Jaipuria Institute of Management,

VineetKhand, Gomti Nagar

Lucknow – 226 010

Academic Year 2019-20

Batch 2019-21
Trimester 3rd
Programme PGDM
Name of Course PE
Section A
Name of Faculty Dr. AC Pandey

Nature of submission Project Report

Topic of Assignment / Project Ethical Issue
Deadline for submission 16th Mar
Group/ Learning Team Number LTA09
Maximum allotted marks
Contribution of group/LT members in the assignment/project

Sl. Name & enrollment Contribution Signature

No. number of student
1 Meher Bullar JL19PG073
2 Sagar Sinha JL19PG125
3 Sahaj Srivastava JL19PG127
4 Saloni Shri JL19PG130
5 Shitiz Srivastava JL19PG143
6 Shruti Srivastava JL19PG185
The Descent of Air India
Conclusion and Analysis
The Vague Decision making
The Flying Rights game
The Loss , The Gain
People Involved, The Nation’s Loss

Date of receiving at PMC Signature of PMC staff

Penalty (marks to be deducted):

THE DESCENT OF AIR INDIA

These Boeings (B777) were meant to fly for the next 25 years, then civil
aviation minister had told the government in August 2004, when the deal
for ordering 111 Boeings and Airbus for the national carrier was finalized.
—Mail Today, 19 April 2014

Air India to sell three remaining Boeing B777 planes (after having sold 5,
four months earlier)—Mail Today, 30 April 2014
If the above statements are true, why did we make the purchases and, within five
years of the delivery of the aircraft, sell them at roughly 427 crore each to Etihad
Airways after having purchased them in 2005 for 1,300 crore per aircraft? How did
our assessment go so horribly wrong? Have we held those responsible
accountable? Indeed, will we ever be able to do so? When will we learn from our
mistakes?

Before we explore this further, let us put the issue in perspective. Civil aviation in
India can be traced back to J.R.D. Tata flying a single engine de-Havilland Puss
Moth aircraft. The aircraft carried mail from Karachi’s Drigh Road aerodrome to
Bombay’s Juhu airstrip via Ahmedabad on 15 October 1932. The company set up
by J.R.D.—Tata Airmail—earned a profit of 60,000 in its first year of operation,
and 6,00,000 by 1937. In 1938 it was rechristened as Tata Airlines. Modern-day
Air India was born when the government of India nationalized Tata Airlines on 25
August 1953. Air India has since been India’s national airline.

During the 1990s, the government, through its ‘open skies policy’ allowed private
airlines to operate in the country. The resultant competition—in the form of fare
wars, promotional fares and discounts for seasons and sectors—brought air passage
within the reach of the common man. It also scripted some business failures, as
competition is wont to do. Bottom lines of even the most efficient airline
companies were hit, and, not surprisingly, the subsequent history of civil aviation
in India came to be chequered—quite a few private airlines were set up but not all
survived.

It was in this competitive environment that Air India found itself struggling to
remain afloat. The million dollar question is: was it ever permitted the freedom by
its owners to commercially charter a course of survival to face rising competition?
Or had the union government become a dead weight?

Concern had been expressed in the media, within Parliament and the government
about the functioning of Air India—its commercial viability and company decision
making. The merger of the erstwhile Indian Airlines and Air India had taken place
and the merged entity, the National Aviation Company of India Limited (NACIL),
was facing severe financial problems. Salaries of employees were being disbursed
five to six months late. Understandably, the employees were getting restive.
Aviation turbine fuel supply companies were threatening to stop further supply.
The airline had to repeatedly approach the government for funds to keep itself
afloat.

It was under these circumstances that the CAG decided to conduct a detailed
performance audit from 2004-2005 of the ministry of civil aviation—and, by
extension, of the public sector Air India, which was under its administrative
control—to ascertain the impact that the liberalized open skies policy of the
government had on the functioning and finances of the company. The purview of
the audit was:

 Air India’s aircraft acquisition process

 The merger of the erstwhile Indian Airlines (which was the domestic carrier)
with Air India (which was the international arm) to constitute NACIL, with
the airline subsequently being called Air India Limited
 And the role of the ministry of civil aviation in managing the civil aviation
sector and awarding bilateral and other flying rights to international carriers
which were seeking a larger share of the country’s burgeoning flying
population.

