Air India Project

A Report on Strategic management in Air India

Submitted by

J.S.Jenkin (52)

Neeta kavalil(76)

Paromita (85)

C.P. Raj mohan (98)

Mozzam (99)

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Contents

Introduction ............................................................................................................................................. 4

Chapter 2: External Analysis ................................................................................................................... 4

Industry Overview ............................................................................................................................... 4

Porter‟s Five Forces Model .................................................................................................................. 5

Chapter 3: Internal Analysis .................................................................................................................... 6

SWOT Analysis................................................................................................................................... 6

Air India‟s Competitive Advantage ...................................................................................................... 6

Chapter 4: Functional Level Strategy ....................................................................................................... 7

Economies of Scale ............................................................................................................................. 7

Learning Effects .................................................................................................................................. 7

Marketing Strategy .............................................................................................................................. 7

Operational Strategies .......................................................................................................................... 8

HR Issues ............................................................................................................................................ 8

Financial Issues ................................................................................................................................... 9

Chapter 5: Business-Level Strategy ......................................................................................................... 9

Generic Business-Level Strategy: Cost leadership with a bit of differentiation ..................................... 9

Disadvantages of cost leadership: Price war ....................................................................................... 10

Strategic Group Analysis ................................................................................................................... 11

Chapter 6: Industry Environment ........................................................................................................... 11

Industry Stage.................................................................................................................................... 11

Applying game theory ....................................................................................................................... 13

Chapter 8: Strategy in the Global Environment ...................................................................................... 14

Air India‟s Global Strategy ................................................................................................................ 14

Basic Entry Decisions to overseas market .......................................................................................... 14

Strategic Alliances ............................................................................................................................. 15

Chapter 9: Corporate Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing . 17

Vertical Integration ............................................................................................................................ 17

Alternatives to Vertical Integration: Cooperative Relationships .......................................................... 18

Strategic Outsourcing ........................................................................................................................ 18

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Chapter 10: Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures Expanding

Beyond a Single Industry ....................................................................................................................... 19

Increasing Profitability through Diversification .................................................................................. 20

Entry Strategy.................................................................................................................................... 20

Restructuring ..................................................................................................................................... 21

Chapter 11: Corporate Performance, Governance, and Business Ethics .................................................. 21

Agency Theory .................................................................................................................................. 21

Governance Mechanisms ................................................................................................................... 22

Board of directors .......................................................................................................................... 22

Financial statement and Auditor: ................................................................................................... 24

Ethics and Strategy ............................................................................................................................ 24

Lethargic work environment: ......................................................................................................... 24

Unethical business practices:.......................................................................................................... 25

Conclusion ............................................................................................................................................. 26

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Introduction

In the following analysis of Air India‟s business strategies, an attempt has been made to critically

examine the principles followed by Air India in devising its policies and the usefulness of those strategies

in resolving Air India‟s issues and helping its restructuring process. These strategies are a part of Air

India‟s Turn Around Project (TAP) and Financial Restructuring Plan (FRP).

Chapter 2: External Analysis

Industry Overview The Indian aviation sector consists of many players which are divided into Low-cost and Full-service

carriers. Jet Airways, Kingfisher, Air India are some examples of Full-service carriers and IndiGo,

Spicejet, GoAir are some of the leaders in Low-cost carriers segment.

Recently the Indian Airline Industry is witnessing a series of disastrous events which are a cause for the

significant loss in profit and reputation of the individual airlines especially Kingfisher which is heading

towards bankruptcy. It is a very big challenge for the low-cost carriers to survive and manage their

profitability amid increasing fuel prices and high taxes.

The only way for airline companies to defeat the competitors and stay profitable is to provide better

service than that of their competitors. Customers evaluate their experience of the flight based on the

variety of services delivered by the carrier. Currently low-cost carriers are offering variety of services to

attract new customers and retain the existing ones. It is a race and the one who provides services superior

to those of the others will always stay ahead and sustain in this hyper-competitive environment.

Air India is desperately trying to gain its lost market share by lowering down its fares and offering better

service to its customer. It is trying to attract customers by offering its new value added services like cheap

up gradation to first class and business class.

