The Hindu Business Line : Why the Air India-Indian Airlines merger needs to succeed

In these days of high costs, the merger will enable the new Air India to rationalise costs by synergising operations. Not only can separate offices and manpower be avoided, many other facilities such as engineering, inventories and IT can be integrated, leading to large savings and giving passengers a better deal, says V. THULASIDAS.

The merger will leverage the advantages and strengths of two large domestic and international networks working as a single entity.

A recent press report stated that the loads in the flights of former Indian Airlines have fallen after the merger. What is implied here is that merger of the two national carriers is not working.

Airlines in India are passing through turbulent times. High crude oil prices, and the consequent increase in ATF (aviation turbine fuel) prices, have been the bane of the airlines business the world over. In 2003, crude was selling below $30 a bar rel; today it is $142.

The price of ATF in India is higher than the international price by about 65 per cent, thanks to the higher basic price and the taxes. ATF sells at Rs 41,500 per kilolitre in Singapore whereas it sells at Rs 68,388 in Delhi.

ATF price is only one part of the high cost regime for airlines in India. Airport and hotel charges and manpower costs, especially for pilots and engineers, are also part of the problem.

Phenomenal growth

The high-cost regime is to be seen against the low yields and revenues of the airlines. The last four years have witnessed phenomenal growth in Indian aviation. Air travel has become more affordable (with the entry of budget carriers) at a time when the economy has been registering spectacular growth, driving demand high. As against just the two national carriers and one or two private airlines, this period saw the birth of several more airlines in India.

There was a time when every air show in the world saw contracts for large numbers of aircraft being signed by Indian carriers. Airbus and Boeing were thrilled and, obviously, encouraged this trend.

There was high praise for the Indian success story from IATA (International Air Transport Association). The government encouraged the growth, not only by facilitating the launch of new domestic airlines, but by also liberalising the bilateral regime and allowing phenomenal increases in the rights given to foreign carriers to enhance capacity into India.

All these are, no doubt, good for the passengers. But this would, at best, be short-lived. When the industry starts to solve the problem of overcapacity by selling below cost, it risks becoming sick. That is not the best way to take care of the long-term interests of the consumer.

The new National Aviation Company of India Ltd (NACIL) is paying the price of a market with large capacity and plateauing growth. In 2006, domestic passenger growth was 39 per cent, whereas in 2007 it was 32.5 per cent.

Despite the erstwhile Air India and Indian Airlines ordering a large number of new aircraft, both international and domestic flights of NACIL still use several old aircraft. In this highly competitive business, and given the market realities, this is not the ideal way to attract a larger share of the passengers.

The merger effect

How does the merger of the two national carriers help in such a situation? First, one needs to realise that none of the aforementioned problems has anything to do with merger. But can the merger help the airlines tide over the situation?

The NACIL’s product quality is bound to improve with the induction of more new aircraft. The hardware part of the problem will get resolved sooner than later. This would not have been a problem had the earlier governments allowed the airlines to renew their fleets, as all other airlines in the world do. After all, the national carriers buy aircraft with their own money; not a single rupee is given by the government, contrary to public perception.

It is the software part that has plagued the national carrier in the last few decades. Operating separate networks for domestic and international passengers, without any provision for interconnectivity is not the best service passengers are looking for. Nor is there a model like this anywhere in the world.

Air India and Indian Airlines were encouraged to think differently and act differently. The two organisations competed with each other, rather than co-operate and offer better services to their passengers. Now there is a chance to change all that and offer the advantage and strength of two large domestic and international networks working as one single entity. The vastness and reach of the new Air India, as a result of the merger and membership of the Star Alliance, will be truly impressive.

In these days of high costs, the merger will enable the new Air India to rationalise costs by synergising operations. Not only can separate offices and manpower be avoided, many other facilities such as engineering, inventories, IT, etc., can be integrated, leading to large savings.

Both in terms of revenue and costs, therefore, the merger can help the national carrier. For this to materialise, the process of merger has to be carried to its logical conclusion. Merger is not easy nor is it painless. It will take time and there will be teething troubles; there could be setbacks and constant irritants. These are all part of the merger process and have to be seen and accepted as such, and solutions found.

Shared vision

There is great responsibility resting on the current generation in NACIL, including its unions and senior management. It is easy to fall a victim to the temptation of encouraging divisive thoughts among the employees of the two erstwhile airlines.

There could be temporary and individual gains for a few but lasting damage to the majority. The synergy of the integrated network can be realised only when the people think as part of one entity. The success of the merger depends on such a shared vision. When that happens, not only will Indian aviation gain but so will all the employees of the national carrier.

(The author is a former chairman of Air India.)

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