Indian School of Business

ISB101
February 01, 2018

Vaidyanathan Krishnamurthy | Catherine Xavier

AIR INDIA: MAHARAJA IN DEBT TRAP

For the fiscal year 2015-16, Air India posted an operating profit of INR 1.05 billion as against an
operating loss of INR 26.36 billion the previous financial year. This improvement, after more than a
decade of loss-making, was largely attributed to lower fuel prices and improved revenues in 2015-16
due to an increase in the number of passengers per flight. In order to facilitate the revival of Air India,
Ashwani Lohani, known as the “turnaround man”, was appointed Chairman and Managing Director
(CMD) of Air India. With a reputation for being very practical, Lohani was well aware of the multitude
of problems staring him in the face. Though he believed that the money-losing airline’s problems were
not insurmountable, he knew they were serious enough. The most important challenge was the huge
debt burden that was weighing the Maharaja down.1 Other worrisome factors included the airline’s
poor ratings on key industry metrics such as on-time performance, aircraft turnaround time and
passenger satisfaction. Low employee morale, the adverse impact of political pressure on the airline
and fuel price volatility were additional concerns plaguing the airline. As Lohani piloted Air India
towards revival, efforts were being made to convert INR 100 billion of Air India’s debt into equity, a
move that would substantially reduce its interest burden and give banks a major say in its functioning.2
Lohani was in talks with banks and investors who could play a critical role in Air India’s debt
restructuring.
Lohani was as well-known for his personal and professional honesty as he was for his operational
efficiency.3 He mulled over the various options related to debt restructuring. It remained to be seen
whether Lohani’s image as the “turnaround man” coupled with Air India’s operating profits would

1 The mascot of Air India was the Maharaja (Emperor), a symbol that became synonymous with the airline.
2 Mishra, M. (2016, August 22). Air India in talks to recast Rs 10,000 crore debt. The Economic Times, accessed November
25, 2017, Retrieved from http://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/air-india-in-
talks-to-recast-rs-10000-crore-debt/articleshow/53802241.cms.
3 Air India posts Rs 105-crore operating profit in 2015-16. (2016, October 14). The Hindu Business Line, accessed November

25, 2017 Retrieved from http://www.thehindubusinessline.com/economy/logistics/air-india-posts-105crore-operating-

profit-in-201516/article9220550.ece.

Professor Vaidyanathan Krishnamurthy and Catherine Xavier prepared this case solely as a basis for class discussion. This
case is not intended to serve as an endorsement, a source of primary data, or an illustration of effective or ineffective
management. The authors would like to thank Geetika Shah for her help in the initial stages of the case. This case was
developed under the aegis of the Centre for Learning and Management Practice, ISB.

Copyright @ 2018 Indian School of Business. The publication may not be digitised, photocopied, or otherwise reproduced,
posted or transmitted, without the permission of the Indian School of Business.

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 ISB101
increase investor confidence and help Air India deal with its debt burden. While Air India’s modest
operating profit was good news, it remained to be seen if it could provide relief to the sick airline’s
actual financials. It also remained to be seen whether Lohani’s attempts at improving employee
relations with the organization and the operational changes he was introducing to Air India could help
turn the tide for the ailing airline. As of July, 2017, two questions remained: Had Air India really turned
the corner under Lohani’s leadership? Could Air India’s short-term progress help it to overcome the
huge debt that had become the “elephant in the room”?
INVIGORATING AIR INDIA
It was August 15, 2016, and India was celebrating its 70th Independence Day. On that occasion, India’s
Prime Minister, Narendra Modi, made the annual Independence Day speech at Delhi’s Red Fort. In his
address to the nation, Modi surprised many when he made a special reference to the turnaround of
Air India, which had long been infamous for incurring losses and for having being saddled with a
mountain of debt. Specifically, the Prime Minister said, “Today for the first time, I can say with
satisfaction that Air India, which had a bad image, has succeeded in registering an operational profit
last year.”4 In highlighting this fact, his message was very clear: all possible efforts were being made
to revive Air India.
One major step towards reinvigorating Air India was the appointment of Lohani as its Chairman and
Managing Director (CMD) in September 2015. His appointment surprised bureaucrats and aviation
industry analysts for two reasons. Firstly, Lohani was from the Indian Railways, a sector not closely
aligned to aviation. Secondly, he was not an officer of the Indian Administrative Service (IAS), the most
elite cadre of administration in India. His appointment was especially unusual because, for the last
decade, the CMD of Air India had always been an IAS officer. Lohani had earned a reputation as the
“turnaround man” based on his prior achievements. Even before being considered for the position of
CMD, Lohani’s dream of being the turnaround man at Air India was very evident from his tweets. He
had tweeted,5 “If given a chance, a year is all it would take for a turnaround even for a mammoth
organization like Air India.” His dream came true on August 31, 2015, when Lohani took charge as the
CMD of an ailing Air India. On the morning of September 1, 2015, when he assumed office, Lohani
clearly knew that things at Air India were bleak and grim.
THE INDIAN AVIATION INDUSTRY
In 2014, the Indian civil aviation industry was among the top 10 in the world, with a market size of
US$16 billion. Domestic airlines carried 55.06 million passengers in the period January-October 2014
as compared to 50.7 million the previous year.6 Indian airports handled 121 million domestic and 41
million international passengers. More than 85 international airlines operated in India, while five
domestic Indian carriers ferried passengers to over 40 countries in the world.7 In 2016, there were
449 airports located throughout India; out of these, only 122 airports were operated by the
government-owned Airports Authority of India (AAI). In all, regular commercial flights were operating

