Merger ill-timed; harsh decisions needed to improve airline health

While recognising the need for the erstwhile Air India to acquire new aircraft, the Comptroller and Auditor-General criticised the national carrier and the Civil Aviation Ministry for an “unduly delayed acquisition process'' that was “deleterious to the financial health of a commercial airline.''

The CAG report, tabled in Parliament on Thursday, said the acquisition of 111 new aircraft for Air India and Indian Airlines was a “recipe for disaster'' and should have sent alarm signals in the government.

“Interestingly, although the original proposal of Air India for acquisition of 18+10 aircraft took its own time for processing, the revised proposal for acquisition of 18+50 aircraft was processed faster.” The process gained momentum culminating in the signing of the contract in December 2005.

The CAG's latest performance audit report on “Civil Aviation in India'' also called the merger of the two erstwhile state-run carriers “ill-timed,'' and said “the financial case for the merger was not adequately validated prior to the merger.''

The decision to increase the number of aircraft to 68 in AI's acquisition plan “does not withstand audit scrutiny.” The entire acquisition for both airlines was to be funded through debt (to be repaid through revenue generation), except for a relatively small equity infusion of Rs. 325 crore for IA. “This was a recipe for disaster ab initio and should have raised alarm signals in the Ministry, the Public Investment Board and the Planning Commission.”

Terming the move for getting a “large number'' of planes “risky,” the national auditor said the acquisition had “contributed predominantly'' to the AI's massive debt liability of Rs. 38,423 crore as on March 31 last year.

The CAG recommended “a total hands-off approach [by the government] to the management of the airline.''

The 121-page report dwelt at length on the ailing national carrier's losses, fleet acquisition, merger, huge debt burden, delay in joining the global grouping Star Alliance and its financial and operational performance.

The CAG said that the erstwhile AI's initial proposal was made in December 1996 and its examination continued “in fits and starts'' till January 2004 when a plan was made to buy 28 planes. It was revisited and later a decision taken to acquire 68 aircraft.

The revised plan saw “a dramatic increase'' in the number of planes to be purchased and the sequence of events up to November 2004 clearly demonstrated that the pre-merger AI “hastily reworked'' its earlier plan.

Commenting on the “speed'' of the process of acquisition of 68 aircraft, the CAG said that while the first plan took eight years to decide on 28 planes, “between August 2004 and December 2005, the proposals were formulated by Air India, approved by the Board, examined and approved by the Ministry of Civil Aviation, the Planning Commission, the Department of Expenditure, the Public Investment Board, an empowered Group of Ministers and also the Cabinet Committee on Economic Affairs.''

Observing that many assumptions in the revised plan were “flawed,” the report said the negotiation process was “irregular and adversely affected the transparency of the process.''

“No benchmarks” of comparable prices and commercial intelligence were set. Consequently, “the effectiveness and efficacy of negotiations and the reasonableness of the price arrived at are difficult to ascertain.”

The CAG took the Ministry to task for ignoring the concerns over potential difficulties of IA in successfully finding the acquisition process with a positive Net Present Value (NPV). The subsequent Additional Secretary and Financial Advisor, Ministry of Civil Aviation, repeatedly expressed serious reservations about the acquisition proposal but his views “did not cause a rethink on the acquisition process.”

The erstwhile IA had ordered 43 single-aisle aircraft from the European consortium, Airbus Industrie, while AI chose the American major, Boeing, for acquiring 68 aircraft.

Commenting on the health of the merged entity, “Air India,” the CAG said it was in a “crisis situation'' and salary payments and aviation fuel obligations were becoming difficult.

“If the airline has to survive, the management and the employees will have to set personal interests aside and undertake some harsh decisions, till the health of the airline improves.''

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