Air India’s Revival Package: Recommended Dos & Dont’s
05 October 2018
In October 2017, CAPA released a strategic noting presenting our assessment of the key success factors for the proposed privatisation of Air India [see bottom of this page]. This was based on our understanding of the national carrier and the market in which it operates. Despite the best efforts of the Government of India to balance the interests of all stakeholders, the divestment process for Air India failed to attract a single expression of interest from prospective bidders.
With the privatisation of the core airline operations of Air India having been deferred in June 2018, the Government of India is shortly expected to announce a second revival package. In anticipation of this development, CAPA has identified some key dos and don’ts to ensure that the infusion of public funds is supported by an accountability regime and governance architecture that protects the interests of the tax payer, and positions the airline to maximise the chances of a successful privatisation in the near future. This bail out needs to be accompanied by stringent conditions and oversight.
Air India must be governed by an empowered and accountable Board: The Board should have 2-3 directors with a deep strategic understanding of the business and proven credentials in commercial and planning domains and expertise in restructuring of large organisations. High profile, respected professionals selected from the Indian corporate sector must be in a position to dedicate sufficient time to make a clear, strategic difference. On earlier occasions, the independent directors on the Board may not have been able to commit themselves to the level required to add value to the business, given the complexity of the issues faces by Air India.
The leadership team needs to be recast: There is a very limited pool of skilled airline leaders in India with the expertise to be able to turnaround a business as complex and challenging as Air India. Ideally, we would have recommended that a global search be conducted to identify an expat CEO accomplished in turning around struggling airlines. However, this may be difficult for several reasons, which includes securing approval to be able to offer the necessary compensation for such a candidate. As an alternative, we suggest that an accomplished executive be identified from an Indian public sector unit, with a demonstrated track record in delivering results in difficult circumstances. This CEO will be responsible for stabilising Air India and preparing it for successful privatisation. Although the appointment of an expat CEO is unlikely, we believe that overseas candidates should be considered for other leadership roles, particularly the Chief Operating Officer and Head of Planning, both of which will be key to delivering successful outcomes. The Chief Commercial Officer is another critical position that should be appointed without being subject to internal seniority considerations, unless there is a suitable candidate.
The next level of management needs to be groomed for progression: The success of the revival strategy is dependent upon identifying Air India managers that exhibit the potential to be groomed for senior positions in strategy, commercial, finance, planning and operations. They will in the interim be understudies to the expat officers and other senior management, gaining experience until such time as they are ready to take on additional responsibilities. In order to successfully privatise Air India, any new investor will need to have confidence in the talent pool at the airline. Without a long-term approach to skills development it will be difficult to achieve the desired outcomes.
The Board and management must be ring-fenced from external influence: For the airline to be governed effectively, the Board and management must be able to focus on the business at hand without distractions or interference, whether political or otherwise.
Public funds should not be infused in the absence of a realistic restructuring and business plan: A bail out package without comprehensive restructuring and a new and practical long-term strategy would be a strategic mistake. Global restructuring specialists should be appointed to develop a well-structured plan. Full funding of the carrier should proceed only after the plan is ready and has been accepted by the Board and management. Until such time only limited, interim financing should be provided. The restructuring mandate should include removal of Air India’s working capital debt from its balance sheet, however it is critical that this happens only in the context of a detailed plan.
Divestment of non-core assets and real estate should be part of the business plan: Subsidiary activities such as ground handling, engineering and maintenance, catering and even Air India Express should be divested as part of the restructuring plan. The only possible exception could be Air India Express if the restructuring specialist concludes that it would be better retained in-house. Valuable real estate assets such as the Air India building in Nariman Point and the Vasant Vihar housing complex can also be monetised. The objective of these divestments should be to generate as much cash as possible from internal resources without drawing upon public funds. Appropriate Special Purpose Vehicles should be created for the purposes of restructuring.
Maintaining the highest levels of oversight will be critical: Careful oversight which closely monitors deliverables against established targets and timelines must be an essential component of the strategic framework.
Given the cost and competitive dynamics in the market, CAPA believes that successfully turning around Air India will be extremely difficult. Hence a decision to provide significant capital funding in the absence of an empowered and accountable Board and management, or a realistic restructuring and business plan, will be a major strategic mistake, and potentially very costly to the economy and the tax payer.