4 Narendra Modi's speech on Independence Day 2016: Here is the full text. (2016, August 15). The Indian Express, accessed

November 25, 2017. Retrieved from http://indianexpress.com/article/india/india-news-india/pm-narendra-modis-speech-

on-independence-day-2016-here-is-the-full-text/.
5 Mohanty, N. R. (2016, August 1). Is Ashwani Lohani really 'Turnaround man' for Air India? Huffington Post India, accessed

November 25, 2017. Retrieved from http://www.huffingtonpost.in/n-r-mohanty/is-ashwani-lohani-really-turnaround-man-

for-air-india/.
6 India Brand Equity Foundation. (2014). Indian aviation industry. Retrieved from https://www.ibef.org/industry/indian-

aviation.
7 Enhancing Air Connectivity. (2014, May). Infrastructure Today, accessed November 25, 2017.Retrieved from

http://www.infrastructuretoday.co.in/News.aspx?nId=vvHCsGAq8OJLgmx6/MK2Cw==

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in less than 80 airports. Major cities like Bengaluru, Delhi, Hyderabad, Kochi and Mumbai were served
by privately operated airports. Aircraft movements stood at 2.05 million while air freight handled
reached 2.53 million tons during 2015-16. Additionally, operational airports in India served a total of
around 265 million passengers (205.7 million domestic and 59.3 million international) in 2016-17. This
strong growth and air traffic at Indian airports made India the fifth largest civil aviation market in the
world (behind the United States China, Japan and the United Kingdom).8
In September, 2012, the Indian government had allowed foreign direct investment (FDI) of 49% by
foreign airlines in the aviation sector. Air transport had attracted FDI of US$456.84 million until July
2013. The Indian civil aviation industry had huge growth potential owing to a large and growing
middle-class Indian population, favorable demographics, rapid economic growth, higher disposable
incomes, rising aspirations of the middle class and overall low penetration levels. The industry was
growing at a favorable rate and was soon expected to be the third largest in the world. In the midst of
all this growth, there was untapped potential that could dramatically enhance passenger traffic. Air
traffic density in India was just 72 when compared to China and the US at 282 and 2,896, respectively.
The Indian government was working on building 17 new airports in addition to establishing an aviation
university to increase the availability of skilled manpower.
The Indian civil aviation department had made efforts to increase air connectivity between remote
areas and major Indian cities. Since March 2013, the Indian government had been encouraging airlines
in the country to fly to remote areas by simply mandating that they fly to such locations. To that effect,
the civil aviation sector created the Essential Air Services Fund (EASF) to provide direct subsidies to
domestic airlines to encourage them to fly to remote areas. The airlines, on the other hand, balked at
this move, stating that they lost money on such flights. However, Air India had been instrumental in
ensuring that the growth in the civil aviation sector was equitable and inclusive by providing
connectivity to remote or troubled areas of the country such as the northeastern region, Jammu and
Kashmir, the Andaman and Nicobar Islands, and Lakshadweep.9
AIR INDIA
In 1932, J. R. D. Tata founded Tata Airlines, India’s first commercial airline. In its very first year of
operation, Tata Airlines flew 160,000 miles carrying 155 passengers. In 1946, Tata Airlines was
converted into a public company and was renamed Air-India Limited. In 1948, the Indian government
acquired 49% of the shares of Air-India Limited, with an option to purchase an additional 2% of the
shares. In 1953, the country nationalized all Indian airlines and created two corporations:
1) The Indian Airlines Corporation, which provided domestic air services, and
2) Air India International Corporation, which provided international air services.
In 1962, Air India International Corporation was renamed Air-India. In 2005, in order to gain a
competitive advantage in computerized reservation searches, the hyphen was dropped from Air-India
and the airline came to be known as Air India.10 In 2006, the Indian government announced the merger
of Air India and Indian Airlines to form a new company called the National Aviation Company of India
Limited (NACIL). In 2010, NACIL was renamed Air India.

8 Know India.net. Aviation. Source: Director General of Civil Aviation, accessed November 25, 2017.Retrieved from
http://knowindia.net/aviation3.html.
9 Sanjai, P. R. (2013, March 18). Government thinks small to boost air connectivity. Live Mint, accessed November 25, 2017.

Retrieved from http://www.livemint.com/Companies/LmPNUgFlbPdDeUtOpynprM/Govt-plans-seatcredit-trading-

mechanism-to-boost-air-connec.html.
10 Encyclopaedia Britannica. Retrieved from https://www.britannica.com/topic/Air-India.