The market share of Indian carriers as on October 2011 in the domestic aviation market is shown below:

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Porter’s Five Forces Model

Bargaining power of Suppliers

• Bargaining power of suppliers is high

• Only two established suppliers of aircrafts are Boeing and Airbus

• Less number of aviation turbine fuel (ATF) providers

Bargaining power of Buyers

• Bargaining power of buyers is high

• Customers can easily switch between airlines

• High disposable income, Emerging economy and high price sensitivity

• Substitutes like rail and road transport are used if air fares are too high

Threat of New Entrants

• Threat of new entrants is low

• Initial investment required is huge and profits can only be achieved by providing excellent service at low cost

• All the existing companies have build their brand equity

• Poor infrastructure and unfavourable government regualtions

Substitutes

• Threat of substitutes is medium

• Road and Rail transport are alternatives

• Although time required by air is far less than the time required to reach the destination by rail or road

Industry Rivalry

The industry is highly competitive

Many emerging low cost airlines

There is always a price war in the industry and customers shift to the airline which offers service at the

cheapest cost

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Chapter 3: Internal Analysis

SWOT Analysis

Air India’s Competitive Advantage The only competitive advantage that Air India currently has over its competitors is the strong

government support. It is neither efficient in its operations nor does it provide services better than its

competitors to its customers.

Strengths

• Strong backing by the government

• India carrier with the largest number of fleet and most of them providing in-flight entertainment

• Oldest and has developed a strong brand over a period of time

• It has the first right of refusal for any new route that is initiated by the government

Weaknesses

• Growing labour problems

• Weak Management resulting in huge losses

• Excess staff

• Inefficient operations resulting in flight delays

• Tarnished brand image

Opportunities

• India airline industry is growing at a CAGR of 20%

• Customers are getting wealthier, tend to be less price-conscious and prefer to choose quality service over cost.

• Approval of FDI by foreign airlines in the domestic carriers

• The number of foreign visitors and investors to India is increasing rapidly.

Threats

• Air India faces aggressive competition from world leading airlines and price wars triggered by domestic players.

• The Indian Railway Ministry has improved the speed and services in their medium/long distant routes, attracting passengers away from air service

• Rising ATF (Airline turbine fuel) and labour cost.

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Chapter 4: Functional Level Strategy

Economies of Scale

In case of Air India, economies of scale can be utilized by targeting maximum occupation of in-flight

seating. The two prime requirements for this are low fares and on-time departures.

Air India recently reduced its fares to undercut competition and regain market share that it possessed

prior to its employee strikes in May. However, after attaining its 15-16% market share target (this was its

share prior to the May 2011 employee strike), it raised its fares so that competitors could price their

tickets rationally. (Ref: http://www.valuenotes.com/Investment-Strategy/Air-India-toes-the-line-by-

hiking-fares/174608/16600003.00/C)

Air India is also constantly working towards improving its on-time performance (OTP) which is being

monitored at the highest level. The executive directors of the region have been made responsible for

monitoring, analysing the causes of the delay and taking adequate measures to resolve the same. (Ref:

http://home.airindia.in/SBCMS/Webpages/minister_appreciates_Air_India%E2%80%99s_performance.

aspx)

Learning Effects

Air India has been suffering from severe labour issues for quite some time now. There are frequent news

reports about worker strikes and the resignation of pilots due to unsettled dues. Thus, due to high

attrition, Air India fails to reap the benefits from its learning effects in spite of being the oldest airlines

service provider in the country. (Ref: http://timesofindia.indiatimes.com/topic/Air-India/news ;

http://timesofindia.indiatimes.com/business/india-business/Air-India-pilots-report-sick-10-international-

flights-cancelled/articleshow/10559144.cms)

Marketing Strategy

Air India has come up with innovative marketing strategies like „Shagun Vouchers‟ as a gift for the

wedding season, Silver and Platinum pass scheme, Air Bazaar etc. It also has its loyalty program named

Flying Returns which is India‟s first loyalty program. It has Uniconnect as its telecom partner to promote

its offers. Air India has reduced fares. It has ordered 27 Dreamliners from Boeing. It has started new

services between Delhi-Vijaywada, Delhi- Port Blair. Air India has also started additional flights to Goa

through its wholly owned subsidiary Alliance Air to take care of the peak season demand between Dec

and Jan 2011-2012. Thus it has been adopting competitive marketing strategies based on all four

marketing mixes- promotion, price, product and place. (Ref:

http://home.airindia.in/SBCMS/Webpages/air_india-additional_flight_goa.aspx ;

http://home.airindia.in/SBCMS/Webpages/Latest-news.aspx?MID=320 ; )

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Operational Strategies

An Integrated Operations Control Centre (IOCC) has been launched at T3, Delhi, using Sabre Solutions.

A computerized crew rostering system will also be put in place by June 2012. The IOCC has resulted in

real time monitoring and reduction of delays and turn-around time. Simultaneously, a Hub Control

Centre (HCC) for monitoring and control of all arrivals and departures has been established at T3, Delhi.

For the convenience of the international travelers, Air India will be introducing a new Hub & Spoke

flight on the Chennai- Delhi sector in the new schedule to enable them to connect international flights

departing from the new T3 terminal of the Delhi airport. Air India is also planning to lease out excess

capacity of two 747-400 aircraft and some 777-200 LR aircraft (at a future date), after the induction of

B787.