THE VAGUE DECISION MAKING

To analyze the decision making processes in the government or its public sector
enterprises, I will first run through the role of the airline and the government in the
acquisition process, and highlight the discretion exercised by different entities in
negotiating bilateral flying rights. This is essential to draw lessons for the future, so
those who do not necessarily have the interests of the company or the country at
heart do not get away with errors of omission and commission.
Air India had the distinction of being the first Asian airline to induct a jet aircraft
with the Boeing 707 in 1960. In fact, in 1962, it became the world’s all jet airline.
Its first jumbo aircraft, the Boeing 747, was inducted in 1971 and the Airbus A310
in 1986. In 1993, it inducted its flagship aircraft—the Boeing 747, named Konark
—which operated the first non-stop flight between New Delhi and New York. The
last acquisition by the airline was in 1996, when two more Boeing 747s were
purchased. By this time, however, the entire fleet was ageing.

To ensure a smooth and well phased-out process for new acquisition, Air India set
up an expert committee for a five-year fleet requirement plan in January 2002. This
committee did the required due diligence, undertaking the necessary deliberations
and, in July 2003, submitted a proposal for procuring thirty-five aircraft—twenty-
eight firm orders (eighteen Boeing 737-800 aircraft and ten Airbus A340 aircraft)
and seven on an optional basis. The Air India board of directors deliberated on the
proposal and approved the purchase of twenty-eight aircraft on a firm basis. The
proposal was then submitted to the ministry of civil aviation for approval in
January 2004. While Air India was pondering over the acquisition plan, the PMO
got a letter, signed by forty-three members of the US Congress, highlighting the
advisability of purchasing the Boeing aircraft as against the Airbus aircraft. The
letter appeared to indicate that the Airbus A340 aircraft was being phased out and
that there was a risk of spare parts and maintenance support not being easily
available. Boeing, the letter stated, was separately writing to highlight that the
economics of acquisition was dependent on the number of aircraft being purchased
—a fact we assume the technical committee would have factored in.

The issues raised in the letter were examined by Air India who felt that all the
aspects highlighted had been considered before making the choice. This fact was
then satisfactorily explained by the Air India board and the ministry of civil
aviation to the PMO. The ministry reiterated that a fair opportunity had been given
to both vendors.
This explanation notwithstanding, it seemed that the government’s position was
shifting. A rethink slowly set in, with some alluding that it was the government
rather than the Air India board driving it—the latter proposition would have been
commercially savvier, one would assume. The possibility of a rethink can be borne
out by the events subsequently narrated. I certainly do not want to argue that the
ministry should not be guiding Air India, but the fact remains that corporate
entities, whether in the public sector or private, are professional bodies and they
are expected to plan strategically on the basis of the commercial intelligence
available to them. Promptings from the government to the public sector need to be
minimized especially in view of two constant refrains— one, that there is already
too much governmental interference, and, two, that the public sector must exercise
its own professional skills.

The aircraft acquisition process, after being recommended by the board, triggered a
flurry of activity. Besides the US Congress and Boeing expressing their respective
opinions, the ministry recorded that ‘important developments’ were being
discussed by the secretary, ministry of civil aviation and the PMO. There was no
elaboration of these ‘important developments’. Then, the minister, ministry of civil
aviation, had meetings with Air India in Mumbai and impressed upon them the
need ‘to examine the feasibility of direct India-US/Canada flights’. Perfectly
reasonable, but it defies logic that Air India, with a huge senior staff component
and with fiftythree foreign stations, had not in their strategic growth plans come up
with the idea of a non-stop flight between India and the US.

However, the fact that non-stop flights were to be factored in changed the entire
profile of the Air India purchase; it also meant that the Boeing 777ER, which was
the only aircraft at that point which could fly non-stop on this fourteen-hour
transatlantic journey, had to be considered seriously.

I need to explain why there was a paradigm shift at this point. On 2 August 2004,
the civil aviation minister had a meeting with the secretary, civil aviation, and the
CMD of Air India. At this meeting it was decided that on the basis of the revised
requirements, Air India would revisit the proposal for the purchase of aircraft and
submit a fresh project proposal to the government at the earliest. At this meeting,
the CMD of Air India stated that although the existing proposal for acquisition did
not fully cater to the airline’s fleet, the additional requirement could be projected
separately, after due evaluation, through a supplementary proposal. This view
notwithstanding, the minister and the secretary stated that it may not be advisable
or prudent to go through the pre-PIB and PIB exercise in two separate stages, with
two different sets of proposals for such capital intensive projects. The CMD was
thus directed to take a total and comprehensive view on the fleet of Air India,
keeping in mind its plan and growth for the next fifteen years or so. Since this
meeting was the game changer, I am attaching a copy of the minutes issued by the
government to facilitate a better understanding of the events which then unfolded.

