Should Air India Be Privatized Commerce Essay

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Aviation is considered as vital part of the infrastructure of any nation and is culmination of economic growth, tourism, and trade. It has helped businesses to expand through geographies and plays a pivotal role for tourism industry.

Indian boasts world's fastest growing aviation market with a CAGR of 18.4% Y-o-Y ahead of China (9.7%) and Brazil (7.5%) which is expected to remain more than 16% during year 2012-13, also Indian aviation sector has highest potential of passengers which is pegged up to 280 million by 2020 as compared to current 75 million. All these developments are fuelled by growth in economic conditions of rising middle class, lower airfare offered by carriers, and growth in tourism industry. (CAPA - Centre for Aviation, 2011)


First Indian domestic airline route was started in December 1912 between Delhi and Karachi by the Indian State Air Services with the help of Imperial Airways of the UK. Three years later Tata Sons Ltd. started first Indian regular airmail service between Madras and Karachi without government support. At the time of independence there were eight companies in service. Aviation industry faced some problems at that time namely rise in price of aviation fuel, rise in salary bills, and a fleet of aircrafts which was disproportionately large.



In the wake of the mounting crisis in early days of Indian aviation sector, Government of India nationalized air transport industry; result was creation of Air India and Indian Airlines. Air India became the only Indian international carrier while Indian Airlines catered to the domestic traffic. Indian aviation sector was monopolized by these two carriers till 1991, monopoly of these two carriers ended by open sky policy of government in mid-1990. During 2004-05 government allowed private players to fly international service and this further pressurized operation of Air India as its share shrank. Private players were able to grab the market by providing better facility, capacity utilization and hence low air fare.

Soon after this policy, Air India did little to address these challenges in the competitive environment. Instead of streamlining its operation and efficiency, AI management worked out a plan that led to massive purchase of 111 planes for non-existential purpose. No financial and commercial analysis was carried out for such huge purchase with public money.

Comptroller and Auditor General (CAG) in its report criticized this decision and termed as "a recipe for disaster" and mentioned that it should have raised alarm in the government. According to the report, acquisition of the aircrafts through debt had massively increased debt liability of the company which was at whopping Rs. 38,423 crore as on March 31, 2010. (India Today, 2011)

In 2007, Indian Airlines and Air India were merged into National Aviation Company of India (NACIL) with ill-founded justification and ostensible which was approved by ministry, further led to complete operational and financial breakdown. CAG report further says that acquisition of a large and expensive fleet of aircraft when Air India was going through turmoil was clearly highly priced, without audit scrutiny, no commercial viability or market forecast, and was largely supply driven. It definitely reeked of corruption, abuse of office and misuse of public money. There was mismanagement of maintenance contracts which resulted in grounding of the aircrafts and further created a dent in operations of Air India.

Performance of airline industry depends on both its management and staff, but Air India failed miserably on these two fronts. Air India is known for bad management practices, further government and political leadership never allowed Air India to operate independent, sound and commercial lines. Employees, especially highly paid pilots held the air line and its passengers on ransom through repeated strikes, reporting "sick" and protests. Government lacked in providing professional leadership and management, and simply put civil servants and airline at their helm.

Due to all these mismanagement, frequent strikes by Air India staff has been called and company's HR management collapsed. So alignment of human capital towards stringent is a difficult challenge laying ahead for Air India.


Air India currently owns more than 100 aircrafts and around 27 are in order to be procured. From 2006 onwards, Air India is in losses. Prime reason behind this was increase in number of aircrafts for wet and dry lease. There was lack of market study, route analysis, and pricing decision. Market potential was not much developed at that time for such kind of services. Air India incurred heavy losses till market built up. In 2006, AI leased four Boeing 777 carriers for a period of five years while placed order for its own aircrafts to be delivered in year 2007 onwards. As a result AI had to keep five Boeing 777 and five Boeing 737 on grounded and incurred a loss of Rs 840 crore from 2007-09. Boeing was unable to deliver its new B 787 Dreamliner; else they would have been remained grounded and contributed further in loss. While other ungrounded aircrafts ran on less than 40% occupancy further increased losses to 400 crore from 2006-08. Air India also accused for dropping developed routes for the mere sake of lease expiry of its planes.

Air India had one good money making operation in ground handling of Bangaluru & Hyderabad airports and earned Rs 900 crore in years 2007-08. But it now shares this revenue with Singapore Airport Terminal Services for handling of its own fleet.

As on March 31, 2012, Air India has an outstanding dues and loans worth Rs 67,520 crore, out of which Rs 21,200 crore is working capital loan, Rs 22,000 crore on long term loan for fleet acquisition, vendor dues worth Rs 4,600 crore, and accumulated loss of Rs 20,320 crore. (The Indian Express, 2012)

Indian government has already infused Rs 32,000 crore since April 2009 in the wake of mounting fuel and debt crisis. Central government may also bail off Rs 180 billion plane loan in next 10 years.


Income vs. net profit of Air India is shown in below curve; here clearly income of Air India is stagnant from 2007 onwards but increase in expense e.g. fuel, wages, and other expenses led to increase in losses.

Figure Air India Ltd: Income vs. profit (Department of Public Enterprise, 2012) (Rediff MONEYWIZ)

Figure Operating & Net Profit as % of total income

Further gap between operating and net profit margin has been widened as shown in figure 2, it is because of increased depreciation, interest and other expenses.

Ratio analysis of Air India revels that carrier was in a better situation in year 2006-07 and was capable to cover its current liabilities from its current assets, but from last three years, ratio decreased below 1. It clearly indicates inability of Air India to pay its short term liabilities. Short term liabilities may include fuel charges, employee wages, accounts payables etc.

Figure Air India Ltd: Current & Quick Ratio

Figure Debt Equity ratio of AI

Figure Debt to Capital & Fixed Asset Turnover Ratio

Figure 4 &5 shows that operation and investments in Air India are financed by debt, and this is worrisome as massive interest payments are taking a toll on profitability of Air India. A lower fixed asset turnover indicates inability of Air India to utilize its assets in its operations.

From 2005-06 onwards, Air India is incurring losses, thus there in no Return-on-Capital-Employed (RoCE) and Return-on-Assets (RoA) is also negative.


Findings of our analysis revealed reasons behind this dire situation of Air India which enjoyed market leadership under the aegis of government imposed restrictions to now fourth or fifth place in Indian aviation sector. Decline of Air India mainly attributed to mismanagement of funds, inefficient operations, lack of sound management practices, HR issues, and of course being a government entity political intervention in key decisions making practices.


There are airlines in India which provides low air fare as compared to Air India and yet are in profit because of low cost of operation and staff. Given the employee size of Air India and its federal structure, these cost control seems impossible in Air India in present situation. Air India has highest number of staff per aircraft in the world and has very high wage bill. Further a top management which is mainly comprises of administrative officers who often lack the knack of industry and ability to turn around the company.

Recently Indian government approved 49% FDI in aviation sector which is welcomed by industry. Keeping this in considerations, foreign investors will invest in Indian aviation sector to reap benefits of its potential.

Privatization of Air India can solve its problems related to funding, and operations related areas. It will help Air India to become competitive with other carriers as low cost of operations is a critical aspect at present. Funding by private investors will help in saving huge amount of government spending which may be utilized in other areas. Government is adamant in its stance of continuing Air India with a bailout fund and predicts profits in future. This is highly uncertain.

Air India is also grappling with serious HR related issues, chances are there that privatization of Air India may not be able to solve these. Cost reduction may result in pay cut and layoff that is something Air India staff will never approve, such situation will further deteriorate the situation.