Industrial Sickness In Air India Accounting Essay

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Industrial sickness is defined in India as "an industrial company (being a company registered for not less than seven years) which has, at the end of any financial year, accumulated losses equal to, or exceeding, its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year".

Under the repealed Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA), a moratorium period of five years was given before an industrial company could either embrace sickness or declared to be sick. But under the new dispensation for addressing industrial sickness that is a part of the Companies Act 1956 itself, no moratorium period whatsoever seems to have been given as would be evident from the definition of `sick industrial company' given thereunder:

Clauses for Sick Industrial Company

According to Companies Act, 2002

"`Sick Industrial Company' means an industrial company which has

The Accumulated losses in any financial year equal to 50 per cent or more of its average net worth during four years immediately preceding such financial year; or

Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company."


The above definition tell us that, one may say that moratorium period has after all not been done away with - if anything, it has been retained at the same level of five years.

It is clear that the moratorium period has been completely done away with. For, had the four-year moratorium period been intended that would have been made a common factor for both clauses (i) and (ii).

In the event, every industrial company would inevitably and invariably have to press the panic button needlessly in vast majority of cases and a trifle prematurely in others. This would happen because no industrial company can start making profit from year one. Gestation period ranges from a couple of years to a decade.

Factors Caused Sickness in Air India

Merger of Air India and Indian air lines

With crisis-ridden Air India on the verge of a partial shutdown due to simmering differences between pilots of the erstwhile AI and Indian Airlines, the government has finally admitted that merging these two airlines five years back has not worked out well for the company. The merger has not worked out as planned. Maybe some benefits were foreseen out of this move like synergy and economies of scale, but those did not happen. Both AI and IA were making cash profits till fiscal 2006-07 but have seen losses soaring thereafter asked if it made more sense to run AI and IA separately under one umbrella organization, the minister said 70% of the merger process in areas like IT, accounting, flight codes and marketing were complete. Undoing that will again take many years. Now 30% merger, mainly on HR issues, is left and we are implementing the Dharmadhikari committee report for that. There will be more problems in the way as not everyone will be happy. We need to be firm and patient, Acknowledging that the era of national carriers has drawn to an end globally, the minister added that the airline would need to get its cost structure and work ethos closer to service industry norms to survive. It is difficult for government to run a service industry where customer is king. But in government, everyone is the king. Still some PSUs are profitable. Even AI and IA were profitable before merger and there is no reason why that cannot happen again if everyone cooperates, In its current state, the government has no plans for selling or privatizing AI. In fact the Cabinet meeting which discussed AI's Rs 30,000-crore bailout from public money plan saw many ministers speak against the move. In the end the sense prevailed that the AI mess would first need to be sorted out before a bailout can be announced. Our priority is to bring AI back on track, The contingency plan drawn out by the aviation ministry and airline management to tackle the strike will see many international flights being withdrawn in the short term. Some of the biggest loss-making routes (like Amritsar-Delhi-Toronto) are being shut down. A study done by AI late last year had shown that only two out of its 175 weekly international flights were making some money.

High Ground Salary of Staff

Many pilots of loss making Air India (AI), which is surviving on repeated bailouts from taxpayers, earn more than the chief executives of some of India's most profitable companies. HT has obtained a list of the state-owned carrier's highest paid employees for fiscal year 2010-11. On the list of 335 were mostly management pilots (who hold managerial posts) and senior pilots who made between Rs. 60 lakh to over Rs. 1 crore per annum  - a monthly salary of at least Rs. 5 lakh. Many pilots are just high school graduates. What's more Air India's pilots earn more than their counterparts in market leader Jet Airways and profit making budget airline IndiGo. This when Air India has a debt of over Rs. 50,000 crore and accumulated losses in excess of Rs. 20,000 crore. The top four earners for the year, whose salary crossed Rs. 1 crore each, were all from erstwhile Indian Airlines (IA). They do not operate long-haul international flights that typically entitle one to higher perks. This should be an eye opener for the AI management. Such high salaries, Ranganathan said, indicate towards a clear manipulation and nexus between Air India officials and pilots. More than 15 employees in the list obtained by Hindustan Times earned more than Rs. 90 lakh a year while there were more than 65 whose annual compensation package was more than Rs. 80 lakh. By comparison, the annual package of SD Shibulal, CEO, Infosys Technologies was Rs. 83 lakh in 2011-12 while its chairman emeritus, NR Narayana Murthy received Rs. 38.2 lakh. RC Bhargava, chairman Maruti Suzuki India Ltd, earned Rs. 35.6 lakh. Ranganathan said many management pilots spend most of their time in simulator training where allowances are much higher than actual flying.