I am tempted to write about a very curious phenomenon that unfolded concerning

audit’s observation on the 2 August 2004 meeting. In the draft audit report which
had been sent by the CAG to the ministry for its comments, audit had used an
expression ‘in the meeting the minister nudged [emphasis mine] Air India to revisit
its proposal’. The moment this draft audit comment was read in the ministry, all
hell broke loose. Bureaucrats of all hues—serving and retired—including Air India
officials, started approaching us to drop use of the word. The funny part was that
just about every person dispatched to plead with us against usage of that word also
acknowledged that, that meeting, in fact, was the turning point. (Indeed, a serving
executive director perceived the so-called ‘nudge’ to be an order!) Yet, they had
been commissioned to make the plea for removal. How did one word cause such
discomfiture?

The pressure was immense. What could one do? We deliberated. Ultimately, we
did drop that word from the final report, but not because of any external coercion.
And here I highlight the robustness of the auditing process, in that every
word/sentence in the report must necessarily be backed by a key document (KD).
The word ‘nudge’ was not in the KD and was merely our interpretation—which
could be faulted. Hence, it was decided to drop the word. After the 2 August 2004
meeting, the CMD was then left with no other option but to take the proposal back
to his board, which met on 13 September 2004. The very same board which had
recommended only twenty-eight aircraft earlier now revised its stance. Some
members opined that in light of the advice of the ministry, the fleet acquisition
program needed to be revisited in its entirety. The board, however, not totally clear
about the ministry’s advice, sought a clarification from it, and received the
following response:

Strictly speaking it is for the AI board to take a view in the matter.

As far as Ministry’s advice is concerned, there is a suggestion that
AI needs to take a total comprehensive view on its fleet, keeping in
 mind its plans and growth for the next fifteen years or so. This
clarification further reiterated the earlier direction that Air India
ramp up its fleet acquisition proposal ‘keeping in mind its plans and
growth for the next fifteen years or so’.

What is significant is that it was entirely silent on how such a massive acquisition
exercise would be funded. I emphasize this as we see Air India being encouraged
to purchase a huge number of aircraft, regardless of the financial implications of
this purchase and the financial crisis it would create for the carrier. The board of
Air India finally met on 24 November 2004 and approved a revised long term fleet
plan for fifty aircraft. In addition to this was a proposal to buy eighteen aircraft for
Air India’s low-cost subsidiary, the Air India Express. This was the huge
commitment that Air India was getting itself into.

For a better understanding of the issue, I need to dwell on the conduct of board
meetings. Sunil Arora, an outstanding officer of the Rajasthan cadre, was then the
managing director of the erstwhile Indian Airlines. He found the atmosphere of
government interference somewhat stifling. What does a bureaucrat do when
placed in such a situation? The textbook solution is what he adopted, and kudos to
him. On 28 May 2005, he wrote a detailed letter to B.K. Chaturvedi, then the
cabinet secretary, drawing attention to how certain critical decisions were being
taken at Indian Airlines based on the directions of the minister, civil aviation. Since
this letter is now in the public domain, one can highlight the issues that it sought to
address. The significant practice emerging out of this letter is that ahead of the
board meetings, officials received telephonic instructions from the minister or his
representative on what decision to take. What did Sunil Arora write in the letter? I
reproduce a sample, in the context of the change that the ministry was advising in
the fleet acquisition purchase programme:

It is strange that between January 2004 and August 2004 when the
market parameters governing Air India’s operations did not really
change, Air India was being directed by the Ministry of Civil
Aviation to completely reconsider its fleet plan.

And
 In the case of the AI board meeting of 26th April, 2005, I had
received a phone call from the Secretary, Civil Aviation on the 25th of
April, 2005 advising me to attend the Board meeting and support the
fleet plan proposal to be put up by the Air India management.

And how did the board meeting go? Arora records the following in his letter:

The Board members had not been circulated the Techno Economic
Feasibility report prepared by the Techno Economic cum Negotiating
Committee, either prior to or during the above board meeting. Only a
presentation was given outlining the recommendations of the same
Committee. The Financial Evaluation Report was sent only on the
29th of April, 2005, i.e. three days after the Board meeting.

Arora goes on to record:

As per the original request for proposal, bids were invited for aircraft
deliveries as per specific year wise induction plan. Surprisingly an
aircraft type (Boeing 787) which did not meet the required delivery
schedule with delay in delivery carrying up over to 2011 was selected
whereas the competing aircraft in this category met the requirements.
The interim capacity arrangements by way of dry lease would be in
the region of millions of dollars which had not been factored in the
evaluation [emphasis his].

Arora then states in his letter that on receiving the board minutes he had found a
discrepancy between the PowerPoint presentation which had been made to the
board and the record of discussions. In that context, he mentions in his letter to the
cabinet secretary:

I subsequently compared the copy of the power point [sic]

presentation made on the 26th of April, 2005 to the board, with the
minutes of the board meeting of the 24th of November, 2004. It clearly
showed changes in the aircraft specifications related to seating
capacity for all the three different types of aircraft being considered.
This was despite the assurances given by the Director of Planning,
Air India in the course of the presentation to the Board on 26th of
 April, 2005, that there were no changes to the earlier approved
specifications. Changing the seating specifications aff ects the basic
economics of evaluation and may have a bearing on the selection of
aircraft itself [emphasis his].

