The Hindu Business Line : How Indian Airlines can soar

ADOPTION OF efficient management systems combined with serious cost cutting and improved operations have considerably improved the liquidity position of the state-owned Indian Airlines. An endorsement of the new financial strategy is reflected in the Indian Airlines recording a net profit of Rs 28 crore in the first quarter (April-June) of 2005-06 against Rs 5.95 crore in the corresponding previous period despite an unprecedented rise in the ATF (Aviation Turbine Fuel) price.

Over the past few years Indian Airlines passed through a difficult phase with mounting competition from private operators and severe liquidity crunch. Oil companies and foreign store suppliers were constantly reminding the carrier of their outstanding dues. Even as banks were reluctant to extend additional credit facilities, pressure was building from unions and associations for early settlement of their arrears.

All this and the challenge from competing private airlines sent the Indian Airlines management looking for administrative and financial solutions. Today, the airline is seemingly out of clouds and its liquidity position has improved considerably.

Much of the credit should go to the former Chairman and Managing Director, Mr Sunil Arora, who has gone back to his parent cadre, Rajasthan, at the end of his tenure, and the incumbent chief, Ms Sushma Chawla, who made cost control an obsession to revive the fortunes of IA.

Of the staggering Rs 380 crore payable to retired and serving employees, only Rs 90 crore remains payable, to serving employees; all arrears of the retired employees have been fully paid. Indian Airlines discharged this without creating any fresh liability, thanks to effective cash management.

The long-term loans taken for aircraft acquisition which stood at Rs 1,628 crore as on March 31, 2000 were down to a mere Rs 147 crore as on March 31, 2005. This means that in these five years, which were worst for the airline industry especially after 9/11, Indian Airlines cleared Rs 1481 crore of debt, mainly from internal accruals; the company never defaulted on its debt service obligation. Its short-term loan position also has improved.

The Indian Airlines board had earlier approved an increased borrowing limit of Rs 500 crore to meet the short-term fund requirement. Initially, the company borrowed right up to the limit, but brought it down to Rs 230 crore as on May 31, 2005. This became possible because of effective budgetary and cost-control measures.

After sustained negotiations with banks to reduce the interest rates, the interest cost element was reduced and the average rate of borrowing brought down from 12 per cent to 9.5 per cent per annum. While the reduction in the rate saved Rs 7 crore, Indian Airlines gained nearly Rs 52 crore on the renewal of the Aviation Insurance Policy for the period October 2003 to September 2004. It saved another Rs 30 crore on insurance policy renewal for the period beginning October 2004.

The Department of Public Enterprises accorded an "Excellent" rating to IA for its performance for 2003-04; the airline had won it last in 1997-98. The airline hopes to do an encore in 2004-05. The outstandings of the oil companies have been reduced considerably and only current month bills are pending against the earlier outstanding of three months.

A major reason for Indian Airlines' financial turnaround was the serious cost-control exercise. For instance, a cost-benefit analysis was made mandatory before undertaking any major project.

Also put through were a drastic cut in overtime payment, freeze on recruitment other than operational and voluntary retirement schemes, rationalisation of staff facilities, reduction in staff on duty travel, temporary postings, crew layover expenditure, fuel tanking and streamlining of material consumption, stores and spares. These measures led to savings of Rs 102 crore in 2002-03, Rs 190 crore in 2003-04 and Rs 148 crore in 2004-05.

One reason for lower cost saving in the year ended March 31, 2005 was the unprecedented rise in ATF prices; ATF constitutes 35 per cent of the airlines operating cost. ATF prices went up by 30 per cent in 2004-05 to an average of Rs 27,500 per kilolitre against Rs 21,000 a kilolitre in 2003-04. It rose further by 27 per cent in May 2005 to Rs 34,800 per kilolitre.

The estimated fuel cost of Indian Airlines and Alliance Air rose from Rs 866 crore in 2000 to Rs 2,750 crore in 2005-06 which is Rs 600 crore more than budgeted estimates.

Besides rising fuel cost, Indian Airlines also had to deploy far more capacity on Category II and III routes due to social and political compulsions than competing private airlines resulting in a huge but avoidable loss.

Against a mandated minimum laid down in the Route Dispersal Guidelines of the DGCA (Directorate-General for Civil Aviation) for deploying only 10 per cent of Category I capacity on Category II routes, 1 per cent of Category I routes on intra-Category II route and 50 per cent of Category II routes on Category III routes, Indian Airlines deploys 18.5 per cent, 1.9 per cent and 70.6 per cent respectively. This pushed up the annual financial loss of Rs 40 crore on excess Category II operations and Rs 150 crore on excess Category III operations.

Just imagine the status of Indian Airlines were it to save Rs 190 crore by deploying the right capacity, as mandated under the Route Dispersal Guidelines. For one its net profits would have been up Rs 200 crore in 2004-05 when it reported a net profit of only Rs 17.50 crore and even more in the previous two years after adjusting for the fuel cost which has only risen except for a modest drop in the intervening period.

So, Indian Airlines appears to have been given a bad name after comparing it unfairly with private carriers; Indian Airlines flies more on sectors where the earnings are less, and is also called upon to do various emergency duties.

Often there is a tendency to compare, again unfairly, the employee ratio of Indian Airlines with other carriers. The total staff strength of Indian Airlines has been reduced from 20,554 in 2000-01 to 18,504 in 2004-05 or by about 10 per cent. Alliance Air, its subsidiary, employs 842 people, mostly on contract.

With 67 aircraft in the Indian Airlines fleet, the aircraft-employee ratio worked out to 1:289 as on March 31, 2005 against 1:404 at the beginning of 2000. Even this ratio is high because Indian Airlines performs various non-core activities such as major maintenance and surface transport which are mostly outsourced by private carriers.

If such activities are contracted out, and comparable activities taken into account, then IA's aircraft-employee ratio would come down to 1:192 which compares favourably with leading airlines such as Singapore (1:161), British Airways (1:178), KLM (1:220), Virgin Atlantic (1:282), Air Lanka (1:434), Thai Airways (1:321), Malaysian Airlines (1:321) and Air France (1:245).

With IA staff getting productivity linked incentives (PLI), like their Air India counterparts, the increase in its fleet size will further improve the aircraft-employee ratio except for the mandatory recruitment of pilots and engineers. Of its 67-aircraft fleet, IA has three Airbus A300s, 47 A320s (of which 17 are leased), 11 Boeing 737-200s, two Dorniers and four leased ATRs.

Pending induction acquisition of the 43 Airbus aircraft, IA plans to augment its fleet (including replacement) by dry leasing 10 A320s, five A319s and six ATRs. Indian Airlines proposes to retire five Boeing 737-200s and convert them into freighters to augment its cargo capacity. It is also leasing 12 wide-body aircraft to widen and deepen its international operations.

The airline has managed its finances well with relentless cost controls as is reflected in increased revenues even as expenses rise, available seat kilometres, revenue passenger kilometres, seat factor and passengers carried. All it needs is strong government support. If the Government relieves it of the burden of excess deployment on Cat II and III routes, quickly approves its new fleet plan and accords early clearance for joint ventures for its MRO (Maintenance, Repair and Overhaul) and ground handling companies, IA's fortunes will soar higher.

(The author is a New Delhi-based freelance writer.)

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