AUDITSCAN
All Weighed Down:
The Soaring Staff Costs of Our National Carriers
One of the first Indian companies to go
on-line, ICICI is now poised to take a major leap in the Net-based trading
business.
By M.V.
Ramakrishnan
''Sky is the limit!'' is a familiar
expression that eminently describes the business of an airline. In recent
years, it has also been an accurate descriptor of the staff costs of
Indian Airlines and Air India. One has been aware of this in a general
way, but just how high these costs have tended to soar, and why, has been
graphically brought out by the Comptroller and Auditor General of India (CAG)
in a Central Commercial Audit Report submitted to both Houses of
Parliament on May 4, 2000. The report contains some concise tables, which
play host to some very illuminating numbers.
The Indian Airlines Story
The wages of excess
 IA:
Trend Of Staff Costs shows the expenditure incurred by Indian Airlines
(IA) on its staff between 1993-94 and 1998-99, and the corresponding
operational- and total-expenditure, and fleet strength. During this
period, the airline's staff costs increased by 207 per cent, and its cost
per employee by 209 per cent. The staff cost per Revenue Tonne Kilometre (RTKm)-a
yardstick that measures the actual traffic carried on which revenue is
earned-increased from Rs 4.11 lakh in 1993-94 to Rs 12.34 lakh in 1998-99.
And the proportion of staff costs to the operational expenditure increased
from 15 per cent to 28 per cent in the same time frame.
 In
absolute terms, IA's annual expenditure on staff has increased by Rs 590
crore in this period. To cope with the constantly rising expenditure, IA
increased its fares every year from 1994 to 1998. And staff costs
accounted for between 9 and 36 per cent of such hikes (IA: Staff Costs
& Fare Hikes).
The reduction in staff strength was quite
marginal in these years: more than 540 new posts were created, including
271 in the executive cadres. But the strength of the fleet declined
steeply, from 54 to 41.
Among the major airlines functioning in the
South-East Asian region, the number of employees per aircraft in IA was
second only to Pakistan International Airlines (Employees Per Aircraft).
And, IA's productivity in terms of the Available Tonne Kilometre (ATKm)-indicating
the maximum traffic that can be carried-was the lowest (Productivity Of
Selected Airlines-S.E. Asia).
 The
audit review notes that senior-level posts were added arbitrarily. A dozen
posts for directors were sanctioned between 1994 and 1998 without adequate
justification, raising the number of IA's directors from 18 to 30. Six of
them were created by upgrading six posts of general managers, and these
six posts of general managers were, again, sanctioned. More than 130
retired employees were hired between 1995 and 1999 on a contract basis
with dubious perks, merely for performing routine jobs. And, while there
was a substantial underutilisation of manpower all round, huge sums were
paid as overtime allowance, resulting in the Budget estimates being
invariably exceeded every year.
Incentivised to Work
 The
period between 1995-96 to 1998-99, at IA was marked by steeply escalating
expenditure on various Productivity-Linked Incentives (PLI), for which the
management entered into separate agreements with various employees' unions
and associations. The rationale behind these incentives was to prevent the
luring away of skilled and experienced pilots and engineers, by
newly-established private airlines. Consequently, the aspirations of other
employees also had to be considered. The expenditure on PLI was estimated
to be around Rs 150 crore per annum, but it was expected to generate
additional revenue in excess of Rs 200 crore per annum.
However, a serious flaw in the whole set-up
was that the base performance levels at which PLI would come into play
were fixed below the existing actual average performance levels (IA: Low
Incentive Base). In other words, some extra money would be paid even for
maintaining status quo. Surely, the management must have realised at the
outset that the massive outlay on PLI would not be matched by any
impressive spurt in productivity.
 In
the event, a dismal scenario followed. Productivity in terms of ATKm and
RTKm improved only marginally between 1995-96 and 1998-99, and the
additional revenue earned fell far short of the estimated Rs 200 crore per
annum. However, the expenditure on PLI was much higher, and even exceeded
Rs 200 crore per annum in the last two years (IA: Trend Of Available Tonne
Kilometres and IA: Trend Of Revenue Tonne Kilometres).
 That
apart, IA's RTKm was consistently lower than its ATKm. A PLI agreement
with one of the unions in 1997 was given retrospective effect from a
date when a similar earlier agreement was still valid. This overlapping
led to an unjustifiable (incremental) expenditure of Rs 37 crore. What
emerged as a result of all these was an anomaly where PLI costs added up
to Rs 667 crore in the four years ending 1998-99, even as the organisation
suffered a net overall loss of Rs 64 crore (IA: PLI Vs. Profitability).
