Karela Fry

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Air Ministry’s wings clipped

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In a report released yesterday, the Comptroller and Auditor General has taken notice of problems with Air India on three counts: purchase of an excessive number of planes, giving away routes to foreign airlines, and the as-yet-incomplete merger with Indian Airlines. Moneycontrol has some details:

The report dealt with several aspects of the ailing national carrier’s losses, fleet acquisition, merger, huge debt burden, delay in joining the global airline grouping Star Alliance and its financial and operational performance.

Noting that the fleet acquisition process took an “unduly long time”, the CAG said the initial proposal was made in December 1996 and its examination continued “in fits and starts” till January 2004 when a plan was made to buy 28 planes, which was revisited and later a decision taken to acquire 68 aircraft.

It said the revised plan saw “a dramatic increase” in the number of planes to be purchased and maintained that the sequence of events up to November 2004 clearly demonstrated that the pre-merger AI “hastily reworked” its earlier plan.

“This increase in numbers does not withstand audit scrutiny, considering the market requirements obtaining then or forecast for the future, as also the commercial viability projected to justify the acquisition. The acquisition appears to be supply-driven”, the report said.

Commenting on the “speed” at which the acquisition process for 68 aircraft proceeded, it said while the first plan took eight years to decide on 28 planes, “between August 2004 and December 2005, the proposals were formulated by AI, approved by the Board, examined and approved by the MoCA, the Planning Commission, the Department of Expenditure, Public Investment Board, empowered Group of Ministers and also the Cabinet Committee on Economic Affairs”.

Observing that many assumptions for the revised plan were “flawed”, the CAG said the negotiation process was “irregular and adversely affected the transparency of the process”.

Maintaining that “no benchmarks” relating to comparable prices and commercial intelligence were set, it said, “Consequently, in the absence of such benchmarks, the effectiveness and efficacy of negotiations and the reasonableness of the price arrived at is difficult to ascertain”.

The public audit body also took the Civil Aviation Ministry to task for liberalising the bilateral air traffic entitlements with other countries in a manner which “did not provide a level playing field to AI (and to a lesser extent other Indian private airlines)”.

“These (bilateral) agreements, besides not affording adequate time to AI/IA (Indian Airlines) to set their houses in order and gear up for a highly competitive environment, very evidently worked to the detriment of the national and Indian private carriers”, the CAG said.

“At this stage, Indian carriers (including AI) will have to tackle renewed and serious challenges to compete effectively with established international ‘mega carriers'”.

Terming the merger as “ill-timed”, the report said this exercise was undertaken “strangely from the top (rather than by the perceived needs of both these airlines), with inadequate validation of the financial benefits”.

The merger was also carried out “without adequate consideration of the difficulties involved in integration (notably in terms of HR and IT, among other areas)”.

Other factors responsible for the “critical” state of affairs in AI were “chronic operational deficiencies, a weak financial position, grossly inadequate equity capital and undue dependence on debt funding providing little or no cushion for the financial shock when it came”. Besides, high fuel prices and global recession also hit the airline hard.

The CAG, in its strong critique of the merger process, said there were “huge delays in actualisation of the merger/operational integration” and added that the single code passenger reservation system was activated only this February.

Had the possibility of the merger, including various aspects like route rationalisation, network integration and common maintenance and overhaul facilities, been considered even at a late stage in the process of fleet acquisition, “the underlying economics could have been significantly altered”.

Observing that a common fleet acquisition plan for the two earlier carriers could have been considered, it said the potential benefits would have been far higher had all these steps been undertaken before finalising “the massive and separate fleet acquisition undertaken” by the two airlines.

Regarding human resources integration, the CAG said while apprehensions regarding HR problems were expressed in 2006, the integration of 98 per cent of staff below the level of Deputy General Manager “has still not taken place”.

Though Air India had “inherent strengths”, it said, “There was no evidence of Civil Aviation Ministry having provided it with positive support in the last few years”.

That last para is a strong indictment of Mr. Praful Patel who was the minister during the period when all these problems occured. Mr. Patel attempted a defence, which is reported by Asian Age:

But former civil aviation minister Praful Patel told the media the CAG report was full of contradictions. He said the government had in 2004-05 gone in for aircraft acquisitions, which the CAG itself had noted, were delayed for several years before that. Mr Patel pointed out that the CAG report itself states that liberal bilateral aviation agreements (with other countries) had benefited the Indian traveller in terms of lower tariffs.

This defence mis-interprets the report, as you can check for yourself by reading Moneycontrol’s article.

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