India. Deo in his report observed that the so-called merger is a kind of marriage between two incompatible individuals having wide variances with hardly any meeting ground.
The committee observed that utilisation of aircraft in the company is at a low of 9 hours per day, while the benchmark is at 16 hours per day.
Hence, NACIL should take necessary steps to increase the utilisation of aircraft.
The committee also emphasised the need for ground handling by NACIL, corporate work culture, and training.
Recognising the fact that the employees of any organisation and their welfare are key to the success of any organisation, the committee recommended fair treatment to loyal employees.
On issues relating to service matters, the committee recommended that no unilateral decision should be forced upon and the genuine aspirations of the officers in each cadre should be addressed judiciously.
The assurance made to the employees before the merger of the two organisations that “No employee would be placed at a disadvantage at any stage,” must be fulfilled, the committee recommended.19
The officers of AI have complained to the top management about the unequal career progression between AI & IA’s employees and demoralised workforce.
Their words highlight the problems Raghu Menon faces in integrating national carriers Air India and Indian Airlines following their merger. Menon is the Chairman and Managing Director of National Aviation Company of India Limited (NACIL), the holding company that manages the merged entity. He had been handpicked in March 2008 to oversee the merger process, including the ticklish job of integrating the two airlines’ combined workforce of 33,500 employees. The new CMD said at least 60–70 percent of the merger process would be completed in a year’s time. A year on, the Maharaja, Air India’s mascot, wears a confused look. Integration has been too slow. The creation of a common passenger reservation system was supposed to be one of the key synergies of the merger. But 20 months on, the two still operate separate reservation systems for international and domestic routes. The unified system, which has been in the works for more than a year, is now expected to be ready only in the first quarter of 2010. The delay has also forced Air India to postpone its entry into the Star Alliance, a global club of 21 airlines, to the middle of next year. It was earlier supposed to join the alliance in the second half of 2009. Air India estimates it will add $118 million to revenues through code share arrangements by joining it, so the common system is critical.
Even the formation of a common management team for the two airlines, as envisaged by Accen-ture, has been proceeding at a snail’s pace. Currently, the process of combining the functions of 150 executives at the top level is on. That will take some time. Already, there are murmurs of dissent among the 850-odd mid-management employees in the organisation, citing mismatch in growth and career progression between the employees of Air India and Indian Airlines.
The slow progress in integration has attracted the attention of the Board for Reconstruction of Public Sector Enterprises (BRPSE), which suo motu decided to look into the matter. “Rationalisation of staff is important. There is no evidence of the serious will to integrate,” says Nitish Sengupta, Chairman, BRPSE. However, despite repeated reminders, he is yet to hear from either the Ministry or the airline.20
Mutual Distrust 21
Many of these problems stem from the different work cultures of the two carriers. “The integration process is caught in a turf battle between the employees of Indian Airlines and Air India,” claims J.B. Kadian, General Secretary, Air Corporation Employees’ Union. At the time of the merger, Air India and Indian Airlines had 15,000 and 18,500 people on their rolls, respectively. The headcount has now come down to 31,500, largely through retirements. No voluntary retirement scheme has been extended to employees thus far. Morale is at an all-time low, say many employees.
The distrust between the two sides is almost palpable. For sure, many jobs will become redundant when functions are unified. Many of those appointed are from Indian Airlines, fuelling resentment among Air India employees. Integration has become a tightrope walk for the management.
Menon concedes that people issues will always be challenging and it will take time to integrate a workforce of such magnitude. But he insists things are still on schedule. “The overall merger process was expected to take 2–3 years,” he claims.
PROBLEMS WITH AIR INDIA22
AIR INDIA, the brand that today encompasses both the erstwhile Air India and Indian Airlines, is in serious trouble. The National Aviation Company of India (NACIL), formed by the merger of the two airlines, ran up losses of Rs. 2,200 crore in 2007–2008. Losses for 2008–2009 estimated at over Rs. 5,000 crore. In 2009–2010, losses could exceed Rs. 12,000 crore. How did the airline get into such a mess?
Parliament’s Committee on Public Undertakings (COPU) has come up with a report that seeks to identify the underlying causes of AI’s losses.