Arora goes on to add that:

[…] during the last one year almost all the Board meetings of Air India,
and even some meetings of airports authority have become a farce.
Instructions on key agenda items are communicated beforehand on
telephone or personally by Minister Civil Aviation or by his OSD Shri
K.N. Choubey. No suggestions to the effect, that the issue in question
requires a more detailed examination or that there are some
implications, are countenanced. The key word is ‘immediate and
unquestioned compliance’.

Arora then writes:

I reproduce some glaring instances of such compliance below: Air India

discussed their dry leasing plans in the 99th board meeting held in
Mumbai on 17-7- 04. Prior to this meeting, Minister spoke to me and
told me that since he and Secretary Civil Aviation were satisfied about
the correctness of the plans, it is expected that we should immediately
endorse it during the Board Meeting. When I tried to tell him on the
telephone that the Agenda item raises some issues, I was curtly asked to
endorse the proposal and a counter question was posed on the telephone
that when the Minister and the Secretary himself are satisfied, what
more is there for us to see.

There is one more example I would like to emphasize to draw attention to the fact
that the boards of public sector enterprises are treated as subordinate offices of the
ministry, and ministers treat such enterprises as their personal fiefdom, brooking
no discussion or disagreement. Arora goes on to say:

During the 101st meeting of the Air India [Board] held in Mumbai on
13.9.04, […the] agenda item seeking approval of 400 crore for the
refurbishment of 6 Boeing 747-400 aircraft, which are already 8-11
 years old, and 8 Airbus A310 aircraft, which are already 14-18 years
old [was submitted]. There was no budgetary approval for this item. No
cost benefit proposal for the item was put up. The agenda item itself
blatantly mentions that this exercise is being undertaken at the behest of
the Minister, Civil Aviation [emphasis mine]. Prior to the Board
Meeting, there was a call by the Minister and the message was that the
item in question has to be approved immediately.

I do not at this juncture know what action was taken on this letter. However, such a
letter could neither be ignored nor the issues dismissed, for the simple reason that it
is not easy for a serving officer to put down in writing his apprehensions about his
own minister. There are risks to one’s career. Rather than attributing a cause and
effect relationship, I state facts. Sunil Arora reverted from central deputation to the
state in June 2005. Ordinarily, he would have been eligible for his next stint to the
centre after a mandatory ‘cooling off’ period of three years. However, that was not
the case. In 2012, orders were issued posting him to the innocuous office of
‘development commissioner, handlooms’. One assumes that these orders were
issued after the prime minister’s approval, as is the protocol. However, no sooner
had the orders been made public, than they were hastily withdrawn. Arora
continues to serve in his state cadre despite his colleagues having been appointed
as secretaries in the government of India.

I refer to the letter written by Sunil Arora and the issues contained therein only to
emphasize the fact that after Air India did the ministry’s bidding, everything
progressed at record speed. Thus, whereas the decision making process to propose
the purchase of twenty-eight aircraft by the Air India board had taken two years,
from January 2002 to January 2004, the revised proposal for fifty (plus eighteen)
aircraft was submitted within four months of the 2 August meeting. It is curious
that even as Arora stated that the market parameters governing Air India’s
operations had not undergone a change, the board was now taking a different view,
and painting a rather optimistic, and somewhat unsubstantiated, growth trajectory
for Air India.

Air India was now presuming that its frequency for long range aircraft would
increase from the originally presumed forty-five per week to 303 per week. What
formed the basis of this sudden optimism remains unexplained. The available seat
kilometres which were earlier presumed to be 10,780 were now hiked to 62,667.
Given the exponential confidence in Air India’s projected performance, the cost of
purchase of these aircraft was being increased to US$6,149 million from the
previous modest projection of US$1,104 million.

In the government, proposals involving such a large outlay go through various

stages of examination. Each stage is independent and is expected to advise one on
the viability or profitability of undertaking the proposed programme. The Air India
proposal also went through such an examination. The planning commission
observed that the assumptions regarding traffic projections were risky and the
upgradation was ambitious. It felt that the airline’s projected increase in its market
share—from 19 per cent to 30 per cent—was not backed by any strategy. It was
also not clear how government policy would support such ambitious projections.

