f o r    m a n a g i n g    t o m o r r o w
JUNE 17, 2007
 Cover Story
 BT Special
 Back of the Book

Rupee Rise
Though an appreciating rupee is a cause for concern for many industries, it is proving to be a boon for some, particularly those that have large foreign currency borrowings. A weaker dollar is making repayments cheaper. Also, state-run refineries and those in the aviation sector are well-positioned to benefit from the stronger rupee. The Indian currency is up 8 per cent this year and is Asia's strongest currency against the dollar in 2007.

The ECB Route
The cap on maximum external commercial borrowings (ECBs), an annual ritual for the government, is fast losing its significance. Since the bulk of the foreign borrowings is raised under the automatic route by companies, it is becoming difficult to enforce the cap. The government had raised the annual limit of ECBs last year from $18 billion (Rs 81,000 crore) to $22 billion (Rs 99,000 crore). Now, it seems that total inflows will cross the $22-billion mark.
More Net Specials

Business Today,  June 3, 2007

Ready For Take-off
Air India and Indian will soon merge into one mega airline operating on both domestic and international routes. But its flight path is strewn with air pockets.
All clear: (R-L) Air India's Thulasidas, Aviation Minister Patel and Indian's Trivedi (extreme left)

On Tuesday, May 22, Union Civil Aviation Minister Praful Patel showcased the new colours of the soon-to-be-merged Air India and Indian at a crowded conference at the headquarters of the Civil Aviation Ministry. The new airline, which will have red and orange livery, will be called Air India and the operating company will be called National Aviation Company.

Patel has categorically ruled out any layoffs, which means the new mega carrier will have an employee strength of around 34,000-that's about 280 employees for each of the 120 planes it is expected to have by the end of the year-enough to fill up its daily capacity with its employees alone. In leading global airlines like British Airways, Singapore Airlines and Emirates, the comparable figures are 120-150 employees per aircraft. Then, a horribly mixed fleet of Airbus and Boeing aircraft will negate any engineering synergies, and unions such as the Airlines Corporation Employees Union (ACEU), demanding an early resolution of the pay arrears issues, can bring the airline to its knees. The big question is: can the merged carrier fly at all?

The minister thinks it can. Patel, who can rightfully claim credit for more than doubling the number of domestic flyers from 12 million to 30 million during his three-year tenure, courtesy low-cost carriers, has said that he considers this merger to be his finest achievement as minister. "The unions and all the employees are on board, and it will take some time for all the synergies to work out. But I believe the merged carrier will become a world-class one in a few years," he says.

Two Power Centres

The new company will be headquartered at the Air India Building at Nariman Point, Mumbai. However, domestic operations will continue to be run from Airlines House in New Delhi, the current headquarters of Indian.

V. Thulasidas, CMD, Air India, who is expected to lead the merged carrier, says it will take at least 18-24 months before a complete merger takes place on the ground. "Even though we will become one company in July, it will take time to integrate our operations, routes and fleets," he says. Adds Vishwapati Trivedi, MD, Indian, who is expected to be the second-in-command in the new carrier: "We have begun the process of synergising our IT systems, but a true merger will happen only when we shift our entire it infrastructure to one system. And that will take at least 12 months."

The top management of the two airlines may be saying all the politically correct things right now, but turf wars between employees lower down the hierarchy will present a huge problem once the operations of the two airlines are integrated.

Thulasidas already has a plan in place to tackle this. "Employees 'in duplicate roles' will be shifted to separate business units (SBUs)-such as the low-cost Air India Express (which will itself merge with Indian subsidiary Alliance Air to form one low-cost carrier for both domestic and international routes) and engineering operations," he says. That looks good on paper, but managing the bloated workforce will not be easy.

Turf wars are bound to break out. Indian, for example, operates several international flights to West Asia and South-East Asia, and has even leased two Airbus A330-300 aircraft for international operations from Winter 2007. An Indian executive pointed out that senior flight crew and executives will be loath to give up their international flying rights to the Air India portion of the new airline. One way of working around this issue will be to draft senior Indian crew to fly on international sectors once Air India's new Boeing 777 and Boeing 787 aircraft arrive. Trivedi is quick to point out that consulting firm Accenture, hired by the government to prepare the merger road map, has yet to submit its recommendations. "A decision on how to share responsibilities will be taken only after we see the report," he says.


The new airline will have to face and overcome the following challenges:
Increased competition on the US route: Jet Airways plans to start operations on the lucrative India-US sector in August, and Kingfisher might soon get international flying rights as well.
Strategy: Air India will fly non-stop between India and the US; these direct services will take traffic away from intermediate airlines in Europe and South-East Asia.

Opening of the money-spinning Gulf routes to private competition: Private Indian carriers will soon muscle into what is practically an Air India and Indian monopoly.
Strategy: Airline officials say that the sector is already highly competitive and that Gulf carriers such as Emirates and Etihad already operate multiple daily flights to cities such as Delhi and Mumbai, so it's not really concerned about the entry of a few more airlines.

