Author: R Jagannathan
Publication: Firstpost.com
Date: September 9, 2011
URL: http://www.firstpost.com/business/the-patel-effect-cag-nails-the-reasons-for-air-indias-failure-79414.html
The report of the Comptroller and Auditor
General (CAG) on Air India confirms that Praful Patel presided over its demise
in the six years he was Civil Aviation Minister. The minister is not specifically
named in the report, but there's little doubt that it was his stewardship
that did Air India in.
At last count, Air India had a working capital
loan of Rs 21,200 crore, long-terms loans for aircraft purchases of Rs 22,000
crore and accumulated losses of over Rs 20,320 crore. Losses in 2010-11 are
reported to be in the range of Rs 7,000 crore.
The debt that is killing Air India today was
piled on due to decisions taken under Patel's guidance. The CAG report confirms
that the airline should never have funded its huge aircraft purchase with
debt, and never have merged with Indian Airlines. Both decisions were influenced
by Patel (See earlier Firstpostreport).
Under the NDA, Air India had a modest plan
to buy 18 smaller capacity and 10 medium capacity aircraft. But in November
2004, with Praful Patel at the helm, the airline's board went overboard and
ordered 50 medium and long-range planes worth about $7.2 billion, and 18 more
for Air India charters.
CAG's comment on this decision: "It does
not withstand audit scrutiny." Reason: the bigger aircraft were used
to fly on long-haul overseas routes which turned out to be money losing.
"This sector, on which American/Canadian
airlines were already operating non-stop flights and based on which fact Air
India was made to reconsider its fleet requirement, turned out to be a loss-making
sector right from the date of commencement and continued to be so," the
CAG report said. That's again largely the handiwork of Praful Patel.
On the merger, CAG found little justification
for the government's in-principle approval of the merger. In fact, the aircraft
purchase decision, taken together with the merger, was like a double blow
because both Air India and Indian Airlines had ordered aircraft keeping their
separate requirements in mind.
When they merged, there were just too many
aircraft of the wrong kind for the wrong routes. The benefits of the merger
would have come from route and aircraft optimisation. But Indian Airlines
had made a separate order for 43 Airbus aircraft before the merger.
The CAG says as much. "The potential
benefits for the merger would have been far higher had this (route and aircraft
planning) been undertaken before finalisation of the massive and separate
fleet acquisition exercises undertaken by Air India and Indian Airlines.
That a businessman like Praful Patel could
not see this is unthinkable.
So what are the lessons to be learnt from
the CAG report and the saga of Air India's flight to disaster.
One, ministers should be divested of the task
of running public sector enterprises. Praful Patel should have been making
policies for the sector, not meddling in how Air India is run. Good ministers
may actually end up protecting public sector monopolies, but Patel ended up
ruining Air India. Either way, ministers should be kept at arm's length from
public sector companies. They either do damage to the sector (by bad policy)
or the companies (by bad decisions). This conflict is at the root of public
sector mismanagement.
Two, mergers make no sense unless the economic
rationale is clear. Worldwide, two-thirds of mergers fail to deliver the goods
primarily because of the people factor - making people from two different
companies and cultures work together, not to speak of rationalising and unifying
their salary structures. Air India's merger failed partly because of its failure
to resolve HR issues before the merger.
Three, there is no point throwing good money
after bad in public sector units. In Air India's case, the only flaw in the
CAG report surfaces here. It has suggested an equity infusion to help the
airline reduce its debts and give it a chance to succeed. Air India is currently
seeking an equity infusion of Rs 6,600 crore, but given its scale of losses,
there is no way it can be made viable if ministers and babus are going to
run it.
Praful Patel's tenure has effectively killed
all possibility of reviving the airline.