The department of expenditure in the ministry of finance observed that the

argument of enhancement of capacity necessarily leading to higher market share
was not an assumption which had been substantiated. They stated that a purely
supply side response would run into huge demand side risks. There could be no
more telling an observation than this—that too from the ministry of finance.
Clearly, the entire proposal was supply driven. However, the ministry of civil
aviation stuck to their viewpoint that market share could be increased by increasing
capacity—a curious assumption, given that their share had remained static between
1999 and 2004, oscillating between 19.5 per cent and 19.4 per cent.

It is an indication of the persuasive powers of the ministry of civil aviation that,

citing a shortage of time, the public investment board gave clearance to the
proposal for the purchase of the aircraft at a cost of about 38,000 crore. Then
started the negotiation process with the vendors through a price negotiating
committee. First Air India negotiated. Then the ministry separately constituted an
overseeing committee with a former CAG as its chair —a rather unusual process, if
one may say so. There was then an eGoM to participate in a final round of
negotiations with the manufacturers. This final round was held on 24 December
2005.

Incidentally, when the various interventions by the price negotiation committee

and the overseeing committee were concluded, the civil aviation minister held a
meeting, on 12 November 2005, 126 on the seat configuration of the B777 aircraft
which were to be purchased. Ordinarily, once the negotiations commence, the
aircraft specifications stand frozen. However, in this instance, the specifications
were revisited—at whose initiative, it is not clear. These are technical and
commercial issues which should be addressed by the board or the management. It
is curious, then, how this role came to be taken on by bureaucrats and the ministers
rather than the professionals in the public sector enterprise.

At any rate, the decision taken was that in the context of the fiercely competitive
aviation scenario, Air India Limited would provide ‘the best possible product in
terms of seat comfort, in-flight entertainment systems and other amenities on the
new aircraft’. 127 In pursuance of this decision the seat capacity of the long range
and extended range aircraft were reduced by twenty-eight seats and thirty-eight
seats respectively. This decision was communicated to the vendor without the sign-
off from the Air India board—in fact, they didn’t even know of it. This crucial
decision, which effectively changed the entire cost configuration of the aircraft was
intimated to the Air India board much after it was communicated to the vendors.
Airline officers and professionals whisper that this has been the single decision
which has added to the unviability of this long range non-stop flight—with the fuel
guzzling B777 aircraft providing more first class seats which go unoccupied (or are
used to upgrade ministers and bureaucrats) while reducing economy seats, which
are popular.

The eGoM, after negotiations with the vendors, conveyed its recommendations to
the prime minister on 24 December 2005. On 30 December, the PMO conveyed its
acceptance of the purchase of sixty-eight aircraft to the ministry of civil aviation,
which then passed it on to Air India on the same day. Air India signed the
agreement with Boeing on that very day.

THE LOSS

This case seems to illustrate that decisions impacting the commercial viability of
the public sector airline were ministry driven; that there was seemingly scant
regard for the cost-benefit criterion; that the board was kept in the dark at crucial
junctures; and that there was a lack of accountability in the entire decision making
process. Within one year of the long range aircraft being delivered, they were
termed fuel guzzlers, and later sold to Etihad airways in 2014. Newspapers report
that the nature of the sale was ‘five aircraft at the price of one’, paid by Air India.

If the government actually did want Air India to make these purchases in public
interest, the funding should have come from the budget. No commercial proposal
could be commercially viable if the entire fleet acquisition worth nearly 40,000
crore was financed by debt alone. In this particular case, the equity infusion was a
miniscule 325 crore.

The much talked about non-stop flights to New York/Newark/Chicago sectors all
arrived in the USA in the morning and left late in the evening. This inadequate
utilization of the aircraft by keeping it on the ground for twelve hours evokes
shock and surprise by industry professionals. But as mentioned by the then
executive director, ‘none could demur as the decision was taken at the highest
level’. Bhargava goes on to analyse that once all aircraft were delivered, 3,500
crore would be required per annum for debt servicing. This implied that Air India
would have to generate revenue of 75,000- 80,000 crore per annum, which is not
the combined turnover of all Indian carriers put together! Add to this the fact that
the ministry continued with liberal bilateral rights policy. Yet, Air India’s market
share was expected to go up to 30 per cent from the 19.5 per cent it had been
hovering at. Who did the arithmetic? Will the country ever get to know? Or will
the exchequer continue to bleed for the folly of a few?

The audit report brought the entire issue into the public domain. The PAC
discussed it. What did the PAC recommend? No one knows. Besides making
media headlines for a day or two, nothing came out of the disclosure.

