People's Democracy

Air India - Who Is To Perform

And Who Is To Perish?

Dipankar Mukherjee

PERFORM or Perish � that was the threat given by the minister of civil aviation to the employees of National Aviation Company of India Limited (NACIL), the merged entity of Indian Airlines (IA) and Air India (AI) last month. This threat came in the background of the sudden stoppage of monthly wages of the employees for the month of June on the plea of resource crunch, or more correctly, due to lack of working capital. Simultaneously there was a big hue and cry in the media with selective leaks from the ministry that Air India (the brand name of the new entity NACIL) is running on huge losses. The estimates varied from Rs 7000 crore to Rs 5000 crore. The huge workforce with figures ranging from 35,000 to 50,000 was highlighted as a major threat to survival of Air India as an entity. This workforce has to behave �� that was the sermon from the ministry and corporate media, which in most uncertain terms meant that the workforce has to be drastically reduced, the workforce should accept wage cuts, delayed wages, etc.

FACTS AND

THE FICTION

During the first tenure of the UPA government, the combined net profit of Indian Airlines and Air India was Rs 162.44 crore in 2004-2005 and Rs  64.94 crore in 2005-2006 (Public Enterprise Survey 2006-2007, Volume II). The combined manpower was 33,547 which has now come down to 32,287 as on March 31, 2008. It was in 2006-2007 that both the airlines suffered losses of Rs 668 crore (provisional). But why? This is what the parliamentary standing committee on civil aviation was informed as per the 138th Report of the Committee on Demands for Grants (2008-2009) of Ministry of Civil Aviation, placed in parliament on April 28, 2008.

�The committee was informed by the ministry that the erstwhile Air India had suffered a provisional net loss (after tax) of Rs 447.93 crore during the year 2006-07 as against a net profit of Rs 14.94 crore for the year 2005-06. The ministry in its reply to the query on the reasons for the loss has stated that this is due to settlement of wage arrears to the tune of Rs 425 crore, decrease in load factor and fall in yield due to competition. The ministry has also informed that the passenger load factor has declined from 66.2 per cent to 63.8 per cent for the year 2006-07�

�The committee was further informed by the ministry that the erstwhile Indian Airlines Limited had suffered a provisional net loss (after tax) of Rs 240.29 crore during the year 2006-07 as against a net profit of Rs 49.50 crore for the year 2005-06. The ministry in its reply to the query on the reasons for the loss has stated that the varied price of ATF is one of the main causes for the loss. The ministry also replied that on the revenue front also airlines continued to be hit by rapidly declining passenger revenue yields on account of intense competition and deployment of excess capacity in the market. Further, the bottom line of the company was affected due to the writing off of the entire amount due from its subsidiary company Airlines Allied Services Limited (AASL). However, the passenger load factor has increased from 71.6 per cent to 73.1 per cent for the year 2006-07.�

The amount written off from AASL was Rs 295 crore. Therefore, the wage arrears of Rs 425 crore and amount of Rs 295 crore together amounts to  Rs 710 crore which is more than the combined loss of Rs 668 crore for Indian Airlines and Air India. This meant that there was no operating loss even after tax for the year 2006-2007.  The overall reduction of load factor of both the airlines together was 0.9 per cent only. Amusingly, the ministry attribute varied fuel costs as one of the reasons for the losses of Indian Airlines. However, the same reason was not attributed for the losses of Air India. The committee was also informed that the purchase of new aircrafts by Air India will have very positive impact in its operations. As per the ministry�s annual report for 2007-2008, Air India had signed an agreement for purchasing 68 aircrafts at a cost of $11 billion and a loan of $7.2 billion was cleared by EXIM Bank of USA on October 9, 2006. Subsequently the order for acquiring 43 more aircraft was also cleared.

The above facts (and not fiction) were in public domain till April 2008. Was there any �doomsday� projection whether on over staffing or bankruptcy of merged Air India till that day?

