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By the numbers: What an Air India turnaround entails

By the numbers: What an Air India turnaround entails

By the numbers: What an Air India turnaround entails
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By Satyendra Pandey  Jul 19, 2019 1:29:45 PM IST (Updated)

Multiple union leaders of Air India’s 13 unions met with its chairman recently. Their demand:  the government must not go ahead with disinvestment plans. It should rather focus on reviving Air India. A completely understandable claim. But no plans were presented – from either side.

Multiple union leaders of Air India’s 13 unions met with its chairman recently. Their demand:  the government must not go ahead with disinvestment plans. It should rather focus on reviving Air India. A completely understandable claim. But no plans were presented – from either side.

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Here are what the numbers look like and why the contention remains that Air India will be sold off in parts:
The current government has already invested Rs 24,000 crore into the airline
From 2014-15 to 2018-19, the government invested more than Rs 24,000 crore in the airline. This investment was towards sustainability and, of course, the turnaround. But the results of this infusion are yet to be seen – on costs, on revenues or even on the product.
The sad fact is that for the amount of money that has been put into the venture, a new airline could be established. And herein lies the challenge.
Because investors are always looking at alternatives. And currently, those include buying an existing airline, setting up a new airline or waiting patiently for a Jet Airways like situation towards grabbing only select value accretive assets.
To compete, Air India needs to cut its costs by Rs 10,000 crore — annually
With a fleet strength of 124 airplanes, Air India lost about Rs 20 crore a day in the most recent financial year. This during a period when the total traffic growth was 11.6 percent and both full-service competitors were also facing financial challenges. An opportune time for any airline, but Air India failed to capitalise on the market dynamics.
Air India faces the dual challenge of competing with foreign carriers on international routes and Indian carriers on domestic routes. But to even come close to competing, it needs to attack its cost per available seat kilometer (CASK), which is the key measure of success for airlines.
Its current CASK is 18-22 percent higher than competitors. As such, they can simply discount and take traffic from Air India or match prices and be profitable while Air India bleeds. In either case, the unpleasant reality of costs not being competitive has to be attacked. The question: who will drive this reduction and how?
Balance sheet restructuring requires another Rs 10K- 14K crore —again annually
Air India carries on its balance sheet consolidated debts of Rs 58,351 crore. This in any form is unsustainable.
But if that wasn’t bad enough, add to that a constrained lending environment, an extremely weak balance sheet and the airlines credit rating (not considering sovereign guarantees). To alleviate the debt issue, the government has created a special purpose vehicle (SPV) named Air India Asset Holding Ltd (AIAHL) as part of financial restructuring.
The aim is to transfer Rs 29,464 crore to this SPV, which will then be paid out with the money accrued from asset sales. The asset sales include non-core assets and non-operational assets.
Assuming these are successful, that still leaves Rs 28,887 crore of debt. To service this debt requires cash-flows. And the cash is just not coming in the proportion it needs to.
With a net loss of Rs 7,635 crore for FY19, the airline requires access to credit of between Rs 10,0000 crore to 14,000 crore – annually. This figure does not include working capital shortfalls and provisions.
Additional investment in fleet, product and network estimated conservatively at about Rs 700 crore
Air India is currently flying a fleet mix of 124 aircraft powered by five different engine types (excluding sub-types). Majority of the fleet about 65 percent is narrow-body aircraft with the balance being wide-body aircraft. And of this 75 percent of the fleet is already leased with lease terms that are not quite competitive.
Add to that the fact that the fleet is not mission-specific, which presumably derives from how the fleet orders were put in. In this scenario, renegotiating the contracts is the way to unlock additional value. Yet again the question remains: who will drive this reduction and how?
Due to the cash-flow situation at the airline, the on-board product has not been upgraded and is waiting for additional investment. This investment would be over and above the cost savings and balance sheet restructuring and assuming the product upgrade only happens on aircraft flying international routes the amount is north of Rs 700 crore at the minimum.
As a proxy, consider a similar investment by Emirates of $150 million in converting the 10 Boeing 777-200LR aircraft in its fleet from three to two class cabins featuring wider seats in business and a fully refreshed economy class.
Finally the network redesign requires talent that is empowered and can deliver on a core network strategy. That is, the airline requires talent that understands market dynamics, which understands network dynamics and is empowered with a clear mandate.
The problem of skin in the game remains
A turnaround at Air India requires all stakeholders to be aligned towards a single outcome. That outcome: a profitable airline that is the first choice for flyers. Unfortunately, in spite of key assets and advantages, this has simply not happened. Rather, the airline continues to bleed and the demands are for additional equity infusions and for writing off the debt.
Given the support coupled with the lack of progress seen over years, it throws up an interesting question. Namely: why? And this is best answered by a quote from the famous author and statistician Nassim Nicholas Taleb where he states, “Being wrong, when it is not costly, doesn’t count …”
While it is simple to dismiss it as mismanagement or the lack of management, at a deeper level what the numbers indicate is that there is no skin in the game. That is, the incentives are not aligned. And they haven’t been aligned for several years. As such, an Air India turnaround seems a flight of fantasy.
Satyendra Pandey is the former head of strategy at a fast growing airline. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds.
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