THE FLYING RIGHTS GAME

Let us now explore the other issue that I had referred to, namely, the role of the
different authorities in negotiating flying rights on a bilateral basis. What are
bilateral flying rights? To facilitate international flights of different airlines, the
respective governments have to negotiate a treaty-level agreement to regulate
them. These treaties are termed bilateral air service agreements. The treaties cover
the traffic rights, namely, the cities covered, the number of passengers that can be
carried and, at times, the tariff that can be charged.
 In 1944, around the time that the Second World War was ending, fifty-four
countries came together in Chicago to discuss how to regulate international travel.
This resulted in the signing of the Convention on International Civil Aviation,
commonly known as the Chicago Convention. It established the rules within which
international aviation functions and gave shape to the International Civil Aviation
Organization (ICAO) to administer this. The ICAO has, over time, developed
various traffic rights under which the airlines can operate. These rights are called
‘freedoms of the air’, that are negotiated by governments for mutual benefit and for
the convenience of the travelling public. The ‘freedoms of the air’ are listed against
designations of value (for instance, first, second, third, and so on), and are of
different types, such as flying across a country without landing there; landing
internationally for technical reasons such as refuelling or maintenance; or landing
internationally to carry passengers from and to different destinations.

India has a very significant interest in these freedoms not only from the viewpoint
of its own airlines but also because a large number of Indian-origin passengers are
seeking to travel abroad, especially to the Gulf countries, and there are limitations
on seat availability on those routes. Keeping this in mind, the Indian government
subscribed to an open skies policy, which would ease the difficulties of its
passengers and also expand the operation of its own airlines. In 2003-2004,
bilateral agreements to facilitate this were liberalized. However, while allowing for
open skies, the council of ministers struck a note of caution in September 2004 by
urging the ministry of civil aviation to bring proposals for building up the capacity
of the country’s public and private airlines, providing air travel facilities on
international routes, and ensuring the optimal utilization of these. The ministry of
civil aviation did so and apprised the cabinet in December 2004 that reciprocity
was the underlying principle while choosing these flights. That said, Indian carriers
were, at that point, utilizing only about 30 per cent of the capacity negotiated for
them while foreign carriers were utilizing 65 per cent. Also, although these
agreements had been signed with fifty-one countries, Indian carriers could fly only
to twenty-five of these, thereby leading to a disproportionate utilization heavily
weighted against us. At that time, only Air Sahara and Jet Airways were flying
abroad, besides Air India.

Against this background, it was decided to support Air India’s fleet acquisition
programme with adequate infusion of equity and government guaranteed
borrowing. It was also decided that traffic rights for Air India would be reserved to
complement the acquisition plan over the following two years. The existing
compensation which was being received by Air India through the government
mandated commercial agreements was also to be continued for five years.

It is undoubtedly true that the liberalized policy towards foreign carriers in the
bilateral agreements benefitted the Indian traveller, but what it did to Indian
carriers is an entirely different story. The sequence of events which took place
between mid-2007 and mid-2010 —a period of three years—wreaked havoc on
Indian carriers, both public and private.

During 2003-2004, Emirates, the carrier of Dubai, was landing at six cities in
India and had a capacity entitlement of 10,400 seats per week. Very soon, in 2008-
2009, their cities of call increased to fourteen and the capacity was hiked to 54,200
seats per week. All this while our carriers, despite their best efforts, could not
obtain permission to land at Dubai’s Jebel Ali airport besides the Dubai
International Airport.

In May 2007, Emirates obtained a capacity increase from 18,400 seats per week to
21,950. In summer 2008, this was enhanced to 28,200 seats and in winter of the
same year, it rose to 29,100 seats. Emirates was also permitted to upgrade the
capacity of the aircraft they were utilizing from Mumbai, ostensibly to ease
congestion at the airport. In December 2007, Emirates sought to replace their 237-
seater Airbus aircraft with the 380-seater Boeing 777 aircraft. The examination of
this request by the ministry of civil aviation evinced a very interesting comment.
The observation was that there was no justification for this request. But in the same
breath, the ministry said that due to the open skies policy, and to help the travelling
public, the request could be considered. This is typical bureaucratic behaviour—a
door is shut for protection, but then a window is opened. The minister discussed
this issue with the joint secretary, and ostensibly in the interests of the travelling
public, they decided to grant Emirates’ request, although there was seemingly no
justification for it.

Soon enough, in January 2008, Emirates’ long pending demand to have a port of
call at Kozhikode (Calicut) was unearthed from files in the ministry. This was also
approved, close on the heels of the earlier sanction, in December 2007, to upgrade
their equipment. Within two months, probably emboldened by the ease with which
their requests met with success, the Dubai civil aviation authority (CAA) wrote to
engage in bilateral talks for reviewing and enhancing the existing entitlements.
(The earlier enhanced entitlements had come about merely on a file examination of
their requests.) The Indian director general of civil aviation (DGCA) felt this was a
justifiable request as they were utilizing their entitlements to the tune of about 80
per cent. Air India protested, pointing out that Emirates had got a 60 per cent
increase only a while ago. Air India also pointed out that their seat utilization was
about 87 per cent, as against the (approximately) 75 per cent of the Indian carriers.
Moreover, Air India hoped to substantially enhance its own capacity, and
increasing the entitlement would only facilitate further sixth freedom traffic for
Emirates.