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As of 2016, Air India flew nine types of aircraft in the domestic and international sectors, connecting
over 100 destinations across the globe. The company managed around one-fifth of the domestic air
travel market in India. Air India operated a fleet of Airbus and Boeing aircraft serving Asia, Australia,
Europe and North America. Headquartered in South Mumbai, Air India had two major domestic hubs
— one at Indira Gandhi International Airport in Delhi and the other at Chhatrapati Shivaji International
Airport in Mumbai. Additionally, by 2016, Air India came to be third largest airlines in India in terms of
the number of passengers carried. The leaders in the commercial domestic airline segment were
IndiGo and Jet Airways. As of April 2016, IndiGo had a market share of 38.7%, while Jet Airways and
Air India had market shares of 18.9% and 15.1%, respectively.11
PROBLEMS PLAGUING AIR INDIA
Over the years, the list of problems plaguing Air India had been growing exponentially (see Exhibit 1).
The airline was faced with several issues that had been contributing to its downfall. Some of the
strategic issues faced by the airline included:
x Routing and Network Issues

Strategically, the airline operated a little over 200 routes. The local routes connected Tier II and III
cities with Tier I cities 12 . Most of the local routes were conventionally unprofitable as there
weren’t enough passengers to cover fuel and roster costs. Despite the unprofitability of these
routes, Air India had no choice but to service them, because as a government enterprise, it was
committed to the development of even unprofitable regions. This stifled Air India’s profitability
and competitiveness. Lohani pointed out that it was largely because Air India functioned as a
public enterprise that it lagged behind its competitors on key industry metrics such as on-time
performance, aircraft turnaround time and passenger load factor. Analysts opined that low ratings
on performance factors adversely affected the brand image of the airline and diminished its
profitability.13

x Managerial Issues14

Analysts suggested that frequent disputes between management and staff had left both parties
with an utterly apathetic attitude towards the debt-ridden airline. Experts believed that poor
communication between management and staff had caused great inefficiencies in Air India’s
operations. Being a public sector unit, Air India had long inherited the evils associated with Indian
public sector units such as archaic management systems, an overly rigid bureaucratic system of
operation and excessive red-tapism. Delays in making managerial decisions made it extremely
difficult to be progressive, especially when it came to purchasing or leasing aircraft, which required

11 IndiGo leads with 38.4% market share; Jet Airways, Air India follow in March. DNA India, accessed December 22, 2017.
Retrieved from http://www.dnaindia.com/money/report-indigo-leads-with-384-market-share-jet-airways-air-india-follow-
in-march-2204915.
12 Cities in India are categorized on the basis of population (as per the 2001 census): Tier I cities have a population of

100,000 and above, Tier II have a population between 50,000 and 99,999, and Tier III cities have a population between
20,000 and 49,999. In comparison with Tier II and Tier III cities, Tier I cities have better standards of living and job
opportunities.
(Based on data from https://www.mapsofindia.com/maps/india/tier-1-and-2-cities.html).
13 Mishra, M. (2017, May 12). Run ragged by rivals, Air India has just two choices left: Privatise or perish. The Economic

Times, accessed December 22, 2017.Retrieved from

http://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/air-india-revival-can-only-happen-after-
privatisation-experts/articleshow/58634759.cms.
14 Kannan, S. (2012, May 16). Air India: Problems run deep in India's national airline. BBC News, accessed November 25,

2017. Retrieved from http://www.bbc.com/news/business-18082903.

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quick decision-making. Additionally, unlike other airlines, Air India continually faced immense
political pressure to provide freebies to government officials. Cases of misappropriation of funds
and abuse of air travel policies were very common in the organization. India’s VIP culture also
affected the airline’s operations, with families of VIPs often abusing the privileges accorded to
them by the government.2

x Internal Incompatibility

The poorly executed merger of Air India and Indian Airlines was considered to be one of the
biggest causes of poor performance, especially in terms of employee output and human
relations.15 Employees at Air India suffered from low morale and all the ills that came with it.
Lohani considered this to be the primary issue that was causing the downfall of Air India. In an July
2016 interview to The Economic Times, he said:

“The biggest reason for the downfall of Air India was the merger between erstwhile
Air India and Indian Airlines, which was done despite the fact that both carriers are
totally opposite of each other. There were many differences between the two
companies in terms of work culture, areas of operation, compensation, working
conditions, entitlements, etc. The merger resulted in massive discontent and
frustration amongst the staff. The subsequent demerger of ground handling and
engineering companies added to the problems. In hindsight, it appeared that a no-
merger scenario may have been preferable... Air India is, however, committed to
resolving all pending issues at the earliest and bringing about continuous
improvement in the services provided to passengers.”16

The merger also brought its share of unprecedented financial problems to the already ailing airline
(see Exhibit 2). In 2006-07, Air India reported a loss of INR 4.47 billion and Indian Airlines’ losses
amounted to INR 2.4 billion.17 From 2007 to 2009, the merged organization’s losses rocketed to
INR 72 billion.

x Huge Debt: The Elephant in the Room

The most glaring problem for Air India was its accumulating debt. At the end of fiscal 2014-15, the
airline had a total debt of INR 513.67 billion. While the airline managed to phase out more than
INR 50 billion of debt from its books during the year 2015-16, its total debt stood at INR 460 billion,
of which INR 280 billion were short-term loans used as working capital, while the rest constituted
long-term loans taken for capital expenditures such as buying aircraft.18 The short-term debt was
needed to meet regular day-to-day working capital expenditures.

15 Ibid.
16 Mishra, M. (2016, July 1). Indian Airlines merger has caused Air India's downfall: Ashwani Lohani. The Economic Times,
accessed November 25, 2017.Retrieved from http://economictimes.indiatimes.com/opinion/interviews/indian-airlines-
merger-has-caused-air-indias-downfall-ashwani-lohani/articleshow/52998986.cms.
17 Manghat, S. (2016, August 19). Can Air India, saddled with over Rs 51,000 crore debt , really turn around?

