Revival of Air India – Prepared in the year 2008

Air India was a great brand and whoever travelled abroad a few years back had an

excellent experience in travelling by Air India. The Maharaja symbol, represented the

rich Indian culture. The liberalization of the Airline sector coupled with lowered

productivity of the assets led to the present Economic Condition of Air India.

The financial condition is very bad today but it is not at a level that it would be difficult to

turn around the company. There are many hidden assets the company has which could

be capitalized to restructure the company. Since it is owned by government, reserving a

few privileges being the national carrier could be created for Air India.

The company requires restructuring of the Businesses, Operations, Systems and

Procedures and Capital Structure. There is a greater need to follow a asset light strategy

and capitalizing on the hidden assets going forward.

The vision can be set as “To become a World Class Airline enterprise and be ranked

among the Top 10 Airlines by 2015”..

The Mission could be , ’ To operate in All businesses related to Air Transportation and

establish operations across the world.” By addressing participating in all the related

businesses , the asset utilization could go up and the fixed cost of operation per

Passenger KM could be brought down substantially.

They could set an objective to become cash positive within a year and book break even

in two years and a profitable Airline in 5 years.

The opportunities for this business are :

• Robust Indian Economic Growth and increasing liberalisation of the sector

• Increasing purchasing power of Indian customers.

• Government’s proactive approach to fast growth of Air Transportation sector

• • Existence of underserved , unserved markets in India.

• Growing international Trade

• Likely opening of Military Airports for commercial aviation

• Liberalisation of international routes through bilateral agreements.

• Growing Cargo business

• Scope for outsourcing non core operations and employing people on contract going

forward.

The Threats for this business are :

• Faster growth of other Airlines

• Threat of new entrants and higher focus on India by foreign airlines.

• Shortage of trained pilots

• High Ticket prices

• Oil price at high levels

• Intense competition forcing price reductions

• Shortage of Airports which will support the growth targets

The Strengths of Air India are :

• Support from the Government

• Lot of hidden assets.

• Presence in all the major Segments of Airline operations.

• Large Fleet

• Availability of Large supporting Infrastructure

• A very wide network

The weaknesses of Air India are :

• Losing market share.

• Poor financial position

• Sub optimal Load factors.

• Very low cargo load factor

• Lower level of productivity across the organisation. Low Employee productivity.

• Large number of non performing assets.

• High overheads

• Less aggressive approach to development of the business compared to the private

carriers.

• Slow response to market developments

• Employee attrition replaced at high cost

The possible strategies could be :

• Expand by acquiring large number of aircrafts by using innovative financing strategies.

• Give lot of emphasis to reduction of costs across the enterprise.

• Improve the internal processes to improve the profitability.

• Adopt the best practices in the Industry adopted by various players across the world.

• Use leasing as a major strategy to achieve the fast expansion.

• Capitalise the non performing assets.

• Explore the scope for JV in all its operations ( Business – wise, scope for Joint

ventures).

• Explore the scope for outsourcing in all possible areas.

• Explore the scope for sharing the ground resources with other players.

• As far as possible ensure only variable costs are added to the system.

• Develop a restructuring plan with three phases. The first phase should focus on

Operational turnaround in performance. The second phase should focus on structural

turn around and in the final phase which is a strategic turn around which should be

complete within 5 years should result in Improving the market position and establishing

the best cost management programme in the industry.

The Change Management could be implemented as following :

• The present need is Change management.

• Apart from expansion initiatives in the past and merger of the companies , no major

initiatives were undertaken to change the way the Airline functions, partly due to the

work culture.

• But by adopting innovative strategies and making the employees partners in progress it

should be possible to achieve the required change.

• Restructuring is the need of the hour and there is a requirement for Organisation

Restructuring, Financial Restructuring, Systems and Procedures restructuring and

making the organisational culture more conducive for growth.

• To achieve this intervention is required from external experts from Finance, HR and

Organisational Development and IT systems.

• Once the Strategy of fast expansion is endorsed by the government, then all the above

change initiatives could be in place to achieve the desired objectives.

Funding Strategies to be followed :

• Stock Markets are good now and the Airline companies attract good premiums. Without

delay go for the IPO.

• Use more off balance sheet financing for the expansion.

• Have an optimal debt equity ratio

• Methods of leasing and securitization of the fixed assets and receivables to be done in

a big way

• Generate funds through New JV’s for expansion.

• Request for one time support from Government and mainly rely of internal funding and

self generation of funds.

• In three years, become self reliant for financial resources.

• Use Equipment supplier finance in a big way.

• Explore the scope for Aircraft suppliers to take a stake in the Airline( 5% to each

supplier of the Aircraft ).

