Financial Daily from THE HINDU group of publications
Thursday, Jun 30, 2005
Logistics - Insight
Columns - Public Policy Note
Why one large airline makes economic sense
If airline operations were highly profitable with less than half of full capacity utilisation, planes would have been built accordingly. Since that is not the case, one must look for alternatives when flights run grossly under capacity and, of course, none would testify that the breakeven capacity is that low.
On the very day IA was flying from the South Indian city to Singapore, there was an Air India (AI) flight too just a couple of hours later. Synergy between the two airlines would have helped both.
Often, people speak eloquently about AI and IA being public sector enterprises and, hence, doomed by ``incentive incompatibility problem''. That can be resolved provided the biggies in the government decide to do so.
There is no sacred scripture that has been pronounced as yet on the a priori inefficiency of public sector enterprises.
For instance, several PSEs of Singapore, with which India is about to sign a Comprehensive Economic Cooperation Agreement, have been highly profitable. They include Singapore Airlines, with close to 60 per cent ownership by Singapore Government (Tamasek Holdings).
To argue the case for far greater synergy, if not total merger between IA and AI, one must know the ground realities of both.
IA, with its fully-owned subsidiary, Alliance Air, is supposed to be one of the largest regional airline systems with a fleet of 62 aircraft (46 owned and 16 leased). If the 11 Boeing-737s operated by Alliance Air (average age 23.5 years), the two smaller planes (age 20 years) and the 22-year-old A 300s (three of them) are not counted, the relatively top of the line planes add up to 46 A-320s, which include 16 leased. The number of employees (as per the Web site) was put at 18,562, an average of 300 per plane (considering all 62 planes).
IA earned a net profit of Rs 44 crore against a heavy loss of Rs 192 crore the previous year. Great turn around? Not yet, since the loss in April-September 2004 was Rs 66 crore. According the 2004-05 Annual Report of the Ministry of Civil Aviation, it is expected that the full year would end with a small profit of a little less than Rs 9 crore, despite the fact that the projected passenger number for the year was higher almost by a million (6.9 million against 5.9 million in 2003-04). The story is similar in the case of Alliance Air, with more passengers and recording a loss of Rs 34 crore in April-November 2004.
IA will face even more intense competition in the coming years. In addition to Jet Airways, Air Deccan and Air Sahara are already in place, Kingfisher has just come and more are expected.
Air India has a fleet strength of 35 planes, of which 18 are owned (average age 16 years) and 17 leased (average age 13 years). The company has a total staff strength of 15,500 (443 per plane). Air India earned a net profit of Rs 92 crore in 2003-04 compared to a net profit of Rs 134 crore in 2002-2003. In April-September 2004, the airline earned a net profit (including deferred tax benefit) of Rs 8 crore compared to a little over Rs 40 crore in April-September 2003. The substantial reduction in the net profit is despite a 23 per cent rise in passengers carried.
The airline has code share agreements with several international carriers, including Silk Air and Singapore Airlines for flights to and from Singapore. It is indeed a matter of joy for the average taxpayer to read in the Ministry's Annual Report that AI has `code sharing' with IA for Mumbai/Bangalore-Hyderabad/Chennai sectors on two flights per week.
Both IA and AI have some grand plans for the medium-to-long term. Indian Airlines proposes to acquire 43 Airbus (A319/320/321) aircraft over five years to cater to traffic growth as well as to meet the capacity requirement arising from the phase out of the existing fleet of Boeing B737-200 and A 300B2/B4 aircraft. Present top-of-the-line plus new planes would imply a total fleet strength of a little over 70 planes by about 2010.
As for AI, its immediate plans are aimed at renovation of relatively old planes and the long-term ones at acquisition of a sizeable number of new planes. The long-range plan for 2012/13 includes retiring 28 B747 and A310 aircraft and acquisition of 68 new planes, raising the fleet strength from the present 35 to 75. The additional planes comprise 18 B737-800 aircraft for its subsidiary Air Indian Express (operating on a low-cost model) and 50 Medium Capacity Long Range (MCLR) aircraft for use by AI.
The anticipated strength of each is dwarfed in comparison with, for instance, SIA's present strength and its future plans. As on May 1, 2005, SIA operated 90 passenger aircraft with 29 more on order and another 28 on option.
The average age of the fleet is just five years four months. The airline earned an operating profit of S$723 million in 2004-05 and had an employee size of 13,572 (150 employees per plane). SIA, thus, has more planes and less manpower than either IA or AI in absolute and relative terms.
To be simply comparable in strength to SIA, a merger of AI and IA would help. We are talking of a combined fleet strength of over 70 planes right now, without each waiting for five or more years. Eventually, the combined strength would double and be a formidable force to reckon with by any international or national airline.
It is not as if the AI-IA merger has not been thought of. It has been making the rounds in Delhi and Mumbai. In September 2004, it was reported that the Chairman and Managing Director of Air India had made a strong pitch for the merger."We need to have an airline with both domestic and international operations," he is reported to have said. The Managing Director of Alliance Air is also reported to have echoed this view.
It would make strong economic sense to have one large airline, provided it is also possible to rationalise the staff strength in line with international airlines of comparable size. As for customers, they would be delighted to have well-planned connections and, of course, baggage transfers immediately after Customs at the gateway port.
(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at firstname.lastname@example.org)
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