Troublesome unions might derail the merger: Both airlines have powerful TUs that hold them to ransom at the drop of a hat.
Strategy: Praful Patel says that all the unions have already been sanitised on the benefits of the merger. The troubles with the Airline Corporation Employees Union (ACEU) have nothing to do with the merger but are linked to an outstanding salary dispute.

Route planning: The two airlines now plan these independently and there is little synergy between the two at present.
Strategy: The domestic and international operations of the airline will be based in Delhi and Mumbai, respectively. To achieve full synergies, the airline will integrate domestic routes to facilitate connecting international traffic.

Diverse Fleet: The two airlines operate nine families of Boeing and Airbus planes. This will make it difficult for the combined airline to leverage economies of scale and saddle it with additional maintenance costs.
Strategy: Airlines officials say that this problem will be fixed gradually as certain aircraft are phased out, leaving the airline with a far more streamlined fleet by 2010.

Diverse fleet, no layoffs (and, consequently, a bloated workforce) and disparate it systems lead to the next obvious question: where will the immediate savings that Patel has promised come from? "There will be tremendous savings on several fronts immediately," promises Trivedi. "For one, in several countries, such as Singapore and the UK, we have different General Sales Agents (GSA); this can be brought under one roof. Secondly, in cities like Chennai, for example, both airlines have lots of office space on lease. We can easily amalgamate our offices. Doing this across several cities and countries can help us save a lot of money within a few months." But the combined real-estate rentals of the two airlines constitute less than 1 per cent of their combined operating costs. So, even a halving of this figure will save the new airline only a few crores of rupees a year.

Both Thulasidas and Trivedi point out that a merger will allow the carrier to tackle competition head-on. "It will be possible for passengers to book from international locations all the way to the interiors of India on one airline and one ticket," Trivedi says. Thulasidas points out that merged ground facilities will also dramatically help the carrier reduce costs. Here, too, the new Air India will have to contend with two sets of personnel for one task, despite Thulasidas's rather simplistic formula for dealing with 'duplicate roles'.

Kapil Kaul, Managing Director, India and Middle East, Center for Asia-Pacific Aviation (CAPA), an aviation market research firm, feels that the carriers had little choice but to go through with the merger. "Without this, both national carriers might have been rendered irrelevant within a few years, given the intense competition on domestic routes, especially from low-cost carriers, and the aggressive plans of Jet Airways and Kingfisher on international ones. So, from an operational point of view, Air India and Indian had little choice but to merge," he says.

Air India: 34 aircraft, including 17 on lease. Another 50 planes will be delivered by 2011

Air India Express: 13 aircraft, including 7 on lease. Another 12 planes will be delivered by 2010

Indian: 54 aircraft, including 22 on lease. Another 42 planes will be delivered by 2010

Alliance Airlines: 12 aircraft, including 4 on lease. By end-2007, the new Air India will have 120 aircraft, including several new ones from Airbus and Boeing. Some older planes will be phased out by then. Air India Express will have 30 aircraft and Air India Cargo 4 aircraft

No Layoffs, But…

Both Air India and Indian are also trying to rationalise their workforces, despite Patel's no layoffs promise to the unions. "We have cut our staff strength gradually from over 23,000 a few years ago, to around 18,000 today," Thulasidas points out. Indian has also reduced its roster of employees from 18,000 five years ago to approximately 15,000 now. Then, it is also trying to shake off its dowdy image by offering older members of its in-flight staff early retirement options.

Thulasidas points out that it is unfair to compare the new Air India's staff strength with that of its global rivals. "Many carriers, such as Lufthansa and Singapore Airlines, have outsourced their engineering work or spun-off their engineering divisions, so their engineering and maintenance staff does not figure on their rolls, but they do in our case," he says. The airline is in the process of signing Maintenance, Repair, Overhaul (MRO) facility deals with both Airbus and Boeing. This will allow it to deploy its personnel gainfully. There is also the possibility of the engineering SBU being spun-off from the parent company. The same thing might also happen with ground operations, which is a money-spinner, particularly for Air India.

The problem with the ACEU, however, doesn't bother any of the parties concerned, even though a recent flash strike by ACEU employees crippled Indian operations on May 17. Patel, however, says: "The issues should be resolved soon".

Global Alliance

The merged airline also plans to enter a global airline alliance, Thulasidas confirms. Entering such an alliance will help the carrier get more international traffic as well as allow Air India passengers to redeem frequent flyer points on other international carriers. And though Thulasidas did not mention it, Air India's existing relationship with Lufthansa and the fact that it uses Frankfurt as its European hub points towards the Lufthansa-led Star Alliance.

"The merger will make Air India a much more viable carrier and more attractive for investors," says Kaul. No surprise then that Patel is looking forward to an IPO in 2008, "once the merger procedures are complete". However, Kaul warns: "The merger has to be executed within an 18-month time frame and it should be followed up with an effective restructuring exercise that includes route and fleet planning, because without that, the entire exercise will be pointless."

That warning should be heeded, because competition is already hotting up. Jet Airways plans to start direct Mumbai-New York flights on August 5, but Air India will beat it to the punch with a non-stop service between Mumbai and New York on August 1. If Air India can make this the template of things to follow, things could look up for the Maharaja, whose services as mascot are being retained.

Other Story Links...