What are the Reasons Behind the Downfall of Air India?

When erecting a castle or a building, the building does not matter. But the pillars that hold them up matter the most. Any mistake in the construction of the pillar will simply make the building weak. Similarly, in a business, every decision is like constructing a pillar.

These pillars will support the entire Empire, and small mistakes can lead to its end. The story of Air India follows the same pattern. A few blunders, which were part of its history, fated Air India’s downfall. 

Reasons for Air India's Downfall

Air India was involved in an acquisition spree in the early years. Nearly 111 aircraft were brought for a sum of ₹70,000 crore. The government planned to fuel the acquisition through debts, which would then be met by the revenue earned. But things happened the other way around. They came up with another plan, which was for the airline to merge with Indian Airlines.

The move was aimed at increasing synergy. However, despite numerous efforts to jump out of losses, the airline only fell deeper and deeper into them. Equity of ₹48,212 crores was also introduced to deal with the losses. In the later years, it turned out to be an addition to the already-carrying burden. The government couldn’t meet the annual interest payment obligations. Hence, Air India was forced to see a loss of roughly ₹52000 crores.

Alongside the debts that kept climbing on the balance sheet, Air India and Indian Airlines together showed a debt of ₹2000 crores. It also exhausted the turnaround fund, which was injected to meet the operating costs. Another disastrous move was selling 5 Boeing 777-200s below the estimated price to Etihad, which made Air India incur a loss of ₹671 crores following the deal. In 2012, it was declared that the losses would be met with the help of taxpayer money.

While all this is on one side, the increasing fuel costs have started thinning the profit margin. Employee expenses, insurance, and retirement also contributed to the already increasing costs. Currently, the debit column of Air India holds $7.5 billion (over ₹6200 crore) in its account. As per experts, this will grow in the future if the current situation continues mounting to a further loss of $1.5-2 billion in the next financial year.  All this pushed the government towards the disinvestment plan, a plan which had to be taken well before.

The government planned to sell a 100% stake in Air India. The process started in January this month, and the government was hoping to find a potential buyer by early March.

a. Financial mismanagement: This includes factors like:

• Large-scale debt: Air India made hefty acquisitions of new aircraft without a clear revenue plan to support them. This resulted in a massive debt burden that the airline struggled to repay.
• Inefficient operations: High employee costs, including those for untrained staff, and a lack of focus on cost-effectiveness further hampered profitability.
• Government dependence: Reliance on government bailouts to cover losses instead of implementing long-term financial solutions created a debt cycle.

b. Ill-timed mergers: The merger with Indian Airlines in 2017, while aiming for synergies, faced integration challenges and didn't achieve the desired financial gains.

c. Unplanned fleet expansion: A sudden increase in aircraft orders without a corresponding increase in routes or passenger demand led to underutilized resources.

d. Increased competition: The rise of low-cost carriers and more efficient private airlines offered passengers better prices and services, eroding Air India's market share.

All the above reasons started a chain reaction that led to Air India's demise—but that's not all!

COVID-19’s Impact on Air India

But the entry of the pandemic turned the entire situation upside-down only to block the road further. COVID-19 hit the entire aviation industry, leaving major players like American Airlines, Lufthansa, and all others even remotely connected with the airline industry all hurt and bruised. It also caused a major impact on Air India's disinvestment plan. The Maharaja sustained a $500-600 million (over ₹4,000 crore) loss this quarter. Following this, the CAPA extended the deadline for submission of Expression Of Interest (EOI) till April 30. 

However, in the current scenario, no one will come forward to buy Air India because they are having a hard time dealing with the pandemic. Though Tatas are interested in it, a single bidder will not make the deal a healthy one. Hence, the government has planned to wait for market sentiments to improve. Until then, the airline will be funded with $300-400 million (over ₹2500 crore) to meet its interim operating requirements. 

Though numerous drawbacks can be pointed out, the airline stands tall both in the international and national markets. It holds a market share of 12.3% in the domestic market and 42.8% in the international market, which happens to be a highly attractive factor. Matters relating to the future of disinvestment seem to be unpredictable and obscure at the moment. A clear action plan can be expected from the government only when the Covid-19 tsunami has eased.

Present Troubles

Air India is still facing some troubles even after its privatisation in January 2022. Here's a quick update:

a. Challenges with integrating airlines: Merging Air India with other airlines like Vistara has encountered hurdles, with pilot strikes disrupting operations.

b. Supply chain issues: A shortage of aircraft parts has led to grounded planes, impacting Air India's capacity to meet passenger demand.

c. Negative publicity: Incidents of unruly passengers and questions about crew training have put Air India's image in a negative light.

d. Overall industry recovery: The Indian aviation sector itself is still recovering from the pandemic's impact, facing issues like high fuel costs and competition.

The Bottom Line

Air India's downfall wasn't a quick plunge but a slow descent over many years. A combination of financial mismanagement, questionable decisions, and a dynamic industry landscape ultimately forced the government to take decisive action.

While Air India's future under new ownership remains to be seen, its story serves as a cautionary tale for businesses in any sector. It highlights the importance of sound financial planning, strategic decision-making, and adapting to a competitive environment.

Also read: Air India Sale: Tata Group Bidding Strategically.