BloombergQuint, accessed November 25, 2017. Retrieved from

https://www.bloombergquint.com/business/2016/08/19/can-air-india-saddled-with-over-rs-51000-crore-debt-really-turn-
around.
18 Air India reduces debt by Rs 5,000 crore last fiscal. (2016, October 19). The Economic Times (PTI), accessed November 25,

2017. Retrieved from http://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/air-india-reduces-

debt-by-rs-5000-crore-last-fiscal/articleshow/54942987.cms.

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Lohani explicitly mentioned that the most challenging part of Air India’s revival was its
undiminishing debt and debt servicing. To that extent, debt servicing was so high that it was
turning marginal operational profits into net bottom line losses. Additionally, the high debt service
costs made repayment of the principal amount to the lenders an almost insurmountable task. In
comparison to other airlines in India, Air India’s debt was more than six times the debt of its closest
competitor.

Huge interest costs were eating into Air India’s profits for several years. Jet Airways, which ranked
second to Air India in terms of debt, had an interest coverage ratio of 2.26 in March 2016, while
Air India’s interest coverage ratio was close to zero.19 This demonstrated Air India’s reduced ability
to even service its interest payments through its operational profits (see Exhibit 4).

A comparison of Air India’s operational expenses with comparable airlines such as Jet Airways and
SpiceJet showed that Air India wasn’t completely off the mark in terms of operational effectiveness.
The ailing airline did compare well to its competitors on most parameters, except for the huge debt
that it was shouldering (see Exhibit 5).
SpiceJet, an airline that was closely comparable to Air India, was in a state of crisis with an uncertain
future in early 2015. SpiceJet’s major problems ranged from a shrinking fleet and network to reduced
market share. Further, lessors were demanding the return of their aircraft for non-payment of lease
rentals, while service providers such as AAI and oil companies had suspended credit lines pending
payment of outstanding dues. However, in about six months, the tide had turned for SpiceJet; it
overcame its precarious situation. The airline took drastic measures to put itself back on track. SpiceJet
had written its own successful turnaround story — it reduced its debt, consolidated its finances and
then systematically expanded its fleet and network.20
Air India, in contrast to SpiceJet, had been following a turnaround plan that was generously backed by
a financial package of INR 300 billion by the Indian government; yet, the ailing airline’s revival was
nowhere close to satisfaction. Most successful turnaround stories underlined the need for controlling
debt by temporarily downsizing operations, fleet and network. Air India, under the leadership of
Lohani, had been working hard to reduce operational, fleet and network expenses, yet it hadn’t shown
signs of improvement as Spicejet had.
The inevitable question then was: Why hadn’t Air India turned the negative tide, despite the large cash
infusion and turnaround plan? Evidently, the response to this question lay in Lohani’s suggestion that
Air India’s undiminishing debt was watering down all efforts to revitalize the airline. Speaking to The
Economic Times in January 2017, Lohani said:
“[Air India] achieved operational profits for the last financial year which means we
were at least able to meet our expenditure. We used to attract a lot of negative vibes
and reporting in the media. That has tapered down. Our services have improved... But
I am using the word partly, because the legacy problems remain. The big burden —
our debt remains... My biggest threat is debt... remove that, and we will beat
everyone hollow.”21

19 Authors' calculations based on data obtained from Moneycontrol.com.financials.

20 Bhargava, J. (2015, July 8). SpiceJet's revival has lessons for Air India. Business Standard, accessed November 25, 2017.
Retrieved from http://www.business-standard.com/article/opinion/jitender-bhargava-spicejet-s-revival-has-lessons-for-
air-india-115070801317_1.html.
21 Chowdhury, A., & John, S. (2017, January 7). Take off the debt, Air India will beat everyone hollow: Ashwani Lohani. The

Economic Times, accessed November 25, 2017. Retrieved from

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When Air India posted operating profits for the first time in a decade in 2016, Lohani was upbeat about
the airline’s progress; however, being a very practical leader, he cautioned against believing that Air
India had the tide turning strongly in its favor. Referring to Air India’s success in posting operating
profits in a May 2017 interview,22 he said, “[2016] has been a good year. The airline has stabilized ...
Expansion is on track both internationally and domestically. It has been a satisfactory year except for
the debt.” However, he also cautioned against unrealistic hopes that Air India would soon be able to
overcome its huge debt, stating:
“We need divine intervention to resolve [the debt issue]. I didn’t know [in 2009] that
when I get this airline, it will have a debt of 50,000 crores [500 billion]... Had there
been no debt, I would have fixed the airline by now. Debt is a humongous challenge.
... Till the debt is resolved, Air India will continue to be a sick company.”23
LOHANI, THE TURNAROUND MAN
In his book, Taking charge: Management guide to troubled companies and turnarounds, John O.
Whitney clearly detailed the expectations around a turnaround leader. He observed that leadership
during a turnaround was very different from leadership during regular times. A turnaround leader was
expected to be in full control of the organization through careful and frequent personal scrutiny.
Stakeholders expected a turnaround leader to take control of the sinking organization by doing the
following: laying stringent controls on operating expenditures, carefully reviewing capital projects,
restructuring the organization chart, clearing up a highly disorganized mess, and most importantly,
showing stakeholders that the organization was high on disaster control and that all necessary
corrective measures were being implemented.24 Following Lohani’s appointment as Air India’s CMD,
a government official remarked, “He is an honest professional and does not bow to political will.
Looking at his considerable experience with public sector undertakings in the past, he could help turn
around Air India.”25