THE MERGER

MAGIC

After raking in profits in the years 2004-05 and 2005-06 and ensuring no losses in 2006-07, the merger magic came into play. In the annual report of ministry of civil aviation for the year 2007-08, which was placed in parliament, the merger of Air India and Indian Airlines into the new company NACIL w.e.f August 27, 2007 was projected as a major achievement. The parliament was assured that the merger would not only improve competitiveness but would also:

�                    Create the largest airline in India;

�                    Improve world rank to number 31 in revenue terms, as against the current ranks for IA (67) and AI (48);

�                    Enable optimal utilisation of existing resources through improvement in load factors and yields on commonly serviced routes as well as deploy �freed up� aircraft capacity on alternate routes;

�                    Provide an opportunity to fully leverage strong assets, capabilities and infrastructure

�                    Provide an opportunity to leverage skilled and experienced manpower to the optimum potential.

Was the ministry, when the above projections were made, unaware of the serious threats confronting the civil aviation industry? Did the threats which the minister so eloquently explained in his statement in Rajya Sabha on July 09, 2009 viz lower seat occupation, high competitive market, high fuel cost, high fixed cost, etc not exist then? On what basis were the above-mentioned projections made? Was any sensitivity analysis made when these companies were merged and 111 aircrafts worth a staggering Rs 50,000 crore purchased? Sensitivity analysis based on SWOT (Strength, Weakness, Opportunity and Threat) of an industry takes into account not only the present business opportunities but also the future threats, the market risk, global economic scenario, etc. Were these factors unknown? Who has mis performed and brought the national carrier to a point of perish? Who is engaging in 'employee-bashing' as part of a sinister design to sweep the actual facts under the carpet?

KITE-FLYING AT

ITS WORST

When the whole of media, management and the ministry were engaged in doomsday predictions about NACIL and issuing threats to employees to work without pay as part of a �perform and perish package�, none of them bothered to place in the public domain the basic document based on which the financial performance of a company is judged i.e. the annual report and the balance sheet of the company.

The first annual report of NACIL for the year 2007-08 was prepared and placed before parliament after 15 months i.e. on July 09, 2009, the day the minister gives a statement in parliament. The statement shows all of a sudden a loss of Rs 2226 crore! Why this inordinate delay in presenting the report? And where is the balance sheet of 2008-09? Even the minister states in his statement on July 9 that �during 2008-09, the expected loss is approx Rs 5000 crore�. Look at the words carefully, it is neither a provisionary nor an audited statement of loss. It is only an approximate estimate and the revenue and expenditure accounts are still undisclosed. Yet the business media and the ministry are already on the kite-flying job of diagnosing the reason for such staggering losses and targeting the employees without even seeing the balance sheet.

The analysis of 2007-08 annual report clearly shows how the NACIL management is trying to hoodwink the people by covering up as to what exactly is happening to the national carrier.

In response to para 4 (IX) of audit observation in the annual report questioning deferred tax assets of Rs 13712.9 million shown in the balance sheet in the absence of virtual certainty of future taxable profits, the NACIL management commented confidently:

�The merged entity would provide an opportunity to fully leverage the strong assets, capabilities and infrastructure and deploy the skilled and experienced manpower available to the optimum potential. With all the synergy benefits arising to the merged entity, the company would be able to emerge in the domestic and international airlines industry. Recently the company has taken several measures in order to reduce its cost platform and as a part of the turn around strategy to face the impact of global recession�.Fuel prices which have till very recently been skyrocketing have started cooling off which would certainly encourage air travel in the country/globally, as airlines prepare to reduce the fuel surcharge. As a result due to these measures there is a definite / virtual certainty of future taxable profits being available to the company (emphasis added).�

The above comments, made in December 2008, assured definite taxable profit in spite of all the real or fictitious weaknesses/threats, now being talked about. Yet after only six months, the management suddenly comes out and tells �see we are bankrupt, we do not have working capital to pay wages, manpower has to be reduced etc etc� and the minister advises �perform or perish�. Perish means privatisation of NACIL with 111 brand new imported aircrafts.