Product / Services Strategies

Be present in the following businesses including any other business which is adjacent to

these businesses.

• Full Service Carrier

• Value Carrier ( dedicate a few aircrafts for this concept)

• LCC

• Cargo services

• Technical Services

• Customer Services

• Ground Support

• Catering

• Warehousing Services

• Aircraft/Airport and E – retailing.

• Tours and Travel Services and \

• Any other adjacent businesses to be identified in future.

Distribution Strategy

• Use all the channels available for marketing and selling .

• Target a sale of more than 80% through internet and E-commerce going forward in

future.

• Collaborate with others to create kiosks for selling the tickets.

• Create long term alliances with the Top 10 tour operators in the world and the top 10

tour operators in India.

• Government should make it mandatory for all the Central , State Government

Employees and PSU employees to use only NACIL for official purpose.

Post Merger Integration

There are still issues relating to Merger of both the Airlines . This was mainly on account

of HR issues.

• First phase should be to achieve the financial integration and balance sheet

consolidation. Bring in uniformity in accounting and reporting systems across the

divisions.

• In the Second phase, merge all the supporting and infrastructural facilities.

• Keep the Brands and services for International, Domestic and LCC separate in terms of

marketing and promotion.

• Keep the old labour agreements with the Unions of erstwhile entities intact and in IT

have different systems to support the complexity of payroll. This has happened in a big

way in a Private sector bank and the for the same position in the company , they have

four different pay scales and performance systems which are not made very explicit.

• Use the Size of operations to negotiate better deals with the suppliers of Aircraft and

other equipments.

• Clearly define the SBU’s and unambiguous targets on performance to be set for SBU

through very effective Budgeting and performance monitoring systems.

• Achieve the merger on HR /Employee issues in a gradual manner and this will require

efforts which should go in line with the Change Management required across the

enterprise. This aspect will take at least three years to achieve.

• A phased approach with different times frames have to drawn up for aspects relating

Finance, Support Services, Product, Branding, HR, IT Systems, reporting systems and

Marketing.

Asset Utilisation

• The use of Aircrafts require lot of improvement from the present levels and there is a

scope for increasing the average use of these aircrafts by at least 15% from the present

levels.

• An objective should be set to achieve usage of at least 12 hrs per aircraft per day.

• Achieve a capacity utilisation of 85% of all the infrastructure and supporting facilities.

This could be achieved by sharing some of these facilities with the other airlines.

• Explore the scope of leasing the extra free land , leased land and identify scope for

improving the revenue through this route.

• The company has lot of hidden resources including Realty , which could be valued at

much higher rates than what was shown in the balance sheet.

• An exercise to be conducted on all the non performing assets and action plans to be

drawn up for improving the utilisation of these assets or disposal of these assets which

would help in releasing resources for growth.

• The company owns properties in Premium places and the scope for enhancing the

revenue from these properties could be explored including Sale/Lease/Joint

Development and extracting higher revenue from these properties

Cost Control

• Reduce the number of types of Aircraft in the system which would help to save on

Maintenance costs.

• Wherever possible convert the fixed costs into variable costs

• Change the quality of paper in which the tickets are printed.

• Identify the non value adding variable expenses and control them very effectively.

• Cut down the speed of Planes if the availability of landing space for the aircraft is likely

to be delayed from the scheduled time.

• Develop the crew scheduling in such a way that layovers and night halts are minimized

to a great extent.

• Reduce the maintenance costs.

• Reduce the number of lay overs by strengthening the route planning and crew

planning.

• Share the infrastructure with other airlines and earn revenue from sharing of

infrastructure.

Fuel Management Strategies

• High fuel costs are increasing the Break even levels for the Airlines.

• Now they constitute 40% of an airlines’ operating cost.

• ATF in India is costlier by 60 – 70%.

• Fill the fuel where the price of fuel is very low

• Enter into long term contracts for supply with a provision for lowering the price indexed

to the Price of the ATF in the world market.

• Instead of using the Jet engine use on – board diesel power generation unit to rev up

the aircraft while passenger board and embark.

• Monitor the fuel consumption flight wise to ensure

• Fuel Hedging strategies – Like in other countries request the government to allow the

hedging of fuel requirements, which would help to reduce the cost of the fuel.

Performance Reporting system

• Develop a very robust Operating and Financial Reporting system across the enterprise

and for each SBU and division.

• Prepare Perspective Plans, Strategic Plans and Annual and Monthly Budgets.

• Introduce the concept of Balanced Score card across the enterprise.

• Prepare monthly Financial reports and forward it to the Ministry for their review. Have a

review with the Ministry every month on the performance.