Regular Strikes

National carrier Air India (AI) lost over Rs 26 crore after its pilots went on strike since Tuesday midnight adding to its debt burden that stands at over Rs 40,000 crore and push it to the No. 4 position. Besides, the strike is helping private carriers to further consolidate their business. The AI management on Friday said the strike is still on. It said none of the striking pilots, numbered at around 660, reported for duty despite its deadline and the contempt of court proceedings against them. "We are working out the future course of action. Industry experts feel that the operational losses could be above Rs 100 crore as it includes fuel costs and other aviation charges. Around 100 flights were grounded as stranded passengers cried foul over the steep fares being charged by other carriers. In the past two years, AI pilots have struck work on three occasions - the current strike being the fourth - resulting in losses of over Rs 700 crore to the cash-strapped carrier. The AI management, according to striking pilots has violated the memorandum of settlement signed in November 2009 on implementing the Sixth Pay Commission recommendations besides curtailing the number of flights by 30 to 40 per cent. Late last year, the minister of state for health Dinesh Trivedi - a trained pilot - wrote a detailed letter to Prime Minister Manmohan Singh, drawing his attention to the precarious condition of Air India. He said AI's domestic as well as international pilots were forced to report to duty and fly even when they are unwell, in violation of duty hour rules that are in place to prevent "fatigue". Until 2004, only AI and Indian Airlines could fly to foreign destinations. Private airlines had been pressing the Centre to allow them to share this lucrative market. The airlines is expected to post losses of over Rs 7,000 crore during the current fiscal and lost Rs 3,450 crore in the first half of the 2010-11 fiscal alone. Its losses during 2007-08, 2008-09 and 2009-10 were Rs 2,226.16 crore, Rs 5,548.26 crore and Rs 7,200 crore respectively. The government has already infused Rs 2,000 crore in two tranches last year (`800 crore and Rs 1,200 crore) as equity but the AI management has asked for Rs 17,500 crore more from the Centre to tide over its financial woes. This has also been suggested by the global consultancy Deloitte, which is assisting the airline with its turnaround plan. But despite the financial help the airline has largely failed to meet the target of the five-year (2010-14) turnaround plan. Against the target cut of Rs 2,000 crore in operational costs by March 2010 it could manage only Rs 900 crore. Unhappy about the chaos and unrest at AI besides and its failure to effectively implement the turnaround plan, the higher- ups in the government have put in a strong word to the civil aviation ministry to supervise its day-today operations owing to internal bickering that recently led to the exit of some if its top officials.