The above steps have resulted in a decrease of the operational losses during FY 2011-12 from Rs 507

crore in April 2011 to Rs 266 in August 2011, showing an improvement in the operational performance.

The top management has been directly involved in improving the quality of service by ensuring

punctuality and on-time performance. Air India has also launched a training program for its pilots to

learn to operate the Boeing Dreamliners. Thus Quality as reliability as well as excellence (to bring in

differentiation and increase profitability) are being ensured. Also, in keeping with Deming‟s strategies,

Quality is being made everyone‟s responsibility starting from the top management to the ground crew

and security agents.

However, there are also occasional safety issues such as the Mangalore Air Crash incident and other

operational issues such as frequent delays, which have taken place in the past. All these have raised

serious doubts about the reliability of Air India‟s service in the minds of its customers. There are also

recent issues emerging out of Air India‟s inability to offer service on several foreign routes and also its

unwillingness to let them be offered to private players by the govt. The private players have been

requesting the govt. to grant them these routes so that the Indian Airlines industry does not lose out to

foreign players. Thus Air India needs to cover a long distance before it is able to restore customer loyalty

and faith in its operations.

(Ref: http://home.airindia.in/SBCMS/Webpages/Latest-news.aspx?MID=320)

HR Issues

Air India has been hiring in recent times for its crew management and ground staff and security agents. It

has also arranged for the training of its pilots for the new Boeing Dreamliners. However, there are several

HR issues plaguing Air India. Pilots often complain about non-settlement of dues due to which there are

frequent strikes and resignations. There are also small groups of employees within Air India which do not

have professional relations with other employee groups within the organisation. Poor inter-employee

relations often come in the way of delivering efficient and smooth service. On a particular occasion, an

Air India flight got delayed indefinitely due to the co-pilot‟s refusal to fly with the commander. Thus

there is a poor employee and cultural integration. Even after the merger of Air India and Indian Airlines,

employees are still treated as belonging to different companies. Such issues reflect poorly on the

organization‟s reputation.

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(Ref: http://articles.timesofindia.indiatimes.com/2011-11-02/thiruvananthapuram/30350100_1_tiger-

airways-sats-air-india-station; http://timesofindia.indiatimes.com/home/sunday-toi/special-

report/Cockfights-in-the-cockpit/articleshow/10537800.cms;

http://timesofindia.indiatimes.com/india/Air-India-pilots-warn-of-another-

strike/articleshow/10843808.cms;)

Financial Issues

Air India has huge financial burdens. Recently the government had freezed its bank account due to non-

payment of dues, then on a part payment, the account was unfreezed. Also, it has procured huge financial

assistance from the government for its Financial Restructuring Plan (FRP) and its order of 27 Boeing

Dreamliners.

Chapter 5: Business-Level Strategy

Generic Business-Level Strategy: Cost leadership with a bit of differentiation

Air India targets price conscious travelers who do not care much about luxury.

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In a respite for private airlines, state-run Air India Ltd has raised airfares to destinations within the

country over the past one month, even after the rise Air India offers lower costs than most Airlines

in the Industry.

Price hike means next-day Air India tickets, which were going for Rs. 3,600 for Delhi-Mumbai, are

now sold for Rs. 6,694 or Rs. 152 cheaper, than budget carrier Go Air‟s Rs. 6,542, according to data

from travel portal IxiGo.com. Jet is priced Rs. 189 higher than Air India at Rs. 6,542.

While Air India may have increased its airfares, the carrier still has the advantage of offering free

food, in-flight entertainment systems and better seats while being close to the airfare of budget

airlines that don‟t offer such facilities, said the person familiar with the development.

Air India is struck in the middle unable to decide the direction of movement in the competitive

positioning, For Delhi-Bangalore, Spice Jet was priced at Rs. 7,155, Air India at Rs. 7,355, and Jet

at Rs. 9,005.Flights to Chennai from Delhi were priced at Rs. 7,143 on Indigo and Rs. 7,355 on Air

India, or about Rs. 212 more.

Disadvantages of cost leadership: Price war

Air India is compounding a price war that has caused industry wide losses and prompted Kingfisher

Airlines to cut flights. Air India is discounting fares and that‟s absolutely a problem.

Ideally, fares should go up when oil-import costs go up. That‟s not happening and that‟s why

airlines are in this situation. Jet and Kingfisher, the country‟s two largest listed carriers, have lost a

combined Rs 63 billion in three years as low fares and rising fuel prices offset surging passenger

numbers. Air India has also been unprofitable since a 2007 merger, causing it to win Rs 32 billion of

state bailouts and seek another Rs 65 billion before the end of March.