• Report Variances with the course corrections and action plans required .

• Track the daily performance of each route, flight, aircraft and the major support and

infrastructure facility.

• Consolidate this on a monthly basis.

• Continuous performance review should be in place to achieve the fast response.

• As soon as possible, bring the above system in synch with the ERP to be deployed

across the enterprise.

HR Strategies

• Increase the level of operations without substantially increasing the employee head

count.

• Bring down the number of employees per aircraft to 120 and this could be achieved

over a period of time.

• Tie up with Aircraft manufacturers for training the Pilots and supply of pilots when a

new aircraft is delivered. When a new aircraft is delivered the Manufacturer can provide

4 trained pilots for each Air craft supplied.

• • Introduce the Balanced score card system to measure the performance of

employees.

• Introduce the variable pay system and the variable pay could go up to 40% of

employees salary. Move towards the concept of cost to the company.

• Retrain the staff in operating departments to handle functions relating to Customer

service.

• Help the surplus manpower to get placed with other emerging Airlines in the country

through out placement services.

Union Management

• Create a committee for all the Unions where each Union president will become a

member.

• In the beginning, conduct a brain storming session with all the Unions to identify how to

make the company more competitive and survive in the highly competitive environment.

• Request the Union to come with ideas on how to improve the productivity of all the

resources within the company which would increase the company’s ability to increase

the wage levels of all employees.

• Future wage agreements to be signed after based on productivity agreements with the

Unions. Productivity to be benchmarked with other leading airlines in the world.

Training/Retraining Strategy

• Identify 10 leading institutes in India and abroad for training the personnel.

• Enter into Strategic Alliances with leading Airline training organisations in the world.

• Develop strategic alliance for training with the equipment suppliers and make it as a

part of the pacakage for purchase.

• Co-operate with non competing Airlines like South West to design enterprise wide

training programme for staff and prepare a master training programme covering from

Senior Management level to Junior Management level.

IT and Systems Strategy

• Install the best systems in the world in the Airline Industry for Enterprise Management,

Yield Management, CRM and other related aspects.

• Add the modules relating to Daily and Weekly performance reporting into the system.

• Pricing and Revenue Management system requires strengthening.

• HR Management system to be brought in alignment with the present challenges

including merger.

• Flight utilisation is very poor and Flight Operation system requires strengthening.

• IP based strategies to be based in a big way

• Infrastructure has to be reviewed for required upgrades to meet the growth targets.

• Set objectives to improve Flight Schedule, Flight Assignment and crew planning

Restructuring implementation :

• Introduce the Balanced score card across the organisation.

• Engage a consultant to introduce this system

• A model Balanced Score card adopted in South West one of the best Airlines is given

here.

• Bench marking to be done with the leading airlines in the world including South West,

Singapore, etc.

Closely monitor the following Key Performance Indicators :

• Aircraft Utilisation – Block hours per day / annum

• Cabin Factor

• ASK /RPK

• Passenger Yield

• Freight Load Factor

• AFTK/RFTK

• Cargo Yield

• Average Employee / Aircraft

• Revenue per Aircraft / Employee

• Fuel cost per ASK and FTK or FTK

• Cost Per Passenger KM / FTK

• Operating profit margin

• Actual and Break Even Load factors

• Return on Investment

• Return on Equity

Organisation Structure :

• Create a Corporate Centre with Central functions like Finance, HR, Safety and Strategy

(including fleet net work and Brand)

• Create Airline Business Units ( SBU’s), Domestic Airline, Cargo Airline, International

Airline and LCC. Each business will have Divisional CEO and Head of Finance and HR.

• Have profit centres for Catering, Ground Handling,MRO and Shared services

• Have SBU’s for Rental Cars, Hotels ,Resorts , Tourism, Travel Services and

Merchandising of products in the Aircraft, Airport and Web site.

• Create a subsidiary for exploiting the Real Estates of NACIL and the associated

companies.

• Provide a big focus to customer service which will be a differentiator for the company

going forward.

Other Strategies

• Create a lead in forming Asian Airlines Association for protecting the interest of the

Asian airlines, since going forward the Asian markets are going to provide the

momentum to the growth of this industry.

• Take the support of Government in adding capacity which would help to maintain the

present market share in the highly competitive market.

• Take the support of government in protecting the routes, sectors which are providing

the profits today. The top 10 profit making international routes could be reserved for

NACIL for the next three years till the company attains self sufficiency.

• Work closely in coordination with the government to promote the Aviation Sector and

Tourism Industry of India which will provide the momentum to the Indian Economic

Growth.

The key to success of all the above strategies will be treat the employees as partners in

implementing this exercise and protecting the interests of the employees.