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 Maharaja Sans Clothes

Omkar Goswami


It is best to start this article with a piece of news from The Economic Times, for nothing better explains the pathetic state of Air India. On Monday, 7 November, India's largest flight caterer, TajSATS, warned Air India that it would be put on cash-and-carry from the very next day over unpaid dues.

Airlines have often been threatened by oil companies and airports due to their delayed payments for aviation turbine fuel or airport fees. But this was unique: of an inflight food supplier threatening “Pay up, or else”. Clearly, nobody has faith in Air India’s ability to pay its suppliers. The amount owed was Rs.45 crore, of which Rs.30 crore was beyond the usual credit period. Air India claimed that it “promised to pay Rs.7-8 crore by next week and a like amount next month” — thus averting the risk of being put on cash-and-carry by TajSATS.

Air India is a national disaster. As of 31 March 2011, Air India had an operating loss of Rs.22,000 crore and a debt of Rs.42,570 crore; In the words of T.V. Mohandas Pai, until recently an executive director on the board of Infosys, it has “a clueless management, an owner who just does not understand how airlines are run, a fast deserting clientele and 30,000 hapless employees stuck in the middle”. And it is seeking a mother of all bailouts, amounting to some Rs.43,000 crore from the Government of India.

Not surprisingly, the learned ones of New Delhi who constitute the policy-making heft of our land — namely a Group of Ministers (GoM) led by Pranab Mukherjee and including P. Chidambaram, S. Jaipal Reddy, Montek Ahluwalia and aviation minister Vayalar Ravi — are considering variations of such a bail-out which, naturally, is called a ‘turnaround plan’.

Under this plan, the government will first put in more than Rs.6,000 crore as equity. That is a financially cute way of describing taxpayers’ money that will never come back. It is just the beginning. Some Rs.20,000 crore of debt will need to be recast, which is short-hand for public sector banks to take a massive hair cut on their Air India exposures. Then there is some creative financials optics, such as selling and leasing back 14 of the 27 Boeing Dreamliner 787 aircrafts that were to join the fleet by 2014 — so as to keep them off the balance sheet. At a time when the financial world is shaking at the fear of a Greek collapse engulfing Italy and the rest of the Euro Zone, no thought has been given to who will actually buy these expensive Dreamliners and put them on their balance sheet for the express privilege of leasing these to Air India. Such details matter not.

Thankfully, the GoM has asked the Reserve Bank of India (RBI) for its opinion. If the RBI is as fiercely independent a guardian of the health of the banking system as it seems to be on combating inflation, the answer should be a clear “No”.

Why should the RBI agree with the GoM’s view that the banks do a massive debt recast involving huge cuts in interest payment as well as a long and substantial moratorium on outstanding debt, when it knows that the problems will re-surface yet again? As it invariably will, because Air India does not even cover variable costs. Even if St. Jude, the patron saint of lost causes, got rid of Air India’s interest burden on its existing debt, the airline will not be able to earn a positive profit before depreciation, interest, taxes and amortisation. It is as simple as that.

Let us be honest. You cannot expect a bloated 30,000 strong workforce, long used to behaving like protected public sector employees and striking at the drop of a hat, to run an airlines that flies uneconomic routes often with low passenger loads, and yet earn operating profits. Today, the state of Air India is worse than the sick industrial units that were under the Board for Industrial and Financial Reconstruction (BIFR) in the late 1980s and early 1990s. The vast majority of the those firms never recovered despite several rounds of concessions being wrenched from banks and financial institutions. More often than not, they had to be liquidated. Frankly, that is the fate which ought to befall Air India.

But of course it won’t. The GoM, the RBI and the civil aviation ministry will ‘convince’ banks to take yet another haircut for this wasteful behemoth. Because nobody has the political guts to say, “Enough is enough”. And because nobody will ask how many abysmally poor rural households will be deprived of their NREGA entitlement of Rs.120 per day for 100 days a year on account of this Air India bailout which, as we know, is destined to fail. Some economics, this! Some politics, too!

Published: Business World, November 2011


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