Its low prices are also destabilizing for the entire industry. Air India‟s prices are determined by

market forces.

Every other airline in India also needs to file fares with the industry regulator. The regulator isn‟t

asking airlines to stop offering low fares. The regulator will step in only if there is a huge aberration.

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Strategic Group Analysis

Air India comes in the low cost but offers moderate amount of features like food, entertainment etc. It is

difficult to make profit staying in the position indicated.

Chapter 6: Industry Environment

Industry Stage

The aviation Industry has been growing over past few months after witnessing some of the worst times, thanks to increased taxes, high fuel prices, Union fights and standoffs etc. The aviation Industry has also

been in news for all the wrongs reasons.

But, things are surely getting better with Aviation Industry registering close to 50% growth year on year

as well as month on month.

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According to latest report released by Aviation ministry, there has been a sustained growth in both the

capacity and demand which continued even in the month of January, 2011.

Seat Factor

On back of festive peak season, December saw tremendous growth in seat factor ratio, with Indigo

registering maximum seat factor of 93.3%. However, Jan seat factors dipped on lower demand.

Flight Cancellations

Indigo scored very well in this area as well which registered lowest cancellation ratio of just 0.5 percent. Spice jet (0.9%) and Jet Airways (1.3%) also witnessed quite less cancellations. On other hand, JetLite

was by far the worst performer with 3.5 percent flight cancellations.

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Applying game theory

Applying game theory to Air India‟s strategy we find that Air India is creating a grave for itself and also other low budget players in the Industry. When Air India lowers the price, the other players also lower

their prices because they have no way out. Finally all the low budget airlines end up suffering.

India‟s three publicly traded airlines Jet Airways (India) Ltd, Kingfisher Airlines Ltd and SpiceJet Ltd

lost a combined Rs. 1,500 crore in the quarter ended 30 September owing to high fuel costs, the

depreciating rupee and competitive pricing.

Air India‟s strategy is shown in red in the figure below.

Profit profit

Loss Profit

Profit loss

Loss Loss

Other players

Cash

rebates

No cash

rebates

Air

Ind

ia

Cas

h r

eb

ate

s

No

cas

h r

eb

ates

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Chapter 8: Strategy in the Global Environment

Air India’s Global Strategy

Basic Entry Decisions to overseas market

Joint venture agreement

Singapore Airport Terminal Services (SATS) and Air India signed an agreement in Singapore on April

16, 2010, to form a single 50:50 joint venture (JV) company that would serve as the vehicle to house

their three existing ground and cargo handling JVs in Bangalore and Hyderabad.

To be named Air India SATS Airport Services Private Limited (AISATS), the JV company is in the

process of being incorporated in Delhi. SATS was chosen by Air India as its JV partner for ground

handling in India. Prior to that, both companies have already collaborated in Hyderabad and Bangalore

under three separate JVs, providing ground and cargo handling services. The incorporation of AISATS

provides a legal entity to house the existing operations in Bangalore and Hyderabad and potential

operations in other metro airports.

1980’ when Air

India represented

India to the outside

world

Current: Present

strategy, Low cost with

ailing Fleet service.

Desired: Only way out, is to compete

with international carriers by providing

differentiated service at low cost

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Merger and acquisition:

The second mind-blowing statement made is about the merger of the airlines.GOI is unable to ascertain

the detailed justification for working towards the merger of AIL and IAL. The report further states that

the merger made little sense after such massive aircraft acquisition plans. Besides the timing of the

merger, the report mentions that financial analysis of the proposed merger was insufficient, without

considering ground level realities. Human resources, maintenance of aircrafts, operations, system

integration etc. were not delved into deeply for decision-making. The auditors are of the opinion, that the

decision was made at the top without due consideration.

Lessons for private sector: Experience has shown that in India most of the mergers and expansion plans

are ill thought. For example, some senior managers propose a location for an office, and the decision is

made. A detailed analysis at operational, financial and market is not available. Fraud symptoms series

that mergers without organizational integration and extensive geographical distribution increase fraud

risks. Hence, organizations must conduct detailed reviews of business strategies while making decisions

having long-term impact.

Strategic Alliances

Agreement with GE Aviation:

Under this agreement GE Aviation provides technical support to Air India and in return Air

India offers maintenance, repair and overhaul (MRO) services for the GEnx-1B engine and

further advances its plans to become a global MRO service provider.