High Expenditure

Air India on Tuesday came in for severe criticism from CAG for "wasteful expenditure" of over USD 2.6 million (Rs 15 crore) on several counts, including its failure to surrender leased premises at London Heathrow airport which remained unused for nine years. The airline had leased a 0.58 acre plot from the British Airport Authority (BAA) in 1968 for over 50 years till 2019 for use as a warehouse to handle its cargo at the airport. The cargo handling was being done by Menzies Aviation Limited (MAL) since 1998, but due to poor working conditions at the warehouse, MAL started doing the job from its own facility in 2004, the Comptroller and Auditor General (CAG) said in its report tabled in Parliament on Tuesday. MAL also agreed to refurbish the warehouse at its own cost and pay minimum royalty of 30,000 pounds or 0.24 crore per annum, besides paying half of the electricity, water and heating costs, it said, adding that MAL did not pay 45,000 pounds (Rs 0.35 crore) worth of royalty. Subsequently, MAL's regulated status was withdrawn by UK's Department of Transport owing to security lapses and it could not use the warehouse for cargo handling, CAG said. However, "despite receiving an offer from BAA in 2003 for early termination of lease at a market value of 3.35 million pounds (Rs 26.23 crore), the Company (Air India) inexplicably preferred to hold the asset idle over the years," it said. CAG said it was imperative for Air India "to act promptly for surrendering or utilising the space", considering the annual commitment towards rent and council taxes. In another instance, CAG said Air India accepted "abnormally higher rates" for hiring transport for teams accompanying the Prime Minister in 2009, 2010 and 2011, thus spending an extra amount of over Rs 75 lakh.

Financial Crisis

Around 2006-2007, the airlines began showing signs of financial distress. The combined losses for Air India and Indian Airlines in 2006-07 were 770 crores ( 7.7 billion). After the merger of the airlines, this went up to 7,200 crores ( 72 billion) by March 2009. This was followed by restructuring plans which are still in progress. In July 2009, SBI Capital Markets was appointed to prepare a road map for the recovery of the airline. The carrier sold three Airbus A300 and one Boeing 747-300M in March 2009 for $18.75 million to survive the financial crunch. As of March 2011, Air India has accumulated a debt of Rs. 42,570 crore (approximately $10 billion) and an operating loss of Rs. 22,000 crore, and is seeking Rs. 42,920 crore from the government. For the past three months (June, July, August 2011), the carrier has been missing salary payments and interest payments and Moody's Investor Service has warned that missing payments by Air India to creditors, such as the State Bank of India, will negatively affect the credit ratings of those banks. A report by the Comptroller and Auditor General (CAG) blamed the decision to buy 111 new planes as one of the major causes of the debt troubles in Air India; in addition it blamed on the ill timed merger with Indian Airlines as well,. Due to high fuel and loan costs, Indian government has already pumped 32 billion rupees into Air India since April 2009 and in March 2012 government bailed out Air India Ltd. with a 67.5 billion ruppes ($1.4 billion) which the amount almost double of the federal government has spent on new hospitals over the past three years.

Management Problems

The new Chairman and Managing director wants to change the order of some of the 111 planes ordered in 2006 to get narrow-body aircraft instead of the wide-body aircraft. On May 4, 2012, the airline was fined $80,000 by the U.S Transportation Department for failing to post customer service and tarmac delay contingency plans on its website and adequately inform passengers about its optional fees. On May 8, 2012 about 100 pilots went on medical leave as a mark of protest while their talks with the management were still on. Later, the same day it sacked ten agitating pilots and de-recognized their union after 160 pilots failed to join duty by the given deadline. On the 15th of May, the Union Civil Aviation Minister Ajit Singh stated that the Government was giving Air India one last chance and that it must perform in order to qualify for a bailout. On May 26, 2012 Aviation minister Ajit Singh announced that he would go ahead and hire new pilots if the strike did not end soon. While, AI management gave an assurance to Delhi High Court that it would look into the hardships of the pilots sympathetically, the striking pilots have decided to end the 58 day old strike immediately. Due to pilots' strike Air India suffered a loss of 500 crore (US$90.5 million) in 45 days. Eventually, following the intervention of the Delhi High Court, the pilots called off their 58 day strike on 4 July 2012.