These comments of Air India carried no weight and the bilateral negotiations were
held in New Delhi. During the negotiations it was decided to increase capacity
through the exchange of letters, and the Dubai CAA also agreed to a ‘change of
gauge’ for Indian carriers, which meant that Indian airlines could alter the size or
frequency of their aircraft to meet traffic requirements. As soon as the Dubai
delegation returned after the meeting in New Delhi, they wrote back saying that
while they had, in principle, agreed to a change of gauge, they would have to
revisit the Indian proposal at a later date due to ‘infrastructure constraints at the
Dubai airport’. This obviously was an excuse to deny Indian carriers their due,
which was immediately pointed out by Air India.

In March 2009, the Dubai CAA reiterated its inability to accede to a change of
gauge for Indian carriers and offered to revisit the matter in 2012. However, the
Dubai CAA’s confidence and, indeed, audaciousness—possibly fuelled by the
nature of the negotiations—permitted it to seek three additional points of call—
Amritsar, Mangalore and Tiruchirappalli—in the summer of 2009. Meanwhile, on
seeing Emirates’ media reports announcing operations from Pune, Jaipur, Goa,
Chandigarh and Amritsar, Air India separately pointed out to the ministry of civil
aviation that they had still not been allowed another port of call in Dubai, whereas
Emirates was flying from ten cities in India. The CMD of Air India protested
saying that while Emirates had been permitted to make Dubai a hub for sixth
freedom traffic, it was to the detriment of Indian airports such as Mumbai and
Delhi, which had been upgraded. This led to a rather strange note on the ministry’s
files. The joint secretary recorded: ‘[…] because of Dubai’s present precarious
financial situation, the entire project at Jebel Ali is reportedly held up.’

How odd that the Indian government was concerned about the precarious financial
position of Dubai and not about its own carriers and airport hubs. The joint
secretary managed to persuade the CMD of Air India to accept the allocation of
Chandigarh and Lucknow to Emirates ostensibly on grounds that this would not
contribute to sixth freedom traffic. The consolation handed to Air India was that
India would project permission for Jebel Ali in 2012. The score thus far: Dubai two
more; India none.

In April 2009, Dubai reiterated their request for six additional points of call. Now
they condescended to consider India’s request for Jebel Ali in 2012. They got
approvals for Coimbatore and Goa and an additional allocation of 1,300 seats to
Kolkata at the minister’s instance. (The secretary was opposed to advancing the
enhancement.) Jebel Ali for Air India continued to be a mirage in the Dubai desert.

Air India protested again in September 2009, pointing out that it had not got a
second point of call in Dubai, while Emirates was getting to fly deeper into India.
This complaint, again, carried no weight. The PMO sought clarifications, probably
because Emirates had approached them this time. The result was that the minister
approved Emirates operating from Lucknow also. The toll was fourteen ports for
Emirates, and nothing additional for Air India, despite the fact that the latter was
being nudged to buy more and more aircraft, thus pushing it deeper into debt.

A detailed analysis by the CAG revealed that 59 per cent of the 2.30 million
inward passengers and the 3.90 million outward passengers that Emirates carried in
2009- 2010 were sixth freedom passengers. Nothing could demonstrate this better
than an analysis made by the Business Standard, the title of which read: ‘Sixth
Freedom Choked Air India’.This summed up India’s airline story.

THE GAIN

What does one make out of all this? What lessons can we draw? We know the
facts. The facilities offered to the travelling public are no doubt of paramount
significance; the advent of the open skies policy and low-cost carriers has helped
them tremendously. The government has created world class airports in Delhi,
Mumbai and Chennai. These need a minimum critical level of passengers to ensure
commercial viability, or else the passengers will have to pay higher charges.

However, in permitting foreign airlines to pick up passengers from interior cities

in the country and fly them abroad, we are denying domestic airlines and airports
the right to grow. Equally, by pushing a public sector airline to expand by asking
for more aircraft, more routes, the government is ringing the death knell for the
country’s national carrier. A better option would be to have indigenous airlines
carry passengers from interior cities to the hubs; from here, even foreign carriers
can operate. This would provide much needed passengers for our carriers and
expand operations in our newly constructed terminal hubs in Mumbai and Delhi.