It is useful to begin by listing some perceived causes of Air India’s losses and examining how far these are valid:
Public ownership is the problem: Governments just can’t run commercial enterprises. There is no way that Air India and Indian Airlines could have survived in the face of greater competition.
There is a problem with this story. Several public sector enterprises have successfully weathered greater competition post-liberalisation and are doing better than before. In the period since 2001, Air India made a profit every year until 2006–2007. Indian Airlines made a profit in three out of those 6 years.
Air India suffers from a bloated workforce typical of the public sector: Air India performs in-house a wide range of functions that other airlines outsource. Still, Air India’s workforce per aircraft of 214 compares favourably with that of several other airlines: Malaysian Airlines (230), Virgin Atlantic (282), KLM (220), and so on. Wages account for just 16% of total costs, so the scope for reducing losses through wage or employee reductions is quite small.
The failed merger is responsible for non-performance and losses: There is little doubt that the merger of the two airlines, done in 2006–2007, has turned out to be a nightmare. But it is hard to describe the mounting losses to the merger per se. The synergies expected from the merger were fairly modest in the first place: around Rs. 900 crore. Of these, Rs. 500 crore was realised in the first year itself. The failure of the merger cannot explain losses of over Rs. 5,000 crore in 2008–2009 and the even higher losses projected for 2009–2010. The merger makes it more difficult for Air India to respond to the situation it is in, it is not the cause of the situation.
Thus, none of the perceived causes can explain the mess of Air India is in today. The report provides useful clues. Air India’s problems, it turns out, arise from two errors, one strategic and the other structural.
It is clear that the root cause of the present situation is the massive fleet expansion plan initiated by the two airlines prior to the merger. Was such an expansion necessary? Officials have justified on the ground that the two airlines needed to replace their aged fleet and also augment their fleet in order to maintain market share given that the market was expected to grow faster than in the past.
The market has not grown as fast as expected. As a result, NACIL is stuck with planes with low utilisation and is having to lease out aircraft. In the case of Air India, 46% of addition to the fleet was towards augmenting capacity; at Indian Airlines, the figure was 30%. (The rest was towards creating new capacity).
The second cause of Air India’s problems is structural. The airline industry is inherently problem-ridden because it combines high capital intensity with volatility in revenues. Leverage in this business is bound to be high but it must be kept within reasonable limits. Air India embarked on a fleet acquisition plan costing Rs. 44,000 crore on a paid-up capital of Rs. 145 crore. This was a recipe for disaster.
One of NACIL’s new directors, Amit Mitra, also the Secretary-General of the Federation of Indian Chambers of Commerce and Industry (FICCI), says drastic workforce restructuring is required. “The cost overhead is high and needs to change. But if there is an issue of workforce restructuring and it becomes a politically sensitive issue, one can look at enlarging the customer base.”
But sources within the ministry say this is just the tip of the iceberg. In fact, many top officials agree in clear-cut terms with the note COPU sent to Parliament. They say the merger process was to be completed by mid-2009 but till date, NACIL is a just halfway through. The synergy has worked well in the integration of network, cross-utilisation of aircraft fleet, leveraging scale for joint procurement like insurance and fuel, and the opportunity to join the global leading airline network Star Alliance, which offers customers worldwide reach and a smooth travel experience. But the merger has not worked in areas like manpower, properties and facilities integration, cross-utilisation of resources, IT augmentation and launching new subsidiaries such as maintenance, repair, and operations (MRO) and ground handling. “The have-nots have totally outweighed some of the benefits the merger achieved,” says India’s top aviation expert, Kapil Kaul.
The Fallout 23
The flux at the top has led to delays in decision-making at a time when demand for air travel has dropped around 8–10% over the last year and competition has heated up in the sector. The national carrier’s domestic market share has been under pressure ever since budget carriers and new private airlines took wing. Air India’s domestic market share dropped from 19.8% in August 2007, when the merger took place, to 13.9% in January 2008 before rising to 17.2% in February 2009.
Losses too have mounted, from around Rs. 700 crore in FY07 to Rs. 2,226 crore in FY08. They are expected to cross the Rs. 3,000 crore marks in FY09. Fuel expenses, interest and depreciation payouts and wage costs together account for around 70% of the airline’s total expenses.