Lohani’s image as the “turnaround man” from his previous assignments followed him to Air India. He
was credited with turning around several ailing public organizations:26

x He was credited with leading the perennially loss-making public sector five-star hotel chain,
Ashoka Hotel, to profitability in the year 2002-03. Having been instrumental in ensuring that
the hotel was taken off the disinvestment list, Lohani steered Ashoka Hotel to a profit of INR
30 million against a loss of INR 90 million in the previous years.

x He led the dramatic turnaround of the fortunes of the ailing tourism sector of Madhya Pradesh
by developing heritage sites in the state. To that extent, during his tenure as the CMD of

http://economictimes.indiatimes.com/opinion/interviews/take-off-the-debt-air-india-will-beat-everyone-hollow-ashwani-
lohani-chairman-air-india/articleshow/56363917.cms.
22 Shakil, S. (2017, May 7). Interview: Employees come first says Air India chief Ashwani Lohani after Ravindra Gaikwad row.

DNA India, accessed November 25, 2017. Retrieved from http://www.dnaindia.com/india/interview-we-will-have-to-start-

hiring-unless-we-want-to-sink-says-ai-chief-2429795.
23 Ibid.
24 Whitney, J. O. (1998). Taking charge: Management guide to troubled companies and turnarounds. Washington, D.C:

Beard Books.
25 Bhargava, Y. (2015, August 20). 'Turnaround man' Ashwani Lohani to head Air India. The Hindu, accessed October 26,

2017.Retrieved from http://www.thehindu.com/business/Industry/Turnaround-man%E2%80%99-Ashwani-Lohani-to-head-

Air-India/article10323652.ece.
26 Ashwani Lohani IRSME is now new Air India chief. (2015, August 22). Rail News, accessed October 26, 2017. Retrieved

from http://www.railnews.in/ashwani-lohani-irsme-now-new-air-india-chief/.

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Madhya Pradesh Tourism, the state received several national tourism awards, including the
award for the “Best Tourism Performing State in the Country” in 2008.

x He played a key role in securing world heritage status for several projects that needed to be
turned around, namely, the Darjeeling Himalayan Railway, the Mahabodhi Temple at
Bodhgaya, and the Chhatrapati Shivaji Terminus in Mumbai.

x During his tenure as the Divisional Railway Manager, Lohani achieved substantial quantitative
and qualitative improvements at railway stations and work areas, earning national awards and
appreciation for the division. He was highly instrumental in revamping New Delhi Railway
Station ahead of the Commonwealth Games. By involving employees in this endeavor,
Lohani’s efforts resulted in New Delhi Railway Station being awarded the “most tourist
friendly station’ in 2011 and 2012. The Commonwealth Games committee applauded Lohani’s
infrastructure improvement efforts at the railway station.
Though Lohani came with vast experience in terms of providing turnaround leadership, his
appointment as the CMD of Air India surprised many because he was not an IAS officer. He was an
Indian Railways Service Officer who was working with the Madhya Pradesh government at that time.
Soon after replacing Rohit Nandan, a senior IAS officer, as the CMD of Air India, Lohani set to work
dismantling the bureaucratic way of operating that he deemed responsible for Air India’s poor
performance. Known to be a competent bureaucrat who achieved what he desired, Lohani recognized
Air India’s root problems early on. He used simplicity, hard work, and professional and personal
integrity to make positive changes, such as curbing misappropriation of funds and abuse of air travel
policies in the ailing organization. One noteworthy example was the manner in which Lohani did away
with Air India’s undesirable practice of providing free air tickets worth exorbitant amounts to family
members of bureaucrats. To curb this evil, Lohani wrote a missive to Air India’s staff instructing them
not to give any free air tickets to his family members. He further stated that those who tried to freely
upgrade their relatives from economy class to business class (the tariff of which was five times higher
than that of economy class) risked punishment.27 In another major improvement, Lohani stopped the
practice of being received at the airport by a battery of officials as he saw it as both feudal and as
incurring unnecessary expenditure.28
Lohani was especially known for bonding well with employees, something that was absolutely needed
at an organization that was plagued by low employee morale. On two different occasions involving
the manhandling of Air India employees by politicians, Lohani stood his ground and supported his
employees without succumbing to political pressure. He had stated in the past that his policy stemmed
from the following words from Virgin Group’s founder Richard Branson: “Clients do not come first.
Employees come first. If you take care of your employees, they will take care of the clients.” 18 Time
and again, Lohani sent out a strong message that Air India’s employees should not be blamed for its
financial woes — it was the top management that needed to own up. He said, “It makes me sad when
the common employee is often blamed for the ills of the organization, whereas the real reason for the
debacle lies elsewhere — in my opinion, on the head honcho.”29 This attitude served Air India well in
overcoming several financial issues related to human resources and employee concerns. According to
Lohani, while external factors were not under the airline’s control, he would aim to continue to boost

27 Mohanty, N. R. (2016, August 1). Is Ashwani Lohani really 'Turnaround man' for Air India? Huffington Post India,

accessed October 26, 2017.Retrieved from http://www.huffingtonpost.in/n-r-mohanty/is-ashwani-lohani-really-

turnaround-man-for-air-india/.
28 Vij-Aurora, B. (2017, April 10). The boss who stood up. Outlook India, accessed October 26, 2017. Retrieved from

http://www.outlookindia.com/magazine/story/the-boss-who-stood-up/298707.
29 Authors' interview with Ashwani Lohani.