Air India has been overhauling jet engines for more than four decades, and has acquired

expertise in the area at low cost while maintaining high standards of quality. The facility not

only caters to the entire wide body aircraft of Air India consistently, but also carries out third

party work for customers situated across the globe. Through this alliance Air India envisages a

state-of-the-art facility catering to GE90 and GEnx engines, including a new engine test

facility. This strong collaboration with GE will enhance the visibility of\the facility in the world

and will result in India becoming one of the major engine MRO players. Further, advanced

repair technology will come to the country by way of this agreement. Another Memorandum of

Understanding signed with Rolls Royce, for undertaking business studies in specific areas.

Agreement with Aero star management

Air India‟s Engine Overhaul Facility, Mumbai, and Aero star Asset Management, Sharjah, UAE have

created an Engine MRO brand called “The A Team”. Directed initially for the Middle East Market, this

strategic alliance will provide engine repair and management solutions to all airline operators of the

region. “A Team” will utilize the existing engine overhaul facilities of Air India at Mumbai and

marketing set up of Aero star in the Middle East. It is also an ISO rated facility.

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The above alliance will provide practical and cost effective solutions for engine repair management

which will result in reduced cost of ownership for engines operators.

Air India‟s technical expertise in the field of engine overhaul and its elaborate facilities coupled with

Aerostar‟s capabilities in MRO marketing and material sourcing will be an ideal combination for high

level of customer care, lower repair cost & tighter TAT and assured quality that will ensure longer engine

time on wing. The arrangement will also result in additional revenue earnings for Air India.

Strategic Alliance with Lufthansa

Lufthansa and Air India are poised to significantly improve their market leadership positions on India-

Europe-USA routes with the new Strategic Alliance agreement signed between Lufthansa & Air India..

Within the scope of an extensive agreement covering a far-reaching bilateral cooperation Strategic

Alliance agreement is signed. The objective of the partnership is expansion of the offer of flights between

Germany and India. All flights between the two countries will be operated by the two airlines in future in

code-sharing. New routes will be added. Through the cooperation in the area of frequent flyer programs,

customers on flights of both airlines can in future collect and redeem miles for the respective

programmers.

India: Miles & More and Flying Returns.

Lufthansa: India is an important market with great growth potential.

Together the strategically outstanding position will be exploited in order to continue to be the leading

European airline to and from India. Air India currently serves up to 33 destinations from Mumbai and

Delhi, including, among others, Frankfurt, Chicago and New York. The fleet of Air India consists of 33

wide bodied aircraft and it has plans to add 6 more in the ensuing winter schedule to make its Los

Angeles & Chicago flights daily. It has also planned to operate daily services between London and

Mumbai & London and Delhi and link. The Lufthansa - Air India pact paves the way for joint

development of air services on India-Europe-USA route.

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Chapter 9: Corporate Strategy: Horizontal Integration, Vertical

Integration, and Strategic Outsourcing

Horizontal Integration: Single Industry Strategy

In 2007, the Government of India announced that Air India would be merged with Indian Airlines. As

part of the merger process, a new company called the National Aviation Company of India Limited

(NACIL) was established, into which both Air India (along with Air India Express) and Indian Airlines

(along with Alliance Air) was merged. On 27 February 2011, Air India and Indian Airlines merged along

with their subsidiaries to form Air India Limited.

Advantages

Staying inside an industry allows a company to focus its total managerial, financial,

technological, and functional resources and capabilities on competing successfully in one area.

A company “sticks to the knitting” i.e. it stays focused on what it knows best and does best.

Vertical Integration

Change in top brass

The government is learnt to have decided to replace Air India CMD Arvind Jadhav, handing over interim

charge of the airline to civil aviation secretary Nasim Zaidi and joint secretary Rohit Nandan. The two

officers face a difficult task at the helm of the carrier that has accumulated losses of Rs 20,000 crore till

2010-11, and carries a debt burden of around Rs 40,000 crore.

Observations

Utilizing general organizational competencies: These are competencies that

transcend individual functions or business units and are found at the top or

corporate level of the multi business company.

Typically these are the skills of a company‟s top managers and functional

experts.

It is expected that the new blood will be helpful in reviving the Maharaja‟s

sagging fortunes and in filling up the government coffers.

The airline also suffers from bureaucratic costs as it is a public entity. It refers to

the costs of solving the transaction difficulties that arise from managerial

inefficiencies and the need to manage the handoffs or exchanges between

18

business units to promote increased differentiation or to lower the company‟s

cost structure.

Alternatives to Vertical Integration: Cooperative Relationships

Code share agreements

Air India has code sharing agreements with the following airlines in 2011:

Aeroflot

Air India Express

Air Mauritius

Austrian Airlines

BMI

Ethiopian Airlines

Kuwait Airways

Lufthansa

Singapore Airlines

South African Airways

SriLankan Airlines

Turkish Airlines

The above agreeents actually help Air India in offering a variety of routes to different places in

the world at the same time maintaining a lower cost structure.There are higher economies of scale

and the cost of serving each customer are greatly reduced. Also there is less duplication of

services that is being required since the airline is effectively transferring passenger requirements

to other airlines coming under the codesharing agreement.. Thus strategic alliances have prooved

to be very useful in the industry.