“The success of the merger depends on how it is implemented, how fast it is implemented and how comprehensively it is implemented. Also, on how far the people in the two organisations understand the merger and work for its success,” says V. Thulasidas, former CMD, and Air India, who were one of the key architects of the merger.
There have been some positives. Accenture’s estimates put the benefits of the merger at around Rs. 600 crore per annum. Menon says that, as per internal estimates, the benefits could touch Rs. 900 crore in FY10. “In the first year of the merger alone, we have achieved close to Rs. 490 crore,” he claims. The bulk of these savings have come through lower insurance premium payouts, common procurement of fuel, merging of offices and route rationalisation.
A lack of meeting of minds as it were is holding back the Air India-Indian Airlines merger. The Secretary, Civil Aviation, recently told the Parliamentary Committee on Public Enterprises that manpower integration between the two airlines had not happened, adding that unless there was a merger of “the hearts of the people”, the actual merger would not work as intended.
Reinforcing the sentiment while giving oral evidence to the Committee, the Chairman and Managing Director of Air India, Mr. Arvind Jadhav, pointed out that “internal procedures, processes, human relations, working conditions, timing and method of dealing” were totally different in the two airlines.
Mr. Jhadav provided various examples of the differences. Such as, in AI, when a pilot is taken on, he is given an advance in dollars at the beginning of the month, while in Indian Airlines this was not the case. “Pilots are seeking parity with AI,” he said.
Turning his attention to the working conditions, the CMD said that while AI employees had a 5-day week, IA employees worked for 5 days in a week. The lunch hour was specific in AI, while in IA it was specific, but rotated.
“So, if you go to an IA counter at lunch hour, you may get a ticket. But if you go to AI, they will say it is lunch hour and that you may come back later. And they are seated in the same room,” said Mr. Jhadav.
The Parliamentary Committee was told that the Government was looking at a sort of ‘pause mode’ in coping with the Air India-Indian Airlines merger.
“Though it may not be possible to de-merge, what we are now looking at is… a kind of pause mode to see that we get out of this financial crisis by having Air India and Indian Airlines run as separate streams within the merger,” the Secretary, Civil Aviation told the Committee.24
25Jadhav is also a bureaucrat but not from the aviation ministry, so can take a more independent fresh look at the problems. He is advertising internationally for a chief operating officer, hoping to hire someone who can transform this ailing airline.
But he has a huge task as he showed in an interview in India’s Business World weekly magazine, August 2009, The Time For Talking Is Over, Jadhav where he spelt out the problems—here are some of them:
- Air India has 32,000 employees compared with 12,000 “in any like-to-like company”.
- Employees are not conscious of working for a business in crisis.
- Pilots “sitting at home” are paid “80 hours of flying allowances”.
- Despite a freeze on recruitment, “we have recruited”.
- “There is a duplication of every activity and no single chain of command”.
- “Revenues are 14,000 crore and costs are Rs. 19,000 crore” (approximately $2.9 bn and $3.9 bn).
- “We have 22 offline stations where we no longer fly”.
- “We have an alarming number of aircraft (25) and engines (33) on standby”.
- For 800 business class seats from Delhi, 750 meals are ordered but there are only 400 travellers—“no-one knows” where the other 350–400 go.
Issues Unresolved after 7 years of merger26
Even after 7 years of the merger there are unresolved issues. Air India pilots are resenting a proposed 15 per cent cut in their allowances, saying such a reduction would place their pay packets below what was prevailing in the market. The pilots consider that 60 percent of their pay package comprises of allowances and hence, 15 percent cut in allowances would affect the pay packages adversely.
Air India pilots are a pampered lot, getting paid more than most other pilots working for Indian airlines. Whether Air India pilots, fly or they don’t, they expect to get paid for 80 hours of flying and expect to get subsistence allowance for flying overseas.
Air India’s total staff bill comes to around Rs. 3,200 crore, of which one-third or around Rs. 1,100 crore goes to pay the pilots alone, who number around 1,600 compared with the total staff strength of about 25,000. The officials said the proposal to slash the allowances by 15 per cent across the board would help the airline to earn Rs. 250 crore annually. They said the airline, which was earlier the market leader in terms of pay and perks which matched global levels, was now in the process of adjusting them to the market levels prevalent in India due to the financial crunch.