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the morale of employees. In a 2016 Live Mint interview, he said, “We are bringing tremendous focus
on human resources (HR). I’m very accessible. Close to 100 to 200 people contact me every day —
either physically, through text messages, phone calls or WhatsApp. The management is looking at their
problems and issues.”30
Overall, experts agreed that Lohani brought about positive governance and structural changes at Air
India to enforce accountability and integrity, and that his operational efficiency sent strong signals to
investors and stakeholders that the airline was in safe hands.
AIR INDIA’S RESTRUCTURING PLAN
The government was pushing for the self-sufficiency of its undertakings and was scouting for ways to
bring down its stake in Air India to less than 51%. One of the options it had considered was to get the
Life Insurance Corporation of India (LIC) to shoulder some of the debt burden. Another option was to
ask the lender banks to convert a part of the debt into equity. However, divesting in Air India in its
present health would be difficult as it was unlikely to get too many buyers. Thus, restructuring of the
working capital portion of its debt was an option that would help cut its interest burden. Further, to
cut down on the aircraft loan, Air India could sell aircraft that it owned and then take them back on
lease.
There seemed to be three options for restructuring the loans. One was to get banks to convert a part
of the loans into equity. The second was to swap the “high-cost debt” with non-convertible
debentures, which would cost 7-8%, resulting in annual savings of around INR 2 billion. The third
option was that banks could be issued preferential capital with a fixed rate of dividend payable.
According to an airline official:
“This way there will be no dilution of equity. SBI Caps [SBI Capital Markets — India's
largest investment bank] had suggested this model but it did not find favour with
banks earlier. Anyway, most of our loan is from government banks and converting to
equity will still mean that [Air India] continues to remain fully government-owned.”31
The restructuring of the debt was being planned under RBI’s Scheme for Sustainable Structuring of
Stressed Assets (S4A). The S4A scheme allowed for the restructuring of large ticket loans where the
project or company was up and running. Under this scheme, lenders were required to separate the
sustainable loan, or the portion of the loan where timely repayment was possible, from the
unsustainable portion. The bank would convert the unsustainable debt into equity or equity related
instruments. This would lower the debt burden of the borrower, while the bank, as a shareholder,
would gain from the improved valuation should a turnaround at the company happen. A 2016 Firstpost
article reported:
“The scheme allowed debt recast of the sustainable portion of a loan in case 75% of
the lenders, who hold 50% of the value of the debt, agree ... Of the INR 200 billion
[working capital] debt under S4A, INR 100 billion each had been classified as

30 Mohile, S. S. (2016, September 12). Air India wants to do a debt restructuring: Ashwani Lohani. Live Mint, accessed

October 26, 2017. Retrieved from http://www.livemint.com/Companies/Cjw0gvAuhmaploLXQNW24K/Air-India-wants-to-

do-a-debt-restructuring-Ashwani-Lohani.html
31 Sinhal, S. (2016, March 26). Air India wants banks to take fresh haircut to turn a profit. Times of India, accessed October

26, 2017. Retrieved from http://timesofindia.indiatimes.com/business/india-business/Air-India-wants-banks-to-take-fresh-

haircut-to-turn-a-profit/articleshow/51556812.cms.

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sustainable and non-sustainable. So, the non-sustainable portion of INR 100 billion is
being converted into equity.”32
This would help the airline reduce its interest payment outlay from INR 40 billion annually to INR 10
billion.33
KEY ISSUES IN IMPLEMENTATION
Though talks had begun to discuss the restructuring, there were several aspects to be decided. What
should be the time frame for the restructuring plan? Once the banks agreed to come on board to take
this step, what should be the price? Pricing the shares for loan conversion was going to be a challenge
as Air India’s equity shares were not listed. 34 Given that it would have to be based on subjective
judgment, would banks and private parties be keen to hold a stake in it? There might be concerns
about the shares turning out to be duds. Whether the banks involved came on board or not could also
depend on the desperation they themselves faced about rising bad debts in the system — it was
possible that Air India’s loan for equity proposal might be the best bet yet for banks to reduce some
of the red ink on their own balance sheets.
Should banks be asked to factor in Air India’s asset base of INR 420 billion? An Air India executive told
The Times of India:
“Our shares are at a par value of INR 10 and conversion will have to take place at our
enterprise value or market capitalization. The listed airlines’ current share prices
range from Rs 65 for SpiceJet to Rs 896 for IndiGo and Jet at Rs 553. We too will have
to find our share's correct price based on market valuation.”35
AIR INDIA TO BE PRIVATIZED
Towards the end of May 2017, the Indian government announced that it was looking to fully privatize
Air India. In mid-May 2017, Niti Aayog, in a report to the Indian Prime Minister’s office, recommended
the total privatization of Air India, whereby the government could exit Air India completely. In support
of Air India’s total privatization, Niti Aayog cited various international examples of governments selling
their entire stakes in airlines and not retaining any shareholding in order to make them viable. British
Airways, Japan Airlines and Austrian Air were some of the examples given in this context. On May 28,
2017, in a panel discussion on Doordarshan News, Indian union finance minister, Arun Jaitley, revealed
that the government was looking to bring in a strategic investor to facilitate its total disinvestment in
Air India. Referring to the urgency of the matter, Jaitley pointed out that the Indian government was
hopeful of making a decision on the future of Air India within three months. Making a strong case for
Air India’s privatization and the inclusion of a strategic investor, Jaitley said, “If there is a good
management that comes forward, the government has a very good view on this. Out of the INR 50,000
crores [500 billion], about INR 20,000-25,000 crores [200 billion-250 billion] is the valuation of the
aircraft, and for the rest of the debt there are some assets of Air India.” Pointing out that Air India had