Strategic Outsourcing

We are open to joint ventures, long-term partnerships and license production under transfer of technology

with leading international aerospace companies to make our aerospace sector strong, competitive and self-

reliant," Defense Minister A.K. Antony said while inaugurating Asia's biggest air show Aero India 2011

on Feb 9.

However still outsourcing is limited to supply of aircrafts to the company. This could be explained by the

fact that India is an attractive location for outsourcing and host country demands necessitate investment

by premier aerospace companies in the country.

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Chapter 10: Corporate Strategy: Diversification, Acquisitions, and

Internal New Ventures

Expanding Beyond a Single Industry

Hotel Corporation of India Limited (HCI):

The Hotel Corporation of India Limited (HCI) is a Public Limited Company wholly owned by Air India

Limited and was incorporated on July 8, 1971 under the Companies Act, 1956 when Air India decided to

enter the Hotel Industry in keeping with the then prevalent trend among world airlines. The objective was

to offer to the passengers a better product, both at the International Airport and at other places of tourist

interest, thereby also increasing tourism to India. However, in 2002-03, three properties of HCL, viz,

Indo-Hokke Hotel Limited (Centaur Hotel, Rajgir), Centaur Hotel, Juhu Beach and Centaur Hotel,

Mumbai airport were sold off. The remaining units of HCI are Centaur Hotel, Delhi Airport, Centaur

Hotel Lakeview, Srinagar and Flight Kitchens at Delhi and Mumbai.

Thoughts on advantages as well as disadvantages:

The concept of product bundling comes into play here. It involves offering customers the

opportunity to buy a complete range of products at a single price.

This increases the value of a company‟s product line because customers often obtain a price

discount from buying a set of products and also become used to dealing with just one company

and its representatives.

It also supports the industry model of its core industry.

However the model could not be sustained as mismanagement of funds and lack of expertise

along with debt burden forced the company to sell of many of its assets.

The airline is at present indulging in restructuring i.e. the process of divesting businesses and

exiting industries to focus on core distinctive competencies.

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Increasing Profitability through Diversification

Subsidiaries

Air India Cargo: A member of IATA, Air India carries all types of cargo including dangerous goods

(hazardous materials) and live animals, provided such shipments are tendered according to IATA

Dangerous Goods Regulations and IATA Live Animals Regulations. At the warehouse in Mumbai, Air

India has developed a system of inventory management for cargo handling of import/export functions.

This takes care of the entire management of cargo, supports Electronic Data Interface (EDI) messages

with Indian Customs and replaces to a great extent existing paper correspondence between Customs,

Airlines, and the custodians. This also replaces manual handling and binning of cargo at the warehouse in

Mumbai by Air India. It makes use of improved scheduling.

Air India Express: Air India Express is the airline's low-cost subsidiary which was established in 2005

during the aviation boom in India. It operates scheduled passenger services primarily to the Persian Gulf

and South East Asia. Air India Express is currently the only airline in Air India Limited which posts

profits. It operates a fleet of Next Generation Boeing 737-800 aircraft.

Air India Regional: Air India Regional (formerly known as Alliance Air) serves mainly on regional

routes. Its main hub is Delhi's Indira Gandhi International Airport.

These are actually helpful in maximizing the learning effects, increasing brand loyalty and also

increasing the share or revenue of the airline on a whole.

Entry Strategy Acquisitions

As part of the merger process, a new company called the National Aviation Company of India Limited

(NACIL) was established, into which both Air India (along with Air India Express) and Indian Airlines

(along with Alliance Air) was merged. On 27 February 2011, Air India and Indian Airlines merged along

with their subsidiaries to form Air India Limited.

It was found that despite the touted advantages the merged entity still was making losses raising doubts as

to whether it would be viable to sustain a national airline at the taxpayers‟ expense. The debate still

continues amid the fluctuating economy and high fuel prices.

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Restructuring

To attract passengers, the airline has come out with its latest print campaign titled „Jaldi Jaldi‟, offering

discounted fares for domestic travel on tickets bought in advance. It also introduced an extension of its

short term promotion scheme Silver and Platinum pass in September this year. In addition the airline has

launched ad campaign sin television and the Delhi Metro and also increased the frequency of its brand

promotion in film, said Air India spokesperson, Mr. G. P. Rao.

