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Corporate Jul 1, 2011

The Praful Patel Guide to destroying AI – Revised Edition

By R Jagannathan

Air India, India's national carrier-turned-cadaver, is waiting for its last rites. When last heard of, the airline had turned in a loss of Rs 7,000 crore in 2010-11, and was investing in an oversized hat to hit the government for yet another bailout masquerading as a turnaround package.

Only, the amounts this time are too staggering for Pranab Mukherjee to agree to without a fight. According to a report in The Times of India, the airline will need equity support of Rs 43,255 crore just to stay afloat over the next 10 years. Mukherjee is hoping to raise that kind of money by selling public sector equity this year. If he agrees to bail out Air India, it's as good as kissing goodbye to this moolah.

With liabilities of over Rs 47,000 crore, the airline is on the verge ofdefaulting on its loans.

Patel presented a merger of Air India with Indian Airlines as the panacea for all ills. Sajjad Hussain/AFP

Mukherjee will thus have to chip in with some money willy-nilly - even if he is not asked for the full sum that SBI Caps has suggested as part of its revival plan for the airline. The newspaper says Air India will require Rs 8,372 crore this year itself - Rs 6,600 crore to pay its bills for 2011-12 and Rs 1,772 crore to keep up with loan payments.

But for all this, the airline still won't be able to make a profit till 2017-18. Air India, it seems, has been fixed - and fixed for good - by former Civil Aviation Minister Praful Patel, who has often been accused by the unions of batting for Air India's rivals till the ministry was prised away from his grip last January.

When Patel took over as Minister of State for Civil Aviation in 2004, the domestic carrier (then Indian Airlines) was market leader with a 42% share, but slipping. Today, it is No 5 - behind Jet, Kingfisher, IndiGo and SpiceJet - fighting extinction.

Here's how Praful Patel did it - ruin Air India that is - and there's nothing his successor Vayalar Ravi can do to rescue it.

First, load it with debt so high that it can never raise its head again. It is now clear the Air India's financial problems began in 2004 when Praful Patel chaired a meeting of the board in which the airline suddenly inflated its order for new aircraft from 28 to 68 without a revenue plan or even a route-map for deploying the aircraft, says an India Today report.

An airline with revenues of Rs 7,000 crore was being asked to take on a debt of Rs 50,000 crore. Today, it's losses themselves are Rs 7,000 crore. And the bailout it is seeking is as big as the cost of those 68 aircraft. The government might as well have gifted those birds to Air India.

Second, Patel presented a merger of Air India with Indian Airlines as the panacea for all ills. It is surprising how often ministers suggest mergers when public sector companies head for ruin. When telecom company MTNL was sliding, then Communications Minister Dayanidhi Maran was suggesting a merger with Bharat Sanchar Nigam Ltd. That didn't happen, but both MTNL and BSNL are in the sick bay anyway. Praful Patel used the losses of Air India and Indian Airlines to push for their merger, claiming there would be cost savings from synergies. Worldwide, mergers usually destroy value. The Air India-IA merger has been the biggest man-made disaster in aviation history - thanks to their varying cultures and employee costs.

Says Gustav Baldauf, former COO of Air India who fell foul of Patel's successor and had to quit: "The management never resolved the pending human resource (HR) issues related to the merger. I had warned the Chairman-cum-Managing Director and the Aviation Ministry of the consequences of introducing a single code without resolving issues first. But they never listened," he told Mid-Day.

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by R Jagannathan

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