 Apart
from the performance-linked incentives, IA also paid a special
productivity allowance and a fixed productivity allowance to certain
categories of staff without linking them with performance at all. And
defying all logic, it also gave, to certain administrative and technical
officers and engineers, an allowance for 'out-of-pocket expenses' every
day merely for attending office on working days, and an 'experience
allowance' merely for being experienced!
The Air India Story
 More
Wages of Excess
AI: Trend Of Staff Costs shows the trend of
expenditure on staff in Air India (AI) from 1994-95 to 1998-99, the
corresponding operational and total expenditure, and the fleet strength.
Staff costs rose steeply from 16.34 per cent
of operational expenditure to 23.34 per cent, during this period, although
the number of employees remained more or less the same. In terms of
absolutes, the annual expenditure on staff went up by Rs 490 crore.
 AI's
productivity, however, remained the lowest among the major international
airlines. In terms of parameters like employees per aircraft, passengers
per employee and RTKm, AI's figures were the worst (Productivity Of
Selected Airlines). AI's ATKm-level declined from 2,615 million in 1995-96
to 2,541 million in 1998-99. And its RTKm, from 1,620 million to 1,520
million. As in the case of IA, the RTKm was considerably lower than the
ATKm.
Since 1990 there had been a prolonged delay
in arriving at wage settlements, causing severe turbulence in
management-employee relations. Some agreements could be settled only in
1996-98, but, meanwhile, the management decided to pay certain costly
allowances, some of which had built-in anomalies.
Traditionally AI's pilots were eligible for
hotel and lay-over allowances based on the time spent by them on duty away
from their stations. As there was a tendency to abuse this, in 1994, the
system was replaced by one of 'hourly payment' based on the actual flying
time. A related provision was that the line earnings of senior pilots
should not be less than that of their juniors, and in such an event, the
difference had to be made good in terms of hours, if the seniors had been
available for duty. All this looked rational on the surface, but in
practice, the new system was more expensive than the earlier one. The
extra expenditure was estimated at about Rs 17 crore per annum. This goes
against the idea of effecting economies. As the CAG puts it, senior pilots
were paid at higher hourly rates, and they earned more for not flying than
their juniors did for flying!
In 1995, a decision was taken to abandon the
shortfall idea. This, however, did not happen. Rather, its scope was
enlarged, giving a similar compensation to AI's regular pilots vis-a-vis
retired pilots engaged on a contract basis. A fresh agreement in 1998
continued the system, only requiring that the shortfall must be computed
on a six-monthly basis instead of every month, for whatever it was worth.
 More
on Incentives
In 1996 the airline introduced a PLI scheme,
covering about 16,200 out of its 18,700 employees. The airline's
expenditure on PLI during 1996-99 was Rs 356 crore. Just as in the case of
IA, the minimum levels of performance for PLI to come into play was fixed
at below the actual average existing performance levels (AI: Low Incentive
Base). Thus, this scheme was also flawed from the start. Though the
management conceded, in 1999, that the base levels needed to be revised as
they were too low, there has been no move in that direction.
 'Aircraft
availability' is one important criteria for the payment of PLI. The
management claimed that with the fleet strength remaining at 26, aircraft
availability had gone up from 17.14 in 1996 to 25.60 in 1998. But aircraft
utilisation in the case of Boeing 747-200 and 747-500 actually declined
during the period (AI: Aircraft Utilisation). The audit view is that the
choice of parameters was not sufficiently broad-based and did not reveal
the true overall productivity of airline.
Finally, the audit report underlines the
flimsy nature of some special allowances. For instance, a 'productivity
allowance' for general cadre officers was introduced in 1995 with
retrospective effect from 1993, without being linked with performance
levels. When the PLI scheme was extended to the general cadre officers in
1996, it clashed with the existing productivity allowance, which was not
withdrawn and amounted to Rs 71 crore during 1996-99.
A bizarre benefit existing from 1974 is a
'special compensatory allowance' paid to general category officers.
Eloquently attempting to justify its existence by comparing it with a
similar allowance in the government, AI's management pleads:
''Compensatory allowance is granted to employees working in remote
localities, border areas and difficult areas. A similar situation is in
Air India, whereby the officers have to work in difficult areas such as
the tarmac in the burning hot sun in summer and in the cold whilst in
winter....'' Should one stand up and cheer: Bravo, Air India?
About the Author
M.V. Ramakrishnan, who served in
the Indian Audit & Accounts Service from 1957-92, has conducted
various investigative audits, including those of the economic ministries
in Delhi and the Indian High Commission in London. After serving as the
Additional Deputy CAG Of India from 1990-92, Ramakrishnan was the
Consultant to the CAG of India from 1992-93, and the Consultant to the PTI
(Administration & Finance) from 1993-94.
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