The Hindu Business Line : ‘Full benefits from the merger in 2008-09’

The biggest savings from the merger will be through network integration, information technology integration, improvement in the schedules, the passenger loyalty programme and, finally, joining the international airline alliance.

MR V. THULASIDAS, CMD, AIR INDIA

K. Venugopal

The external circumstances for airlines are tougher than ever before. With crude oil prices nearing $100, aviation fuel prices have touched an all-time high; wages in India are rising, and so are other costs. In 2006-07 all private airlines in India reported net losses and, over the weekend, public sector carrier Air India closed its accounts for the year with a loss of Rs 447 crore, and the domestic carrier, Indian, with a loss of over Rs 250 crore. What are the prospects this year for the two airlines that have since merged? Air India’s Chairman and Managing Director, Mr V. Thulasidas, spoke to Business Line in Chennai about those challenges and what the merger can bring to the public sector carrier.

Excerpts from the interview:

On the outlook for the current year

The oil price is even higher than last year. As of Friday, when the board was given the presentation, the price of fuel had gone up to $2.60 a (US) gallon, whereas the average last year was $2.25 a gallon.

This is the highest ever for ATF prices and, therefore, the cost factor continues to be difficult to manage. Other costs are still very high, whether it is wages, catering or hotel rooms. Cost-wise the year will be difficult.

There will also be pressure on (revenue) yields. The international sector is very highly competitive, especially out of India, because of the capacity induction largely by foreign carriers. It is all very good to have a large number of flights, and a number of new cities being connected. It is good for passengers; it is going to help the growth of the market, which is good for the (airline) industry as well in the long term. But in the short or medium term, the capacity induction is going to put pressure on the yield despite the growth in traffic.

If, after the merger (with Indian), the new Air India has to balance the books at least next year (2008-09), we have to look for efficiencies.

In the domestic sector, there has been an improvement in yields in the recent past, largely because of the fuel surcharge increase which will meet a part of the fuel cost — only about 70 per cent of the fuel cost is recovered through this surcharge and no airline has been able to pass on all of it to the passenger.

We, therefore, need to target efficiencies and improve productivity. There are costs that are external, which you cannot do much about, but internal costs can be dealt with… We have had to revise wages. In the past when we (Air India) used to make profits, we had to revise wages as per the norms. Even in Indian Airlines, the wages were revised ahead of the merger.

Overall, that has led to additional expenditure. We have managed to get the unions to agree to higher levels of productivity. But this has to be really translated into productivity; it cannot remain on paper. If every single employee of the company does not understand this, and does not contribute to a much higher level of productivity, the efficiency will not improve…

For example, the cabin crew. The number of cabin crew required to serve passengers on board a Boeing 747-400 used to be 19, whereas internationally no airline has more than 16. Most airlines have 15. When I enquired about this, I was told the Indian service calls for additional work. In that case, I said, you must restructure your service. We have recently concluded an agreement with the union to bring down the crew complement and revise the wages. Earlier, when we could not put all 19 crew on board, one had to compensate the remaining crew for the extra work they would have to put in.

Catering is an area we have to closely monitor. There is a famous example of an airline CEO who ordered that an olive be removed from the food served on board and saved millions of dollars. It is not that we need to compromise on passenger service.

But wastage has to be tackled… we have 12 or 16 first-class passengers and if we order meals for all and the number of passengers is less, the food is a waste. We need to lift fewer meals. Those efficiencies have to be brought in.

We are also looking into the financial benefits from the merger, and the synergies in operations. The consultants had estimated that the merged airline could every year make a net saving of Rs 600-1,200 crore from the third year of operations. What we notice is that the integration savings could be even higher.

In the current year, on two accounts we have managed to get good savings. One is aircraft insurance. Air India used to get good rates; Indian Airlines’ premium used to be much higher.

This year, we managed to transfer the Indian Airlines insurance account at Air India’s rate and got good savings. Then the oil contracts with the public sector companies. Air India used to drive good contracts with lower prices, while Indian Airlines used to pay more. We have brought it down to Air India’s level.

From these two accounts, we will manage a saving of Rs 50 crore this year and Rs 120 crore in a full year. But the biggest savings from the merger will be through network integration, information technology integration, improvement in the schedules, the passenger loyalty programme and, finally, joining the international airline alliance (an announcement expected in December). They are all going to lead to higher traffic loads.

If these changes, already underway, are put on fast track — the merger has just happened on August 27 and this is just the third month of the merger — if we can complete these things within the first 12 months of the merger, we may not get the full benefit in this financial year 2007-08, but in 2008-09 we can derive considerable synergy benefits.

On the possibility of the initial public offering (IPO) being postponed

The losses suffered need not push back the IPO. Our priority is to complete the integration process; the IPO will come after that. Let the benefits be visible and then we can go to the market.

Last year, all airlines in the country suffered losses, but the aviation sector is still bullish because of the growth in the market, and we are also bringing in new aircraft now.

It is, of course, double-edged because we have to bear higher depreciation on them, higher interest payouts because of the borrowing. But it brings in a new product and a new environment in the airline. With the Mumbai New York non-stop flight, we have created the impression that an Air India product can be as good as any.

On the performance of the new, non-stop flight to the US

It is doing well in business class, reasonably well in first class, but it has not done very well in economy class. There are days when the aircraft is full. From now, it will be full in any class; the peak period is coming.

The economy class did not do well from August 1 till now, perhaps because the passenger segment looks for a better price, and we had priced it higher than our normal economy fares.

The one good thing is that the real high net-worth individuals are coming back to Air India, not once but several times. I have had very prominent Indian businessmen, such as Mr Ratan Tata, one of the Ambani brothers, Mr Rahul Bajaj and quite a few of the corporate chiefs… Mr Tata has travelled four times. That shows they consider this to be a premium service.

From the US, I find to my great delight US corporates, senior presidents and CEOs travelling on this flight. Business and first-class was a segment Air India was having problems with; now we are doing all right here. Economy class is where we are not.

Singapore Airlines has started its Airbus 380 service from Singapore to Sydney and is getting a premium fare on economy as well. Maybe in the US-India sector, there is a lot of choice for the passenger who is looking for the best possible price.

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