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Business Commentary/Dilip Thakore

Financial recast isn't enough, IA needs autonomy

There is an argument that the "caretaker" Bharatiya Janata Party-led coalition government is setting an unhealthy precedent by carrying on the business of government as usual, even after the Lok Sabha has been dissolved. However, there is virtual unanimity over its recent decision to press on with the financial restructuring and gradual privatisation of Indian Airlines.

Giving teeth to the recommendations of the Vijay Kelkar Committee whose proposals were made over a year ago, the Cabinet Committee on Economic Affairs has decided to inject Rs 3.25 billion as equity into Indian Airlines and has given the management of this public sector airline the go-ahead to raise another Rs 7.5 billion through an initial public offering.

Equally indicative of the government's seriousness of intent is the CCEA's approval of a moratorium of two years on the payment of outstanding dues by the cash-strapped air carrier.

Unfortunately, Indian Airlines, which came into being way back in 1953 after several small private sector airlines were nationalised and merged, with the exclusive right to ferry air travellers on domestic routes, has never had the opportunity to carry on its business as a commercial enterprise.

In the initial years of the full flush romance with socialism, all management boards of the airline were subjected to backseat flying by the Union ministry of civil aviation and suffered the fate of being saddled with multiple objectives.

And this culture of business illiterate management of IA has taken firm root within the ministry of civil aviation and within the boardroom and offices of the nation's premier domestic airline.

Consequently, in spite of Indian air space having been opened up to a carefully calibrated number of small but nevertheless competitive private sector airlines, IA continues to be weighed down by irrational decision-making and a multiplicity of objectives which have plunged the airline into the red for the past six or seven years.

Only last year (1997-98) did the airline register a modest profit despite raising passenger fares almost every year for the past five years.

For a start, given that the airline owns/flies over 50 aircraft of various shapes and sizes, it is grossly under-capitalised with a share capital of a mere Rs 1.05 billion. This has limited the capacity of the airline's management to borrow and finance IA's fleet renewal programme.

As a consequence, the average age of the airline's airplanes is almost 12 years against the norm of three to five years. The infusion of Rs 9.22 billion by way of Rs 3.25 billion of government equity, employees' stock purchases subordinated loans and compensation in the first phase, and permission granted to the airline's management to divest 40 per cent of the airline's equity to the public, will enable the IA management to raise an estimated Rs 50 billion (assuming a prudent debt-equity ratio of 3:1) to renew and expand its fleet.

The permission given to the airline's management to clear the decks for an initial public offering of 40.4 per cent of the equity of the company to the public and 10.6 to employees will also serve the useful purpose of reducing the Union government's shareholding in the airline to a minority 49 per cent.

This loosening of government control is likely to give the management of IA more space to manage the airline as a commercial venture with the primary objective of earning sufficient profits to finance future growth and expansion.

But even after the IPO, the Union government will remain the largest shareholder. Therefore, it will require a change in the mindset of bureaucrats and politicians in government and the Union ministry of civil aviation to desist from the practice of backseat flying and imposing uneconomic policy diktats upon the airline's management.

In this context, it is important to emphasise that financial restructuring is only the first step towards getting Indian Airlines back on an even keel. Several policies and practices which over the past five decades have become part and parcel of IA's business culture have to be addressed and reversed.

As is well known, IA is heavily over-manned. Against the worldwide norm of 300 employees per aircraft, the ratio of the airline is 700:1. All the management boards of IA have ignored the basic nostrum that it is not the function of an airline to create direct employment.

The primary duty of an airline's management is to run it cost-effectively so that employment is created indirectly in industry and the tourism and travel sectors. One hopes that with employees becoming shareholders, the airline's militant trade unions will appreciate this logic and cooperate in the process of reducing the aircraft-employee ratio which will cut IA's wage bill and improve its bottom-line.

Another policy which needs urgent review is that of forcing the airline's management to fly uneconomic routes. Of course, the cause of national integration and balanced regional development is served if all state capitals and far-flung towns are connected to the metros and each other by air.

But furthering national integration and balancing regional development is not the function of the management of an airline. Its business is to fly routes on the basis of commercial considerations so that the airline's bottomline remains healthy.

Nor is it the business of Indian Airline's management to provide free passages to members of Parliament. For several decades, these worthies have been provided almost unlimited free travel on the airline. If Parliament wants to provide this perquisite to its members, it should raise their pay rather than impose a burden on the airline. The provision of free travel as a perquisite results in the misuse of the facility and is not good for the financial health of the airline either.

Civil aviation is a tricky -- and important -- business. Unlike surface transport it is also a high-risk business. A poorly maintained railway engine, omnibus or motor-car can grind to a halt. A defective airplane hits the ground with the full force of gravity and usually there aren't any survivors.

Therefore, this is a business that should be left to fully-trained professionals whose sole objective should be to run it according to commercial criteria and to build an airline's reputation for safety and on-time reliability.

Unfortunately, this self-evident truism has not impacted itself upon the collective mindset of people in government and the Union ministry of civil aviation in particular. The result of this blindness is that both the national airlines -- IA and Air-India -- are in financial ruin despite charging fares which per flying mile are above international norms. Nor have they built a reputation for safety and reliability.

Financial restructuring is all very well, but it has to be supplemented by the infusion of genuine autonomy and creation of a commercial culture within both the public sector civil aviation airlines which have conspicuously failed to deliver their high-flying promises.

Dilip Thakore

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