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The Patel effect: CAG nails the reasons for Air India's failure

The Patel effect: CAG nails the reasons for Air India's failure

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.

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