How Air India Can Better be Utilized to Fulfill Strategic Objectives

Air India is much maligned for its poor state of affairs. It loses a staggering amount of money each year, due to political interference, a bloated and inefficient workforce, corruption, and incompetence/mismanagement.

Political interference manifests itself in many ways. Firstly, Air India deals with incredible inefficiency because of the procedures it must deal with as a PSU. A timeless read on this topic is Jitender Bhargava’s “The Cost of Being a PSU.” A good example of this cost is the recent Boeing 787 fiasco. Delays due to various ministries are not acceptable. If the government expects Air India to be run as a business, it must be permitted to act as a business. Once the board has approved compensation and delivery, the matter should be finished.

Political interference can also be found in Air India’s route choices, Air India’s lack of freedom in hiring/firing employees (hence bloated and inefficient workforce), and corruption throughout the system. A recent audit report on the corruption in the Ministry of Civil Aviation can be found here. It is really mind numbing to see how much Air India is hurt by government corruption.

However, Air India is unlikely to be privatized in the near future for a few reasons. Firstly, it’s unlikely that a private investor would want to touch AI in the condition it is in. And secondly, it’s unlikely that the government mantris will want to give up one of their playthings. So, with the reality of state-ownership set in, the government should look at how the Maharaja can be better utilized to fulfill State objectives.

Air India already does carry out many functions for the government. Air India is extensively used for armed forces and government charters. The president of India flies exclusively on Air India, and AI does not get compensated properly for such flights. Government estimates show that current president Pratibha Patil’s travels have costed Air India almost 170 crores. Air India is also required to keep slack in the schedule for last minute government routing changes, a significant cost to AI.

However, there are ways in which the government can take advantage of Air India’s capabilities without destroying AI’s profitability. In order to better understand some of these possibilities, we can look at 2 better-run flag carriers – Air China, and Turkish Airlines.

Air China is the official flag carrier and one of many state-owned carriers in China. The airline is, according to the Chinese government, the largest airline in the world by market capitalization, and the most profitable carrier in the world. It is extremely difficult to believe the latter, since Air China is rather inefficient, and it doesn’t command very high yields. Regardless, Air China is doing far better than our own Air India, and there are some lessons that can be learned from it.

Any airline’s biggest asset is its route network. Commercial air service has a variety of positive benefits – it increases both economic and political ties between the cities served, and can be of great strategic value.

Air China serves many routes which serve a strategic purpose. The most notable is service on the Beijing-Pyongyang sector – Air China is the only non-DPRK carrier to fly to DPRK. This service strengthens ties between the Chinese and North Korean governments and economies, and helps China keep its neighbors close. Air China also serves Ulaan Bator, the capital of Mongolia. This destination keeps the Mongols close to the Chinese.

However, destinations don’t need to make less commercial sense to have strategic importance. Air China’s services to neighbors like South Korea, Japan, Taiwan, and Vietnam all are very profitable in addition to their strategic importance.

The Chinese state-owned carriers not only keep their own neighbors close, but they also project China’s diplomatic power throughout the world. Apart from Bhutan (which only Bhutanese carriers serve), every neighbor of India has service by a Chinese carrier, an important part of China’s strategy to surround India with allies.

Strategic interests aren’t just important internationally – Air China’s destinations domestically also work to facilitate rapid and comprehensive domestic connectivity, and to bring prosperity to less developed areas. Tibet and Xinjiang, the two areas of China which are seperatist, have lots of air service, helping integrate the areas with the rest of the country.

The route network which Air China and the Chinese state-owned carriers have built helps fulfill strategic foreign policy and domestic objectives, and demonstrates how state-owned carriers can be utilized well by their governments.

Another example of a carrier which is utilized by its government well is Turkish Airlines. Unlike Air China or Air India, Turkish is only partly state-owned – 51% of the airline is in private hands. This partial privatization helps cut down on inefficiency and corruption, but still allows the government to utilize the carrier in an effective way.

Turkish’s route network contains a variety of routes of strategic importance. The airline serves every Middle Eastern country, bringing Turkey closer to other Arabic countries. Turkish also serves quite a few EU destinations, notably in Germany. This brings Turkey closer to the European countries which Turkey wants to partner with.

However, what is most remarkable about Turkish’s route network is how they have linked with countries which Turkey has declared of national strategic importance. Turkey has been working to import raw materials and develop infrastructure in Africa. Turkish not only serves all the major African destinations, like Accra, Addis Ababa, Johannesburg, Cairo, Dakar, Lagos, Khartoum, Tunis, Casablanca, Dar es Salaam, and Tripoli, but it also serves second tier cities too. Turkish serves Sabha, Benghazi, and Misrata (Libya), Abidjan (Ivory Coast), Kinshasa (Congo), Kigali (Rwanda), Mogadishu (Somalia), and Entebbe (Uganda) from its hub in Istanbul, strengthening business and political ties and increasing cultural diffusion (improving soft power).