32 Bhattacharya, S. (2016, October 27). Banks could hold up to 40% stake in Air India: How the airline is deleveraging.
Firstpost, accessed October 26, 2017.Retrieved from http://www.firstpost.com/business/banks-could-hold-up-to-40-stake-
in-air-india-how-the-airline-is-deleveraging-3076342.html.
33 Ibid.
34 Murlidharan, S. (2016, October 24). Air India may benefit from restructuring scheme but banks could be saddled with

duds. Firstpost, accessed October 26, 2017.Retrieved from http://www.firstpost.com/business/air-india-may-benefit-from-

restructuring-scheme-but-banks-could-be-saddled-with-duds-3069442.html
35 Sinhal, S. (2016, March 26). Air India wants banks to take fresh haircut to turn a profit. Times of India, accessed October

26, 2017. Retrieved from http://timesofindia.indiatimes.com/business/india-business/Air-India-wants-banks-to-take-fresh-

haircut-to-turn-a-profit/articleshow/51556812.cms

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a market share of 14% and a debt of INR 500 billion, Jaitley contended that public money was not
invested in private sector airlines such as IndiGo, Spicejet, GoAir and Jet Airways. Therefore, the need
for investing INR 500 billion in debt-ridden Air India was unwarranted. Further strengthening his
stance, Jaitley said, “If 86% of the flying can be handled by the private sector, they can handle 100%
as well.”36 The biggest challenge in privatizing Air India, however, was finding an investor who would
be willing to take up the debt-ridden airline with its mountainous burden. Was it feasible to find such
an investor? How could this be made to work?
Finding private investors for airline companies in India was not particularly challenging as they had
been showing tremendous interest in investing in Indian airline companies. In fact, though private
equity (PE) firms had traditionally shied away from volatile industries such as aviation, they had
become more actively involved in investing in India’s airline industry, primarily owing to the industry’s
potential for growth and its increasing lucrativeness. For example, in mid-July 2017, Jet Airways
announced that in order to raise capital to fund operations and to face growing competition, it was
looking to sell a 24% stake in the company, which amounted to INR 16.512 billion (US$ 256 million).
Several prominent global carriers such as Lufthansa, KLM-Air France and Delta had shown interest in
acquiring stake in Jet Airways. Further, several major global bulge bracket private equity firms such as
the Blackstone Group, KKR & Co., and TGP Capital also joined the race to invest in Jet Airways. 37
Interestingly, though both Air India and Jet Airways had been seeking to attract private investors
around the same time, Jet Airways was far ahead of Air India in terms of attracting PE firms.
STRATEGIC BUY-OUT
In the last week of June 2017, Indian newspapers announced that Tata Group Chairman N.
Chandrasekaran was holding informal talks with the Indian government over buying a controlling stake
in Air India with 51% equity. It was reported that the Tata Group, along with its existing joint venture
partner Singapore Airlines, might be looking to buy Air India from the government.38 As of 2017, the
Tata Group had joint ventures with two airlines: 1) The low-cost carrier AirAsia India in partnership
with Malaysia’s AirAsia Berhad, and 2) Vistara in partnership with Singapore Airlines. Both AirAsia and
Vistara were relatively small compared with Air India, were late entrants in the Indian domestic
aviation market, and were hindered by slot constraints and pilot shortages. As an established airline,
Air India had the potential to complement Tata Group’s joint venture airlines.39 Tata Group’s strategic
buy-out of Air India was viewed as a homecoming for Air India, which was originally owned by the Tata
Group before it was nationalized in 1953. Tata’s offer to buy out Air India didn’t surprise industry
experts as the Tata Group had expressed interest in the strategic buy-out of Air India in 2013 itself. At
that time, Ratan Tata, the Chairman of Tata Group said, “Tata would be happy to look at Air India as
and when its privatization happens”.40 For the Tata Group, gaining a major stake in Air India would

36 Ek nayi subah: A conversation with Finance Minister Arun Jaitley. (2016, May 28). Doordarshan News.
37 Barman, A., Indulal, P.M., & Mishra, M. (2017, July 13). Global carriers, PE firms join race to acquire 24 per cent stake in
Jet Airways. The Economic Times, accessed November 25, 2017. Retrieved from
http://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/global-carriers-pe-firms-join-race-to-
acquire-24-per-cent-stake-in-jet-airways/articleshow/59535451.cms.
38 Tatas may buy debt-ridden Air India in partnership with Singapore Airlines; Report. ( 2017, June 21). India Today,

accessed November 25, 2017 Retrieved from http://indiatoday.intoday.in/story/tata-group-may-buy-debt-ridden-air-

india/1/984151.html.
39 Phadnis, A. (2017, June 22). Air India history coming full circle? Tata, govt in talks for stake deal. Business Standard,

accessed November 25, 2017Retrieved from http://www.business-standard.com/article/companies/air-india-history-

coming-full-circle-tata-govt-in-talks-for-stake-deal-117062200048_1.html.
40 Tata Group may buy Air India: Report. (2017, June 21). Times of India, accessed November 25, 2017 Retrieved from

http://timesofindia.indiatimes.com/business/india-business/tata-group-may-buy-air-india-
report/articleshow/59251402.cms.

