Flights Of Delusion

IT was literally the night of long knives. Just when everyone thought Indian Airlines was getting its act together, civil aviation minister Ananth Kumar, a relative greenhorn in the business of running commercial aviation, pulled the plug. At one stroke last Friday, he demolished the Air India-Indian Airlines joint board, comprising some of the most distinguished names in tourism and the service sector.

The ostensible reason: the government's ire against Air India-Indian Airlines board chairman P.C. Sen for proposing to set up a holding company with a joint management group to synergise operations of the two national carriers. A move that would ultimately pave the way for its merger. To be sure, the removal of Sen and the others is not entirely without precedent. Three former AI chiefs, D.S. Mathur, Brijesh Kumar and S.P. Gupte, had been shunted out; as had been IA managing directors Air Marshal S.S. Ramdass, L. Vasudev and R. Prasad.

This time around, things are slightly different though. IA, after several hiccups, is well on the track to recovery. A recent IMRB survey shows IA has beaten its rival private airlines on performance and acquired the status of the 'most preferred airline'—it was the 'least preferred' in 1994; the IA market share, which dipped to 58 per cent in December 1995, jumped to 69 per cent last year. According to airline sources, the financial position has also improved. In 1993-94, for instance, operating losses were Rs 68 crore; this year, IA's profit figures are slated to touch Rs 267 crore. And the airlines is slated to make a net profit of Rs 45 crore after a gap of eight years.

Why then did the aviation ministry decide to dump the board? While  Sen himself declined comment, Ananth Kumar dropped a broad hint when he told Parliament that the holding company did not seem viable—and that the government was interested in combining operations of the two national carriers to eliminate competition only on certain sectors like the booming Gulf routes. So, the board setting up a holding company, specifically aimed at merging the two, was at variance with the government view and hence taken as a slight. The BJP government, unlike its predecessors in the United Front, was making it clear that the merger was not on its list of priorities.

But the catch comes here. Airline sources say that the plea that the holding company had been formed without 'informing' the government is not true. At the nub of the debate is the report submitted by audit and consultancy firm A.F. Fergusons. Among other things, it recommended that the joint management group would support the AI-IA holding company in the merger run-up. It said the board of directors of the holding company should have three or four industry representatives from PSUs, chiefs of established organisations in the tourism industry, aviation specialists from companies like Hindustan Aeronautics; and that the chairman of the holding company should also be its MD.

ACCORDING to one estimate, the merger of the two airlines would create a Rs 7,500 crore holding company with accumulated losses of Rs 2,500 crore based on the 1998 fiscal balance-sheet with a fleet of 78 airlines and 36,000 employees. But that was not to be. The Fergusons report was taken up for discussion by the board twice, once in the presence of the aviation secretary. So the plea that the government was not in the know is a bit thin.

The other sticky issue is disinvestment. In August this year, the Disinvestment Commission recommended a partial disinvestment of Air India. In finance minister Yashwant Sinha's budget speech, the government announced it would also restructure IA and reduce its stake to 49 per cent in three years. "A merger would have meant that the Disinvestment Commission would have to take a fresh look," says a ministry official. Under aviation rules, only AI is permitted to have a foreign airline equity partner when it disinvests. But if the two merge, a foreign airliner would hold equity in IA too.

Sources say the disinvestment process itself was clear on what was needed. According to Fergusons, if disinvestment was spread out over a long period—say, three years, as the government was planning—then "the holding company could effectively direct the synergising process". There were other causes for discontent as well. The ministry was reportedly upset with the IA decision to raise fares by 11.5 per cent in October, the eighth in as many years. Sen, a no-nonsense professional, whose term was to expire in February this year, reportedly attributed the hike to escalating costs and a depreciating rupee, but the ministry stressed the airlines should have been "consumer-friendly".

The fare apart, there has been considerable tension between the IA management and the ministry over the purchase of ATR-42 turboprop aircraft. The IA management strongly lobbied with the government against the turbo-props, which would be expected to operate on loss-making routes. But the government pressed for the aircraft, saying it was opening up feeder routes, and IA's ageing fleet wouldn't be able to cope. The government stand was backed by "some top administration officials" and PSUs like Hindustan Aeronautics which would assemble the plane under licence from French aviation firm Aerospatiale.

The AI-IA board gave in a couple of weeks ago but attached conditions the government would find impossible to meet: that the IA would have to hike its prices by a whopping 150 per cent on most routes; that the government would have to give the airline an interest-free loan or meet the costs of acquiring the aircraft. That, sources say, didn't please the ministry.

By removing Sen and the board, the ministry has disturbed placid waters. It will be interesting to watch whether IA, which seemed to be getting out of a hole after a harrowing phase in the early '90s when private airlines joined the fray, can keep the momentum going.