Present Condition of Air India

Air India is the flag carrier airline of India. It is part of the government of India owned Air India Limited (AIL). The airline operates a fleet of Airbus and Boeing aircraft serving Asia, Europe and North America. Its corporate office is located at the Air India Building at Nariman Point in South Mumbai. Air India has two major domestic hubs at Indira Gandhi International Airport and Chhatrapati Shivaji International Airport. An international hub at Dubai International Airport is currently being planned. In 2000, Air India introduced services to Shanghai and to its third US gateway at Newark Liberty International Airport in Newark. In May 2004, Air India launched a wholly owned low cost airline called Air-India Express. Air India Express connecting cities in India with the Middle East, Southeast Asia and the Subcontinent. In 2004 Air India launched flights to its fourth US gateway at Los Angeles International Airport in Los Angeles (which has since been terminated) and expanded its international routes to include flights from Ahmedabad, Amritsar, Bangalore and Hyderabad. On 1 December 2009, Air India introduced services to its fifth US gateway at Washington Dulles International Airport in Washington, D.C., accessed via a stopover at JFK Airport in New York City. This service has been terminated. Air India has the fourth largest share in India's domestic air travel market, behind Jet Airways, IndiGo and SpiceJet, as of May 2012. Following its merger with Indian Airlines, Air India has faced multiple problems, including escalating financial losses, discontent amongst employees, and poor customer service. Between September 2007 and May 2011, Air India's domestic market share declined from 19.2% to 14%, primarily due to stiff competition from private Indian carriers. In August 2011, Air India's invitation to join Star Alliance was suspended due to its failure to meet the minimum standards for the membership. In October 2011, talks between the airline and Star Alliance have resumed. In April 2012, the Indian government granted another bailout package to Air India, including Rs300 billion ($5.8 billion) of subsidies.

Measures for Healthy Functioning of Air India

Cut in Expenditure

Various cost-cutting measures implemented by Air India have resulted in savings of about Rs 800 crore during 2010-11, Civil Aviation Minister Ajit Singh said today.He was replying to a question in the Lok Sabha and also listed the measures which resulted in reduction of expenses.

Rationalization of routes, phasing out of old fleet, closure of overseas offline offices, dismantling of the Frankfurt hub and establishment of Integrated Operations Control Centres were some of the measures that Singh said had reduced Air India losses. In response to another question Singh said that Air India had issued a tender for Computerised Face Recognition Biometrics system in 2006 which was scrapped three years later. Singh said that the tender was not pursued because the expenditure was not bearing sufficent value to passengers.

Change in Salary Structure

The civil aviation ministry has decided to overhaul the pay structure of Air India employees by scrapping the contentious productivity-linked incentive (PLI) remuneration structure, which constitutes the bulk of salary. The new structure, meant to reduce the salary bill, will be based on Public Enterprises Selection Board (PESB) guidelines. However, the would not lead to a major salary reduction, as a wage revision is due. The ministry has decided to restructure the airline's top management by creating a post of joint managing director, who would be an Indian Administrative Services (IAS) officer, to monitor implementation of the still incomplete integration of the erstwhile Air India and Indian Airlines. It has decided to prune the number of executive directors (20 at present) and ensure multitasking. Many of these decisions have been suggested by the Justice Dharmadhikari committee formed last year to recommend ways to integrate the employees of the erstwhile Air India and India Airlines. Civil Aviation Minister Ajit Singh confirmed the implementation of the committee report. "We have accepted the recommendations of the Justice Dharmadhikari committee and the salaries of Air India employees will be in accordance with PESB guidelines and will not constitute PLIs. The implementation of the report will begin soon," he said. The decision to scrap PLIs will impact about 27,000 employees. PLIs constitute over 60 per cent of Air India's annual wage bill of around Rs 3,000 crore and are 80-200 per cent of employees' salaries.

Re-allowing Air India to fly on Profitable Destination

Measures to curb internal corruption

Demerger of Air India & Indian Air Lines

Blocking on Private Airlines

Policy Changes

Change in Management

Learning from the Article

Through this Article we learn that:-

Meaning of Industrial Sickness.

Causes of Meltdown in Air India.

Present Condition of Air India

Measures to curb Sickness in Air india.


 Though Air India faced a huge loss in the past ten years, because of many reasons like internal corruption, higher salary, high expenditure, buying of new aircrafts etc., Air India taken many measures to curb this sickness like cut in expenditure, change in policy & management etc, which helped it a lot in curing of sickness.