THE NATION’S LOSS

This remarkable epic has been scripted and choreographed by those very persons
who had taken the oath of upholding and protecting the interests of the nation and
its treasury. The issues that have been raised in this case study are not about
finding fault with the decisions taken, especially since we now have the benefit of
hindsight. The issue is one of accountability in our whole decision making process.
The alarm signal that I seek to raise is that despite the government putting in place
seemingly robust procedures and system checks, these safeguards can be subverted
by those in the right places. All the agencies designed to raise the right voices did
make feeble attempts to raise them, but no one dug in its heels to say that the steps
being taken would spell doom for the airline or the sector. One must ask why.

The strength of the bureaucracy lies in their pointing out the pitfalls and then
leaving it to the political executive to take the decision—a conscious decision—
after weighing the pros and cons, and obviously taking the onus for the decision.
This is because in a parliamentary democracy the elected representative is
supreme. While acknowledging this strength of our Constitution, how do we hold
the decision makers accountable for the decisions taken under their stewardship?
Does this country, and its exchequer, have the infinite capacity to continue funding
obviously motivated decisions and carry on as if an error is another casualty of the
system? When do we become a nation with no further appetite to tolerate such
malfeasance, and say enough is enough? Will we ever be able to do so?
 BK CHATURVEDI

Former Cabinet Secretary

1966-IAS Officer

PEOPLE INVOLVED
 RAGHU MENON

AIR INDIA- CMD

JITENDRA BHARGAVA

Ex- Executive Director – AIR

INDIA

SUNIL ARORA

IAS Officer

AIR INDIA and INDIAN

AIRLINES -CMD
 V. THULASIDAS

AIR INDIA- CMD

CONCLUSION AND
ANALYSIS

 Squandered Hundreds of Crores on

renaming “Indian Airlines” to
‘Indian’. Any layman can understand
that such renaming doesn’t change
anything.
People still
used to call it AJIT SINGH- CAM
Indian
Airlines.
 Uniforms, logo were changed unnecessarily. Needless to say, that
Praful Patel & his party made lion chunk of this useless drainage of
money by Air India.

 In 2007, Indian Airlines & Air India got merged. This is a case

whichalso tells us that why the two mergers shouldn’t happen. IA was
Company operating within India with Indian norms (6 days a week,
Indian salary structure, no big allowance/bonus). AI was competing
globally with global norms (5 days week, Big bonus/allowances,
structure). This merger led to huge infighting between AI & IA
employees unions, everyone wanted to get the better from others, but
not lose their privileges. Services suffered big time during this merger.

 The combined losses for Air India and Indian Airlines in 2006–07 were
₹7.7 billion (US$110 million) and after the merger, it went up to ₹72
billion (US$1.0billion) by March 2009. In two years, loss increased by
1000% Why because special chartered AI planes used to fly just to
ferry NCP leaders (Sharad Pawar, Praful Patel, Supriya Sule etc). Often
scheduled flights used to get cancelled for flying these VIPs due to
Praful Patel. Airlines had to incur huge losses in refund, staying
arrangement, rescheduling for passengers.

 Praful Patel increased order for Boeing 787 Dreamliner from 26 to 68

(50 passenger and 18 VVIP). Dreamliner that time was new to market,
expensive and without proven record. In fact, Boeing was having huge
financial difficulties with Dreamliner Series. Still Praful
Patel Inflated orders without any plan of how to use these planes. All
pundits commented that it looks like India is trying to resuscitate
Boeing instead of AI. Soon Dreamliner got into Lithium battery fire
issue. All AI Dreamliner planes got grounded for months. This was the
biggest financial burden on AI, because AI took huge loans and
subsidy for this Boeing deal.

 The one decision which killed AI revenues was to remove AI flights

from profitable routes like (Middle East, USA etc). It is well known
fact that Praful Patel gave directions to remove AI from profit making
routes in lieu of cuts from Middle East Airlines (Emirates, Etihad,
Qatar) so that those airlines can capture ever increasing Overseas
 Indian travellers. Today more than 80% westward Indian travellers’
transit via Middle east.

 One-sided deals with UAE for Bilateral flying rights:

Now when you look at above table, total weekly seats available between India &
UAE is highest approx. 1,50,000 (One and Half Lakhs). If you contrast the 2nd
highest weekly seats is just 24,000. with Singapore. Someone may argue that
there is demand so there is so much seating agreement. The hidden point is that
before Patel did this agreement, it was limited at 10,000. So how come suddenly
15 folds increase. Answer is that all those passengers going to UAE are mostly
transiting there before actual destination to Europe, NA, Africa. had this bilateral
agreement limited and AI not removed their planes from those routes, passengers
would have been using AI or other airlines going directly to their destinations
saving plenty of Dollars &Forex for India.