Turkish also has a very impressive Central Asian route network, a region which India has been working on developing stronger ties with. Almaty and Astana (Kazakhstan), Baku, Ganja, and Nakhchivan (Azerbaijan), Batumi and Tbilisi (Georgia), Bishkek and Osh (Kyrgyztan), Dushanbe (Tajikistan), Tashkent (Uzbekistan), Ashgabat (Turkmenistan), and Ulanbator (Mongolia) are all destinations in the Turkish Airlines network.

After seeing how well other countries use their flag carriers as a tool, we can come back home and compare to Air India. Commercial air service can be used to further India’s “Look East” and other international development policies.

Air India already attempts to tailor its route network to serve the government’s wishes. Its low cost subsidiary, Air India Express, serves migrant gulf traffic returning home. The carrier has been very successful with the goal, with high load factors. Air India also serves 2 cities of significant strategic interest from its legacy Indian Airlines network – Kabul and Yangon. However, even these cities are underserved (Yangon is only served twice weekly).

In contrast to the limited routes of strategic value, Air India wastes lots of money on politically mandated prestige routes. A loss of $60 million each year is posted on Air India’s route to Toronto, yet the route is continued due to political pressure. Politicians want service to Chicago, not Congo, despite the fact that the latter would be a far more useful destination.

It’s time that Air India takes a look at the fundamentals of how it crafts its route network. There is no dearth of carriers who can take you from Toronto to Delhi, and the traffic which flies that route is likely to fly regardless of whether Air India is there or not. Where the opportunity for Air India to shine is in routes which require patience and a government cash backstop to develop. Routes which further India’s foreign policy aims and bring new economic partnerships.

Alas, the babus and mantris will likely never realize the golden opportunity which they are missing out on.

DGCA’s Financial Surveillance Report Full Of Controversy

Last Thursday, the DGCA (India’s aviation regulator) finalized their 2011 financial surveillance report. The findings of the report are making waves throughout the industry. The report focused on the financial state of airlines in India, finding that financial issues are endemic in the sector, and that this financial sickness is affecting safety standards.

The most controversial part of the report said: “A reasonable case exists for withdrawal of [Kingfisher Airlines] airline operator permit as their financial stress is likely to impinge on safety.” The report also had similar findings about Air India Express (AIX), a surprise considering that AIX was relatively profitable compared to the rest of Air India and was being hailed as a success story by many aviation analysts. I must admit that I belong to that category myself, considering AIX to be a great step for Air India.

Audits of Jet Airways, JetLite, SpiceJet, and GoAir also yielded poor results. The DGCA found “major financial distress issues” that could lead to safety issues. The reports also talks of “some rapid growth issues” about IndiGo Airlines. The audit of Air India is not yet finished.

 

Source: Kingfisher Airlines

When I look at that list, I’m not really shocked. The report seems to list every single Indian airline as under “financial distress.” It’s great that the DGCA is finally figuring this out. The Indian aviation market is structurally challenged. Despite being one of the fastest growing economies in the world, Indian airlines are unable to make profits. This is due to high fuel prices, extremely high taxes, and poorly negotiated bilateral treaties, among other issues. It is excellent that the DGCA is actually investigating these issues before it becomes too late and safety standards crash.

What may seem really surprising is that the DGCA is considering taking the extreme step of revoking operating permits. However, after looking closely at the financial issues that Kingfisher is facing, it may not seem that drastic of a step at all. A post tomorrow will go into more detail about Kingfisher’s financial woes.

 

Source: Wikimedia

With regards to Air India Express, it is surprising how scathing the report is. 2 years ago, the airline was involved in the Mangalore air crash which claimed 158 lives. However, it wasn’t clear to me how poor the safety culture at the airline is until today when I did some more poking around during research. There is shortage of pilots, check airmen, instructors, examiners and cabin crew… The airline is not able to operate its entire fleet due to shortage of pilots. Flight duty time limitation monitoring is carried out manually (unlike most airlines, including its parent Air India, which use computerized systems). Training of pilots is carried out on Jet Airways’ simulator as AI Express simulator remains unserviceable most of the time.”  This is a bad situation to be in for any airline.

Other airlines have been having similar issues as well. Jet Airways, JetLite, IndiGo, SpiceJet, IndiGo, Air India Regional, and GoAir all were found to be experiencing “financial difficulties” and “growing pains” in their operations. Crew shortages, poor quality training programs for pilots and cabin crew, and a lack of important software that can improve safety were found in some of these airlines, among other problems.

Any safety issues are always extremely worrying. However, despite all these concerns, the airlines of India are still some of the safest in the world. The fact that the regulator is being vigilant enough to ensure that these problems don’t become too severe is an extremely good sign.

Tune in tomorrow for a closer analysis of Kingfisher Airlines’ financial problems.