Also according to a company statement, the airlines passenger carriage increased by 5 per cent and

passenger revenue grew by 4.2 per cent in October. This has followed the restructuring at the

management level as well as improved outlook displayed by the com

Chapter 11: Corporate Performance, Governance, and Business Ethics

Agency Theory

Air India- Union relationship

Air India (AI) and the Air Corporation Employees Union (ACEU) share a bitter relationship,

ACEU is banned by AI for indulging in strike for undue reason. The state-owned carrier elected

office bearers of the union are protesting, alleging the management issued the letter granting

recognition to an employee who is not a full-time staffer.

Following the strike,

The airline sacked 58 union members of the ACEU and All India Aircraft Engineers

Association.

They have held signature campaigns, seeking employees‟ support. The management has

been encouraging this exercise to split the ACEU which had opposed several of its

policies.

AI committees have lost faith of the ACEU members.

The management is playing games. It misrepresented before the high court.

From these we can infer that there is dirty politics being played both by the management and the

employees.

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Air India – Pilots relationship:

Pilots are also not satisfied with the management policies. The agitating executive pilots of Air India

called off strike only after the government gave an assurance that status quo will prevail on cost

cutting measures relating to productivity-linked incentive (PLI).

Governance Mechanisms

Board of directors

Fig 1: BoD comprises people with very little knowledge about Indian aviation industry-

“Financial illiterates”

Fig 2: New BoD comprises industrial stalwarts (Appointed on March 18th 2010)

The current financial state of Air India has led to widespread speculation about the airline‟s ability to

survive. While diehard loyalists are hopeful that the government, in its capacity as 100% owner, will

never allow it to go bust, independent industry analysts are not as optimistic and are in fact willing to set a

timeframe up to which the national carrier can possibly survive, or be allowed to survive.

Existing BoD's

Ajit Kerkar

Hoteliers

Suresh Keswani

industrialist

Inder Sharma

Tourism

Jaya Bachchan

Actor

Newly appointed

BoD's

Anand Mahindra Amit Mitra Fali Major Harsh Neotia

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The government‟s response to the crisis in Air India has been ill thought-out and grossly inadequate. The

action initiated does not reflect the sense of urgency that is warranted.

The recent appointment of four independent directors Anand Mahindra, Amit Mitra, Air Chief Marshal

Fali Major and Harsh Neotia is clearly a case of too little and too late.

The new board consists of Men of equal integrity, competence and proven track record have in the past

been appointed on the boards of Air India and Indian Airlines. Since the airlines have witnessed a gradual

and sustained decline in service standards, market share, etc, over the years without showing signs of

recovery, one should not expect too much from this exercise of appointing new directors.

How much difference did their presence make to the fortunes of the airlines?

A review of the recent past shows that eminent personalities from the private sector have been directors of

one of the two airlines before their merger. Ajit Kerkar, the then head of the Taj Group of Hotels,

industrialist Suresh Keswani, Inder Sharma of Sita Travels and actor Jaya Bachchan, to name a few, have

been on the board of Air India at one time or the other. The national carriers have also had stalwarts like

Ratan Tata, Rahul Bajaj and Russi Modi as chairmen.

In all fairness to them, one can state with a certain degree of authority that most of the time the civil

aviation ministry has been engaged in backseat driving. Internal resistance to much needed changes has

also compounded the problem. What is needed is not new members (with no offence intended to the new

appointees) but good corporate governance. The board cannot have members with little or no

understanding of the airline industry‟s functioning and the ground realities that exist in Air India. It is one

thing to take decisions that are deemed critical and imperative and another thing to ensure the

implementation of such decisions.

How much independence will the newly-appointed members exercise for approving and rejecting

proposals for the sake of the company‟s well-being? One is tempted to raise this question because

notwithstanding the pitiable financial state that the airline has been in for the past few years, decisions

with enormous financial ramifications have been taken by the board, either voluntarily or under some

compulsions thrust on them.

Good corporate governance at the board level should also ensure that calls from ministry officials or the

minister himself are not entertained during board meetings for diktats on what decisions the board must

take on key agenda matters. This disdainful practice of tendering last minute advice (read: order) has been

on for almost two decades. Needless to say, intervention comes in most cases where someone else‟s

interests supersede that of the airline.

What will be of significance, therefore, will be to see how the new board members approach the present

crisis. In the past, most members of the board have played roles which can be broadly classified into three

categories.

(a) Guided Air India‟s destiny with active participation;

(b) Been indifferent and attended meetings more as a ritual; and

(c) Used Air India for benefiting their respective companies.

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Needless to say, most private members, based on their performance, would see themselves classified in

the last two categories as they have generally failed to make an impact that is expected of them. As the

new members have been appointed at a time when Air India‟s ability to survive is being questioned, it is

only to be hoped that they will play a role, notwithstanding the infirmities in the system, which can help

save the national carrier.