HAPPENINGS

POST MERGER

After the merger of Air India and Indian Airlines, which was pushed through with undue haste by the ministry, the government now claims that the loss of Rs 2226 crore during 2007-08 has increased to approximately Rs 5000 crore in 2008-09. On what basis is the question. Where is the balance sheet or even the provisional if not audited financial statement for 2008-09? If we take the major expenditure component i.e. the fuel cost, the average global crude cost in 2009 so far is about 51.85 dollar/barrel as compared to the average 94.85 dollar/barrel in year 2008. This must have brought relief to fuel costs in the period January to June 2009. The manpower cost in 2007-08 was 18.4 per cent of the total expenditure as per the company�s balance sheet, which is quite rational even if we compare with profit-making nava ratnas like SAIL, BHEL and others. Let us compare the revenue and expenditure of NACIL before merger in 2005-06 (when Air India and Indian Airlines earned profit) and after merger in 2007-08 (when it went into losses). The combined revenue of these two airlines was Rs 15,031 crore in 2005-06, which went up marginally to Rs 15,257 crore in 2007-08. However, the expenditure excluding interest but including depreciation rose sharply from Rs 14,923 crore to Rs 17,854 crore in the same period. Why this big increase in expenditure? The manpower was reduced by 1260 persons during this period. The fuel cost component of the total expenditure was shown as 33.7 per cent in the profit and loss account compared to 34 per cent jointly for these two airlines during 2005-06. The main component for the sudden increase in expenditure actually is the interest payments because of the huge borrowing and depreciation on account of acquisition of new aircrafts. The interest payment has gone up from Rs 105 crore in 2005-06 to Rs 701 crore in 2007-08. The cash flow shows investment in fixed assets amounting to Rs 7624 crore during this period. This is likely to contribute to much more increase in depreciation than shown in the balance sheet. In the profit and loss account for the year 2007-08, depreciation is only 4.27 per cent of the expenditure when the same for Air India and Indian Airlines were 5.22 per cent and 4.4 per cent respectively in 2005-06. This looks fishy. As a matter of fact the balance sheet and profit and loss account of NACIL after merger needs an immediate scrutiny taking into account several observation/reservations made in audit report of the statutory auditors.

MINISTER MISLEADS

PARLIAMENT � WHY?

Praful Patel, the union civil aviation minister in his statement in Rajya Sabha on July 09, 2009 admitted that the equity base of Air India is only Rs 145 crore and the government in the past has never assisted Air India, unlike governments in other countries who assisted their airlines when in similar difficulty. So far so good. Then he adds �It is in this background that an equity infusion and soft loan by the government as a measure of softening the adverse financial situation is contemplated�. Contemplated? Is the minister aware of what the management had told the auditors in page 93 of the annual report, audited in December 2008? It states:

�The company has made a proposal to the government to increase the equity base to enhance equity capital by Rs 1231.00 crore and also to provide soft loan support equal to Rs 2750 crore repayable annually over a 15 year period at low interest rates. It is felt that this would strengthen the networth and balance sheet of the company�.

Did the government accept or reject the proposal during the last seven months? Why should it take more than seven months only to �contemplate� when in the case of Jet Airways, Kingfisher and other airlines, the same minister takes only a few days to push through their case for deferment of airport charges to Airports Authority of India and fuel charges to PSU oil companies? Who has under-performed in taking a decision on such a vital restructuring proposal of a company of national pride? And lastly why did not the minister refer to this pending proposal from NACIL to the government in parliament? The answer is clear. Before liquidating NACIL for the sake of private airlines, it is being allowed to have a natural death through such delayed policy making decisions which were  preceded by hostile policy decisions like handing over prime time slots of Air India/ India Airlines to private airlines and through a planned media campaign to malign and demoralise the workforce, based more on fiction than on facts. Industrial unrest is also being created by the management at the behest of the ministry through coercive and provocative actions like delayed wage payment etc.

The government must first perform in the interest of the PSU before asking the employees to do so. If the government is serious, it can take two administrative decisions immediately which can stop cash loss to NACIL. First, give back all the prime slots taken from Air India/ Indian Airlines in domestic or foreign routes and secondly, give priority landing facility to national carriers so that they do not have to spend costly aviation fuel in idle flying over the sky. As a public sector they should have the first right to use AAI, another PSU. And more importantly the balance sheet for 2008-2009 must come in public domain immediately. Parliamentary standing committee should investigate as to how public airlines making profit till 2005-2006 had all of a sudden become Rs 5000 crore loss-making-unit after merger. An independent investigation will reveal the fudging of accounts, if any, and the real under-performers in policy making level who are bent to privatise the total civil aviation sector through a well planned conspiracy. The national carrier, Air India, cannot be allowed to perish at the sweet will of the government of the day.