From Crisis to Resurgence: The Period of Turbulence for Air India

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Continuing our exploration of the fascinating history of Indian aviation, we find ourselves delving into a crucial period marked by turbulence for Air India. 


So, without further ado, let's uncover the tumultuous period that Air India encountered, where mismanaged schemes, mounting losses, and the need for restructuring tested the resilience of the national carrier.





#1 Impact of Economic Reforms and Increased Competition


The 1990s marked a significant turning point for the civil aviation sector in India, as in 1991, the expanse of economic reforms was felt in the civil aviation sector of India as the frequency of foreign airlines in India increased, and soon, Indians had a choice to fly on airlines that weren’t bearing the Maharajah mascot as well. 


Air India’s bureaucrats-turned-chairmen could not keep pace with the aggressive competition and market trends.


#2 Mismanaged Incentive Schemes and Rising Expenditure


In 1994, the Air Corporations Act, which nationalized the Civil aviation of India was repealed, ending the monopoly and making way for other carriers such as Jet Airways, Damania Airways, etc.


During this period, Air India introduced various incentive schemes. 


Air India signed an agreement with Indian Pilot Guild (IPG), a pilot’s union, to implement an incentive-based scheme aimed at improving employee performance and productivity. However, these schemes were poorly administered and ultimately added to the airline's financial woes. 


  • Every pilot had a monthly wage and a variable allowance. 
  • Prior to the approval of the new scheme, the allowance was given based on the number of days spent abroad. 
  • With the new ‘Hourly payment and shortfall-allowance’ scheme, pilots were paid as per the number of hours flown. 


However, the hierarchy of pilots could not be disturbed. If a junior pilot flew 80 hours and a senior flew 65, the shortfall of 15 hours would be paid to the senior as per his or her rate. Senior pilots started earning more for not flying than the juniors did for flying. This terribly mismanaged scheme was passed without the assent of the board and it increased the expenditure for Air India by INR 307.20 crores in the first four years of its implementation. These mismanaged schemes contributed to increased expenditure and further strained Air India's financial position.


To worsen the situation, despite the failure of its allowance schemes, Air India continued to introduce more and more redundant incentives. In 1994, the company bore 42% of the employee salary as incentives as opposed to a standard limit of 35%.


#3 Quality of Service, Safety, and External Competition


In an attempt to boost performance indicators and compete with external rivals, Air India introduced the Productivity-Linked Incentive (PLI) scheme in May 1996. 

  • Incentives were presented to the employees based on certain performance indicators such as passenger load factor and on-time performance. 
  • Employees belonging to both engineering and non-engineering departments were eligible for respective PLIs. 


However, the scheme was weakly administered. The earnings under PLI were over and above the wage. There were instances where a technician with a wage of 50,000 a month received 1,30,000 as a result of the PLI. As a consequence of the scheme, the quality of service and safety significantly fell, yet, the employees managed to generate favorable performance indicators. The external competition was getting more aggressive as Air India struggled with mounting losses and diminishing market share.


In 1997, Air India experienced a substantial financial setback, recording a loss exceeding Rs 400 crore. In response to this adverse situation, the company took decisive measures by ceasing operations on certain unprofitable routes and reallocating aircraft to routes with higher demand.


Additionally, a series of cost-cutting strategies were implemented, reflecting the company's commitment to rectify its financial position. Concurrently, the government displayed a sincere dedication to revitalizing the airline, recognizing its significance in the Indian aviation landscape.


As a result of these strategic actions, Air India exhibited signs of resurgence, with operational profitability being reestablished by 1998. This positive turnaround demonstrated the effectiveness of the implemented measures and instilled a renewed sense of optimism for the future prospects of the airline.


#4 Restructuring Recommendations and Political Opposition


In 1987, Air India was referred to the disinvestment commission which released its report in 1998. The commission suggested financial and operational restructuring. The commission recommended the introduction of a strategic partner through global competitive bidding with a stake of at least 25% equity. The strategic partner would be a syndicate of investors and airlines. Further, a disinvestment of 10% to domestic institutional investors and a discounted disinvestment of 10% to employees and retail investors was recommended. 


The commission made several other recommendations to revive and disinvest Air India. However, they were not implemented. Back then, the government that had allowed FDI in private airlines had restricted the same for Air India. After the commission released the report, the government considered divesting 40% of equity and the Tatas expressed interest even then. The joint venture of Tata Group and Singapore Airlines demonstrated interest. 


However, the move of disinvestment garnered political opposition. By the time the potential bidders completed due procedures for the sale of equity, that is, by 2001, Air India had further degraded. The toxic political climate was deterring leading the joint venture to withdraw its bid.


Conclusion


The period of turbulence for Air India during the 1990s was characterized by increased competition, mismanaged incentive schemes, mounting losses, and the need for restructuring. Economic reforms and the liberalization of the aviation sector presented both challenges and opportunities for the national carrier. Despite facing setbacks, Air India's management made efforts to address financial and operational issues, leading to some operational profits by 1998. However, the road to recovery would prove to be a challenging one, as political opposition and internal challenges persisted. 


In our next blog post, we will delve into the pre-merger doom, exploring the subsequent events that shaped the destiny of Air India. 


Reference:

Bhargava, J. (2013). The Descent of Air India. Bloomsbury Publishing.

Banerjee, P., & Gupta, R. (2021, January 12). Air Indias Productivity Linked Incentive (PLI): Was it Meant to be an Incentive at all. Journal of Emerging Technologies and Business Management. Retrieved June 18, 2022, from https://jetbm.imtnagpur.ac.in/journal/vol2/iss1/5/


Acknowledgment: I thank Ms. Vaishnavi Krishna Mohan, a Student of BA(Hons) Economics at Ahmedabad University for her support in content development.
Location: India

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