Why the government should wind down Air India

Does the government actually plan to do anything to get rid of the loss making Air India before the 2019 elections? I would suspect not. There seems to be a remarkable lack of interest in actually trying to get rid of the carrier, writes Business Today Editor Prosenjit Datta.

By Prosenjit Datta  
Monday, June 11, 2018

Does the government actually plan to do anything to get rid of the loss making Air India before the 2019 elections? I would suspect not. There seems to be a remarkable lack of interest in actually trying to get rid of the carrier. First there were all those onerous conditions that the government put in when it asked for bids. And when not a single bid came in by the deadline, the government seems simply content to carry on as it was doing before the bids were invited. Indeed, the news coming out is that the RSS and its affiliates like the Swadeshi Jagran Manch would prefer the government to continue running the ailing Maharaja. And if that is not possible, they would like a minority equity sale, with some amount of Air India stock being sold to either retail investors or to institutions like LIC etc., and they think that it will be the long term solution to the Air India problems.

I suspect the government would like to go slow till the elections. All politicians know that Air India is an albatross around the neck of any government, and it sucks up tax payers money year after year, even as its services and market share deteriorates. Equally, no political party is going to let go of the opportunity to castigate the government for selling off the national carrier. The Congress and the CPI-M have been among those who have already made enough noises on that score. With general elections coming up in a year's time, why would the government want to give them one more thing to criticize it.

However, politics aside, it would be a terrible economic decision if the government actually decided to hang on to Air India or tried to transfer partial ownership instead of selling it lock, stock and barrel. Despite regular talks about how Air India is improving efficiency, cutting losses, and even making operational profits, the hard fact is that the airline has been losing market share regularly, and it is too dependent on government handouts to keep on flying. Even today, there is news coming out that its cash flow situation is so bad that it is waiting for some money from the government to pay out salaries. The operational profits it talks about is a mirage - the fall in crude prices in 2014 to 2016 and the attendant lowering of aviation fuel prices allowed it to save some face. Now that aviation fuel prices are going up again, it is likely to start posting operational losses once again.

A number of honest and competent bureaucrats have taken the saddle of the airline and tried to turn it around. The problems have proved too difficult for them. Air India is hugely overstaffed and a lot of its employees do not believe in doing their bit to turn the carrier around. They want higher pay and less work and are ready to strike at the slightest talk of reducing any of their perks. Then, there is the debt. And there are other operational problems. One senior executive of a well-run airline told me in an off the record conversation that it would be far easier and less expensive option to start an airline from scratch than to try and turn around Air India, despite the prized foreign slots it had. His point was that it would take well over five years to turn around the airline, and even then, there would remain debt to be paid off, etc. As he pointed out, even Kingfisher Airlines did not have the problems that Air India has. Sure, it was losing money and had plenty of debt, but its service quality was superior and its staff probably had better attitude.

Can the government turn around Air India if it cannot find a buyer? I do not think so, and I suspect neither does the current government - they might be having second thoughts about selling it a year before the elections but they would never have gone as far as to invite bids if they thought it was going to be easy to turn around. Will the selling through equity route work? Again I think it would not. If the shareholding of Air India is just going to be a handful of government owned companies and some scattered retail holding, it will never manage to get a top management team in place to take the hard decisions that are necessary. In fact, no one except a new owner with complete control over management can turn around Air India. And even then it would take a lot of effort.

What happens if they cannot find a buyer for Air India? Politically unpalatable as it would be, it makes no economic sense for the government to continue using tax payer money to keep running it even as losses keep accumulating. A better economic solution would be to bite the bullet and wind it down.

Will heavens fall if we do not have a flag carrier? The US has managed just fine without one, and I see no reason why we need one either as long as we have better and more efficient airlines serving the Indian market.

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