Will Air India finally find its wings – Prabal Basu Roy
The privatization of Air India was one of the most anticipated events on India’s economic calendar, as will be BPCL for a host of reasons that are fundamental to India’s history. To understand the full significance of the Air India divestiture, it is necessary to open the annals of the history of a similar very controversial Lufthansa divestiture in the mid-1990s. This was achieved in a difficult political environment that put Helmut Kohl’s resolve to the test when Germany faced the costs of reunification and its traditionally fierce sense of nationalism for public sector assets that had prevented the privatization of Lufthansa in 1985. The Prime Minister Modi faced similar challenges and Air India’s divestment now provides a definitive glimpse of the government’s will to make it a success.
The ultimate success of any major policy relies primarily on evaluating its intention, execution, and overall implications across a broad set of parameters. Privatization has been accepted by governments in advanced and developing countries for a wide variety of reasons. Classical theories of privatization focus on the role of ideological views, economic theory, fiscal constraints, and the forces of globalization. An in-depth study by Lufthansa indicates that it was neither ideological preferences (unlike the UK led by conservatism of Thatcher) nor the classic economic theory of principal-agency costs that led to its privatization. Rather, it was a combination of a budget crisis – precipitated by the massive costs of unification with East Germany after the fall of the Berlin Wall – and fierce competition in the global transport industry. airline that prompted the political establishment to view the privatization of Lufthansa as the last desperate policy. option.
In my opinion, the divestiture of Air India is for precisely the same reasons. The Covid pandemic has devastated our macroeconomic situation and the federal balance sheet. Air India’s business model, after the disastrous decision in 2011 to merge it with Indian Airlines, was simply unsustainable and it was the Modi government’s only viable option to unravel the mess it had inherited. His right-wing ideological stance has no major role in this, although in the absence of any credible center-left opposition, the decision is much simpler politically this time around.
There are, however, two major differences in approach which were intrinsic to Lufthansa’s ultimate success, and which should also be the overarching goal of the Air India divestiture: to make Air India a financially viable entity and not just l ‘somehow remove government books.
First, Lufthansa’s divestment plan by its chairman, Jgrden Weber, was a carefully crafted strategy that had three distinct strands: rationalization, privatization and reorganization, with each phase depending on the success of the previous phase. Privatization was conceptualized on a high share price which was based on its financial health before privatization – and therefore the need for extensive rationalization before privatization – and finally on reorganization after successful privatization to ensure its competitiveness. continues in the global airline industry, and therefore its long-term feasibility as a business entity identified with German national pride.
With rationalization being the first step required, very difficult downsizing decisions, salary cuts, route consolidations, cost reductions, revenue maximization and new international alliances with profitable airlines. The remarkable feature of the highly successful rationalization program is that it was carried out within the framework of the constrained German model of industrial relations and the social contract between management and labor, as anchored in their basic philosophical framework of consensual negotiation for corporate decision-making through works councils.
Air India has not benefited from any such fundamental intervention by the government or its designated management. The unions and their concerns about employee benefits and reconsideration pay have yet to be formalized in the public domain. Involving unions, including pilots, in this process is a key success factor as it is imperative to demonstrate that privatization would not lead to a change in the balance of power between management and workers, but should be seen as a necessary compromise resulting from reciprocity of interests to save Air India from the bankruptcy crisis due to its uncompetitive business model. Measures such as wage freezes, rationalization of overtime pay, longer working hours, early retirement and downsizing are contentious issues that ideally should have been addressed before the privatization attempt.
Second, it is relevant to note that Lufthansa took a series of fundamental steps before privatization (apart from those related to labor) as part of its downsizing exercise. These included a reduction in capital spending, the sale of its entire Airbus fleet and its Boeing 737 fleet, reducing the age of the remaining fleet to just 5.4 years to facilitate huge gains. financial thanks to energy efficiency and the de-inventorying of spare parts. They also sold their stakes in non-core assets like the Kempinski and Penta hotel chains, sold office space and leased their head office. On the income maximization side, new strategic alliances have been forged to open access to new lucrative markets in Asia and North America, access to profitable but protected domestic markets, pooling of resources to spread the costs and risks of new investments, the consolidation of unprofitable routes, the introduction of low-cost services to national destinations, the restructuring of first-class offerings to favor an expanded business class, etc. privatization offer.
The main factors responsible for Air India’s financial crisis are well known: globally competitive air traffic with much lower cost structures, excessive investment in assets, inadequate asset sweating, large airline structure conventional, the abandonment of lucrative international routes in the Middle East to specific private operators at the start of the last decade, unprofitable domestic routes, bloated staff, low productivity, etc. The financially paradoxical position that Air India faces is its need for external capital to degrade its balance sheet in the absence of significant measures to restructure the company to make it fundamentally competitive. This is the main reason why, despite a world endowed with massive liquidity and an abundance of capital to invest, Air India’s divestment has not attracted any interest from a single international player. Tata’s offer must therefore be seen in this context and one can only wonder if it is not yet a more “emotional” and value-destroying acquisition of the Tata like Corus or JLR!
The fact that Air India continues to have a massive aeropolitical network, including valuable landing rights, bilateral agreements and alliances, is a fact recognized by its competitors. However, despite the giant strides made by India to go global since the mid-1990s, Air India missed the opportunity to secure its rightful share as the national carrier due to poor decision-making in management matter coupled with a lethargic and irresponsible bureaucratic governance structure centrally controlled by babus in Delhi. This is not, however, peculiar to India, as it is well established that state control over industry distorts performance incentives, and public sector managers present the classic moral hazard problem of to be protected from the economic consequences of deficient results, and the well-known principle – the problem of the agent of not being accountable to its shareholders (that is to say, the taxpaying citizens).
Air traffic has exploded since 1995 around the world and companies like Emirates, Qatar Airways and Ethihad have expanded their fleets from two and zero respectively to 250 plus and 100 at last count. Air India, including domestic airlines, is below 125 even today, with around 50 for the 40 international destinations it serves. Therefore, as with Lufthansa, if all participants cooperate, the value creation possible by revamping Air India’s business model is immense in both scale and scope.
India has probably finally recognized that the original political justifications for the nationalization of Air India and the need for strict state control – being strategically crucial for security and industrial policy considerations – are outdated concepts that the world has held. recognized in the early 1980s with the advent of Thatcher, and the steadily shrinking public sector around the world since then, in a concerted attempt to reduce the role of the state in the economy.
For the airline industry, the defining moment, which precipitated changes in the global marketplace and eradicated justifications for state involvement in the airline industry, was the deregulation of the US sky in 1978. which forced the United Kingdom then France to react after 1985, and finally Germany in 1995, with regard to the privatization of its national carriers.
How the divestment unfolds will determine the ultimate success of whether Air India thrives and regains its prominent place as it did as the national carrier. It will also establish that privatization can never be an end in itself for Air India, but part of an ongoing process to restore its competitiveness in the global airline industry. From a broader perspective, the government’s divestment program, and in particular privatization, will remain the most noticeable and enduring statement of its intention to redraw the boundaries between state and economy and to begin a sustainable process of fundamental change in methodology for efficient allocation of public capital and accountability to its ultimate owners, ie. the Indian citizen.
The privatization of Air India will certainly impact Air India, the airline industry and the successful bidder, but will also be a beacon for times to come for our public sector economy!
The Modi government can be blamed for many problems, but its skillful management in unraveling some of Gordian’s historic knots in the economy must be acknowledged. After telecoms, coal and electricity, now is the time to redefine the role of the public sector in general, and the privatization of Air India sends a powerful message if treated as well and as thoroughly as Lufthansa.
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