How to Save Air India

Airline business insights

How to Save Air India

To an outsider, it may seem as if the once proud Indian national carrier – Air India – is on the brink of bankruptcy. And there now is a real issue about the airline’s future. Will Air India go bankrupt? What made it to fall to this situation? And how could it be saved from this situation? We’re going to find out.

The airline’s present issues came to light when a report by the Indian Auditor General was released criticising then Minister Praful Patel’s decision to buy 68 aircraft from Boeing. “The entire acquisition was to be funded through debt ..  [and was a] recipe for disaster” said the report, adding that the assumption that an increase in capacity would lead to a rise in market share was “unduly optimistic”.

 What really caused the problems?

While the report mainly centers around the former minister’s decision to renew the airlines’ ( Air India and Indian merged shortly after ) fleet, this is far from the root of the airline’s problems. While the order might have become too large in Air India’s present situation, it was the poor execution of the fleet renewal and the airline’s overall strategy which has made it so. In fact, in my opinion there was nothing wrong with the order. Air India’s fleet was ageing and it was falling behind the competitors on service levels. What should Air India have ( AI ) done was to create a long-term strategy for its network and to assign the new deliveries accordingly. If it had any difficulty in payments, it could have deffered the deliveries. Unfortunately, Air India hardly seemed to have a strategy. This lack of strategy was a key issue that I pointed to, when I wrote about what could eventually happen to AI, and how to save it, back in 2009.

Instead of implementing the new capacity under a proper plan, AI seemed to simply assign the aircraft without any strategy in place. This inefficient use of capacity was evident by the moves such as using narrow-bodied Airbus A320 series aircraft on major trunk routes out of Delhi to Bangkok and Singapore. And the airline opted to the 1960s strategy of creating a hub in Europe in order to fly to the US. This led to a dilution of revenue and dragged down the long haul fleet’s utilization.

 

A merger went wrong

The decision to merge AI and Indian Airlines, in fact was a necessary step at the time. The two airlines had conflicting market interests and there was a host of cost savings that could be achieved by the synergies of a merger. But it was never executed properly. The fact that the merger took four years to be comleted explains it well.

 

The lack of strategy and inefficiency

In an ideal world, the two airlines should have carefully constructed a plan and defined the future strategy for the now merged single airline. Without wasting time, they should have taken a thorough review on the performance of its routes and taken steps to curtail the losses and improve the performance. They should have aligned their fleets and the crew resources, and utilized them far better. They should have deferred the new aircraft deliveries when they felt that the demand was decreasing. They should have expanded Air India Express’ ( the low-cost arm of AI ) operations and used it to fight the competition.  And they should have launched a proper marketing campaign aimed at uplifting the airline’s image. Instead, Air India worked at the snail pace.

 

And as a result, AI today is saddled with a huge debt and a considerably overstaffed workforce. But it is still not too late to solve the issues, and make Air India a proud national airline again. Here’s how.

 

The solution

While partly privatizing the airline will be a great move forward, it is unlikely that the Government of India will agree to a such measure anytime soon. Hence it is of utmost importance that the airline be properly restructured.

Air India, over the years, has always been lead by an industry outsider with little to no industry knowledge. The airline industry is unique in the sense that it has very little profit margins compared to other industries and a management with a sound knowledge on how the industry performs is essential – specially when you’re trying to bring back a debt-ridden airline into stability. So that it is very important right now that AI appoints a management team with very good industry knowledge and the ability to steer the airline forward. While there are many suitable executives from overseas, it is also likely that there are more than enough talented Indian nationals if the government prefers to have a local management team.

 

 The network

Rationalizing AI’s network is critically important at this stage. The following measures can be suggested to improve the network’s performance.

 

Long-haul network

  • Cut loss making routes (as obvious!)
  • Define the long-haul network’s hub strategy to exclusively focus on Mumbai and Delhi
  • Instead of routing the majority of flights via both Delhi and Mumbai, create a shuttle between Delhi and Mumbai airports
  • Use smaller sized aircraft ( this is where the 787 would help) to operate frequent nonstop services out of both Delhi and Mumbai to key business destinations
  • Cut services to U.S till the rest of the network’s performance improves
  • Avoid any kind of scissor-hub activity at any cost, and make the flights to U.S destinations go nonstop

 

Medium Haul network

  • Increase the flying activity to key regional destinations
  • Focus on the trunk routes by using larger capacity aircraft
  • Create focus cities with two to three based narrow-body aircraft to operate services to major regional points, this will enable AI to counter the competitors better
  • Increase Air India Express’ flying on key routes with intensified competition
  • Expand services into Southeast Asia and try to attract as many new tourism opportunities as possible
  • Focus on improving connecting traffic

 

Short haul and domestic network

  • Rationalize the ex- Indian Airlines’ network and cut services on routes where operating is no longer sustainable profitably
  • Create shuttle schedules between major cities
  • Create connections into Delhi and Mumbai’s hub flows
  • Introduce Air India Express services on routes that are presently loss making for AI

( Expect a more detailed piece on how AI’s network should be shaped, soon)

 

Fleet

The airline should aim to increase the utilization of its fleet. The surplus aircraft after the route rationalization should be leased out or returned to the lessor, depending on what turns out to be the least costly.

The long-term fleet of Air India should be rationalized as below

  • Airbus A320 series
  • Boeing 787-8
  • Boeing 777 series
 The single Airbus A310 aircraft in the fleet and the Boeing 747s should be retired soon. The ATR aircraft should be operated via a separate division, while still under the Air India identity.
 The aircraft’s cabin offerings should be standardized to offer a similar offering through-out the fleet. AI’s 777-200ERs and the 777-300ERs already have a very up to date interior which should be adopted as a starting point with an even better offering.
 Many parties had recently raised concerns that AI will not be able to pay for its future aircraft deliveries. This is a quite uneducated statement. If AI is willing, there are hosts of ways that it can finance these aircraft without an issue and it must be kept in mind that AI will also receive a significant amount of funds in penalty payments from Boeing. It should not be forgotten that even Emirates owns only about 19% of its fleet while AI already owns 51% of its fleet.

 

Other areas

AI should focus on more stringent revenue management coupled with better marketing to position itself as a reliable, friendly and vibrant carrier among the travelling public. The airline should take advantage of Air India Express in a way similar to Qantas – jetStar to explore new opportunities and to keep the bottom line healthy. The airline must take bold steps to reduce its excess overstaffing level. All the related stakeholders need to realise the urgency of the situation and understand that half measures won’t do. The Indian government needs to persistently support Air India through this restructuring mission, including regarding possible lay-offs, if it wants Air India to emerge as a successful national asset, and one that it can be proud of, in the future.

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