“We regret to inform that the flight has been delayed. Our airhostess is stuck in traffic and she will get here in fifteen minutes”. This is not a joke from the internet, this was the exact announcement I heard in the Air India flight in 2011, when it had an outstanding debt of 6 billion and loss of 3 billion!
Air India is the government owned and operated airline of India. It is a full service airline that operates domestic and international flights. Being a government owned airline, it is mandated to serve even less profitable routes in the interest of connecting the country and it cannot fire people to boost profitability. Given the slumping airline industry and rising fuel costs, managing revenue and costs are very important, but let’s see how the air India did everything that was wrong!
Inconsistent Pricing: The pricing strategy was not in line with “Full service carrier” positioning. They competed with low cost carriers at times and would shift towards higher prices at other times. While they rolled out updated lounges and cabin interiors to improve the company’s image among customers, they also cut fares drastically and provided two-for-one discounts.
Improper Fleet Management: Half of its debt was due to purchase of 110 large planes, and this purchase happened while most of its planes were too large to be profitable on their particular routes. In 2006 Air India dry-leased four Boeing 777s for a period of five years, only to get delivery of its own aircraft from July 2007 onwards. For two years it kept five Boeing 777s and five Boeing 737s on ground at a loss of $125 Million. Luckily for Air India, Boeing could not meet the delivery schedules for its new B 787 Dreamliners!
Failed Merger:Air India (Government owned International Airline) was merged with Indian Airlines (Government owned Domestic Airline) in 2007. Their combined loss was $100 Mn at that time, and in two years it escalated to $1.1 Bn. The two merged entities were competing with each other for routes and they largely operated as two separate airlines without leveraging any synergies. They did not share airline codes and operated with two reservation systems.
Improper Route Management: Frankfurt was made a hub in 2009, but it was shut down a year later due to high operating costs. They were running 3 leased Boeing 747s to Los Angeles and one leased Boeing 767 to Bangkok which were running at less than 40% load, but just as these routes were gaining popularity,, it was shut down because the aircraft lease had ended! The merged entities were competing internally for domestic routes .
High Agent Commission: Sales Agents were given 3% share on revenue and an additional 9% share on ticket sales. Additional bonuses were given to specific agents in London, which resulted in commissions of $8.5 Million in 1997.
Poor People Management: Air India had a bloated head count of 214 employees per plane while Singapore airlines has 160 and British Airways has 178. Also, inadequate training of existing pilots resulted in hiring expatriate pilots who were paid more than double the salary.Without proper leadership and motivation, Air India suffered poor service and poor on-time performance. The merger didn’t integrate human resources efficiently, and the pilots compared each other’s salary structures and went on a prolonged strike demanding perks. The domestic pilots were asking for equal compensation as international pilots and the international pilots did not want the domestic pilots to be trained on the new Boeing 787 Dreamliner fleet. The pilot strike resulted in a lot of last minute flight cancellations, disillusioned customers and bad press. There was this particular case where the pilot got off the flight in a transit destination and went on strike, leaving the passengers in a state of flux.
Excessive Freebies: It offered up to 24 free tickets each year to each of their 24000+ employees and even their extended families could use it. An employee whistle-blew one such scam, where employees would often buy tickets from external agents at inflated prices and claim reimbursement while the agents would provide employees with perks like travel packages in exchange and earn commission from the sales. Ministers could fly domestic routes for free, and their “Mumbai-Delhi” domestic route was actually found to be “Mumbai-Singapore-Johanessberg-London-Delhi”!
In 2012, the government pumped in $480 Mn to rescue it from spiralling debt. With a leadership change, some measures like better merger integration, control of prices and optimization of route is taking place. In 2013, Air India posted its first positive EBITDA in years.It was dropped from the Star Alliance in 2007, but has been reinstated recently.
In the 1960s, Air India was doing so well that a fledgling carrier from Singapore came and studied it and is today the famed Singapore Airlines. One can only hope that the Maharajah will be restored to the glory of his yesteryears.