With time being the greatest factor, the four new members should play their parts fearlessly with the

airline‟s interest being the sole guiding force. Indians, particularly Air Indians, serving or retired, will

watch their performance with keen interest because Air India is not just any company but has been an

institution which in the yester years had evoked a lot of national pride.

Here‟s wishing the new members from the private sector all the best and hoping that they will reverse the

historical trend which is heavily loaded against them and help steer the airline out of turbulence.

Financial statement and Auditor:

CAG blasts ministry for Air India mess:

Excerpts summarizing the tussle between CAG and AI:

The national auditor said Accenture, the consultant asked to prepare the merger plan, did not do

enough work on the move's financial implications.

CAG did not agree with the theory that the merger was initiated by AI or IA in April 2006.

'Top down'; the ministry directed the erstwhile AI to appoint a consultant for the process.

The ministry failed to do a good monitoring job.

Ethics and Strategy

Lethargic work environment:

Casual work ethics is always causing concerns. Delayed decision and wrong loss are the reason why air

India accounting for just 0.35 % of global traffic is making 10% total loss of aviation industry in the

world.

Strengths Never Leveraged

AI Engineering: Excellent maintenance facilities with airplane, engine and avionics shops. Only such

certified outfit in the entire sub-continent. The hangars and 5,000-strong team of trained manpower was

never used optimally.

AI Cargo: Half a century of cargo operations around the world. With domestic linkages, it could have

cashed in on India‟s growth. Lost to Emirates, Cathay and Lufthansa.

AI Ground Handling: Handled dozens of foreign airlines. Marginal investment, training and customer

orientation could have made it impossible to beat.

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Poor Leadership

Since 2003, Air India has been run by IAS officers with no experience of running a complex, global

business. The last incumbent, Arvin Judah, was secretary of industries in Karnataka and his predecessor

V. Thulasidas was the chief secretary of Tripura. Rivals like Jet Airways hired expat management. The AI

chiefs looked to their super boss, the secretary of civil aviation, for direction.

Ministers Ananth Kumar, Sharad Yadav, Shahnawaz Hussain and Praful Patel, who were at the helm

when the decline was the steepest, have never been able to put the airline on the course to recovery.

People Trouble

Union Grip: 19 unions with political links have wrested control from the management over the years.

Bad Agreements: Lopsided agreements make it impossible to push for higher productivity.

Poor Work Ethics: Over the years, little pride in working for the airline and a sense that the politicians

(and management) are responsible for all problems. Pilots struck work in May 2011 for more pay, even as

accumulated losses were touching Rs. 20,000 crore.

No New Hires: No fresh hiring (except pilots and crew) has taken place for about 18 years.

Wrong Commercial Calls

New Planes: Brand new, well-fitted B777s and A320s could never be leveraged for higher fares. The non-

stop flights connecting India and the US had the best timings but flights were losing money until recently.

Low Fares: Lost its image for business and first class passengers. Began morphing into an airline focused

on labor traffic between India and the Middle East.

Wrong Routes: Wrong calls on routes with many of them being operated because of political reasons.

Merger Mishap: Integration between AI and IA is still a distant dream.

Unethical business practices:

Some notable unethical behaviors of Air India are:

Cancellation of booked tickets without any prior information.

Freezing employee‟s salaries for a considerable duration of time without any prior notice.

Air India has first right for overseas flights. Air India is neither using the rights nor allowing other

players to operate planes using those rights. There is no mechanism by which Air India can sell

those rights at a fixed cost. This is bad for Industry which is already sick. Further if such practices

are followed by other public sector Industries it would become bad for the Nation.

An Air India flight crash landed at the Mangalore airport during 2010. Most of the 166

passengers abroad were killed. But Air India restrained from paying a petty compensation of Rs.

75 lakhs in total to all the passengers. Air India appealed against the high court order for

compensation.

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Conclusion

Due to the above followed strategies by Air India, the following results have been obtained in the FY

2011-2012:

Key performance indicators (Pax revenue) for the month of October 2011 showed an increase of

5.2% even after reduction of capacity by 2.9 % as compared to last year (Oct‟2010). Whilst

passenger carried increased by 4.9%, the passenger load factor improved by 2.6%. The yields per

RPKM improved by 4%.

On a cumulative basis April-October‟11 the passenger revenue increased by 4.2%, Passenger

Load factor by 2.3% and yield by 4%.

FRP would provide a saving of Rs 1000 crore per annum by way of interest cost. As per the plan

approved for the company by the committee of officers the company is trying to achieve an

overall load factor of 73% in the near future.