As some foreign carriers from the Gulf and Southeast Asia were currently on a head-hunting spree for pilots in India, many pilots of Air India wish to switch over.
The rumours are that the best pilots would leave as large pay packets were being offered by some of these foreign airlines to wean them away.
They also pointed out that new openings were in the offing with the opening up of new Indian carriers like AirAsia India and the Tata-Singapore Airlines venture.
The trouble for Air India comes just 2 years after it suffered a 58-day strike by wide-body pilots demanding better career progression.
The strike was called off after the court’s intervention as the airline sacked 101 pilots and derecognised the Indian Pilots’ Guild (IPG) spearheading the agitation.
27The pilots of the two airlines stuck to flying the aircraft attached to their respective airlines — wide-bodied ones used for international legs in the case of Air India, and the more short-haul, narrow-bodied ones in the case of Indian Airlines. What threw the existing state of affairs into a loop was the entry of the much-hyped ‘Dreamliners’—wide-bodied Boeing 787s that promised to help turn things around for Air India.
The match that lit the tinder hot was a proposal to get an equal number of Indian Airlines pilots and Air India ones to fly the twenty-seven planes that Air India would take delivery of in the next few years. Yet, not all pilots are made equal, apparently. In Indian Airlines, it took 6 years to automatically become a commander. In Air India, it took ten, but only if there was a vacancy available. Someone in Air India who was waiting in the wings for, say, 15 years to become commander would probably be enraged to see a six-years-in-service, narrow-body aircraft pilot, substantially junior to him, occupy his turf and deny him his long-awaited promotion.
Aviation department’s reaction
The government rubbished reports of de-merger of Air India and said its merger with Indian Airlines was well-planned and decided collectively by various agencies. “The merger was a carefully thought-out process and a collective decision of all agencies of the government. We have no move afoot for the Air India-Indian Airlines demerger,” the ministry of civil aviation said in a statement.28
Questions
- What are the major reasons of the delayed integration of the AI & IA? Highlight the employee’s perspective.
- What measures should have been taken pre-merger, to handle the situation?
- What steps should be taken to make the merger successful?
References
1http://timesofindia.indiatimes.com
2Publication: The Economic Times Mumbai; Date: Apr 15, 2010;Section: Editorial;Page: 16.
5India privatisation plans near ‘collapse’. BBC News. 3 September 2001. Retrieved 23 April 2010.
6“Merged Air India-Indian Revenue Projected at Rs. 15,000 Crore by 2010,”www.domain-b.com, February 22, 2007.
7“GoM Clears Merger of Air-India, Indian; Formal Clearance by March,”February 21, 2007.
8January 27th, 2010, Thaindian news.
11Merged Air India-Indian Revenue Projected at Rs.15,000 Crore By 2010,”www.domain-b.com, February 22, 2007.
13“Merged Air India-Indian Revenue Projected at Rs.15,000 Crore by 2010,” http://www.domain-b.com, February 22, 2007.
14Ashwini Phadnis, “Air India, Indian Merger May Add Rs. 1,200 Cr to Kitty,”Business Line Octo-ber 27, 2006.
15Manika Gupta, “Cabinet Give Green Signal to AI-IA Merger,”The Economic Times, March 01, 2007.
16“Merged Air India-Indian Revenue Projected At Rs.15,000 Crore by 2010,”www.domain-b.com, February 22, 2007.
17January 27th, 2010, Thaindian news.
18http://www.dancewithshadows.com. October 18, 2006.
19http://buzz7.com. March 12, 2010.
20May 02, 2009. business.OutlookIndia.com.
21May 02, 2009. business.OutlookIndia.com
22Publication: The Economic Times Mumbai;Date: Apr 15, 2010; Section: Editorial; Page: 16
23May 02, 2009. business.OutlookIndia.com
24Business line. March 19, 2010.
25Is Patel Crying “Wolf” on Air India or is he for real this time, posted by John Elliott on Septem-ber 9, 2009.
26Business today. Trouble brewing again in Air India over pilots’ pay cut. April 9, 2014
27http://www.business-standard.com
28January 27th, 2010, Thaindian news.
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