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signal that the airline had come full circle, but for Air India’s added baggage — its whopping debt of
INR 520 billion.
IndiGo, India’s largest airline41 in terms of passengers carried, fleet size and market share, expressed
interest in acquiring Air India’s operations. In tune with its plans of starting low-cost, long haul
international flights, in July 2017, IndiGo expressed interest in buying out the operations of debt-laden
Air India.42 Pointing out that the air transport opportunities in the Indian market were highly lucrative
and yet mostly untapped, IndiGo’s founders clearly spelled out that company’s interest in Air India
was narrowly focused on acquiring only Air India’s international operations and Air India Express. One
of IndiGo’s founders, Rahul Bhatia, indicated that if the government decided to sell all of Air India’s
operations to a single entity, then IndiGo would explore the option of buying Air India’s operations in
total. Further, suggesting that IndiGo was fully cognizant of the challenges that came with buying Air
India’s operations, Bhatia said:
“In our view, that would be a herculean task which would at best [be] a very
challenging proposition and at worst an impossible task, unless an organization is
willing to fund large losses for a very long time... Acquiring all of Air India’s operations
will bring with it a lot of issues and many more challenges and complexities. We will
assess whether it would be feasible for us to go down that path. At the end of the day,
the exercise is not to become bigger for the sake of becoming bigger, but it is all about
profitable growth and that is the bedrock principle at IndiGo.”43
DOLLARIZING DEBT
Another one of Air India’s options was to convert its rupee loans into dollar debt. Dollarizing debt
would not only lower interest costs, but also possibly reduce principal repayment in the event of rupee
appreciation. The advantage of converting rupee loans to dollar loans was fairly evident: If Air India’s
debt was paid in terms of rupees, then even at a subsidized interest cost of 7%, the interest amount
payable would be INR 35 billion on INR 500 billion. On the other hand, if rupee loans were converted
to dollar loans, then, even with a government of India benchmark of 8%, the equivalent LIBOR interest
rate would be 1.2%. Because of the low benchmark, interest costs would be subsidized by switching
rupee loans and paying them in US dollars, which were more constant. For instance, instead of paying
8% on rupee loans, converting them to dollar loans would at most carry an interest of 2.5%, leading
to an interest cost savings of INR 25 billion. That said, the potential risks with dollarizing debt needed
to be taken into account while considering this option: If the dollar were to depreciate, that would
lead to a fluctuation in the repayment value and Air India would stand to benefit. However, if the
rupee were to depreciate, dollarizing debt would work against Air India. How much risk could be taken
in this regard?
THE WAY FORWARD
The operating profit posted by Air India caused many to believe that perhaps the airline had finally
turned the corner. But the fact remained that Air India’s undiminished debt stood unabated by any
means. Lohani’s reputation as the turnaround man had indeed helped in boosting investor and
stakeholder confidence in Air India’s ability to post operating profits. It remained to be seen if Air

41 Directorate General of Civil Aviation. Traffic report 2017. Retrieved from

http://dgca.nic.in/reports/Traffic_reports/Traffic_Rep052017.pdf.
42 IndiGo keen on acquiring Air India's international ops and Air India Express. (2017, July 8). Hindustan Times (PTI),

accessed November 25, 2017 Retrieved from http://www.hindustantimes.com/india-news/indigo-keen-on-acquiring-air-

india-s-international-ops-and-air-india-express/story-upwMrhbZYVBJPQbFaMpIfL.html.
43 Ibid.

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India’s modest operating profits could provide realistic relief to the ailing airline in terms of debtors
knocking at its door. It needed to be seen where and how Air India would land in the days to come:
Could it continue with its modest operating profits under the leadership of Lohani without much
change to the debt situation? Or would it be left with no option other than to deal with the debt first
to overcome the elephant in the room? Would it be privatized, given that finding an investor was a
formidable task in itself? Would it opt to dollarize debt? What was the way forward for the Maharaja
to get free from the debt trap?

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EXHIBIT 1
SOME PROBLEMS PLAGUING AIR INDIA

Source: Banerjee, K. (2017, June 21). Tatas may buy debt-ridden Air India in partnership with Singapore Airlines: Report.
India Today, accessed November 25, 2017. Retrieved from http://indiatoday.intoday.in/story/tata-group-may-buy-debt-
ridden-air-india/1/984151.html

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EXHIBIT 2
AIR INDIA’S PRE-MERGER FINANCIALS

Source: Manghat, S. (2016, August 19). Can Air India, saddled with over Rs 51,000 crore debt, really turn around?
BloombergQuint, accessed November 25, 2017. Retrieved from
https://www.bloombergquint.com/business/2016/08/19/can-air-india-saddled-with-over-rs-51000-crore-debt-really-turn-
around.

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EXHIBIT 3
COMPARATIVE FINANCIAL NUMBERS OF DIFFERENT AIRLINES (INR MILLIONS)

Year SpiceJet Air India Jet Airways IndiGo

2011-12 37,079.00 43,191.60 89,813.30
2012-13 48,104.77 48,873.40 95,754.10 NA
Operating Expenses 2013-14 60,081.98 63,303.20 102,152
2014-15 48,057.59 80,791.80 95,380.70 77,007.24
2015-16 37,009.44 NA 76,890.90 73,914.76

2011-12 522.57 38,860.70 10,057.90

2012-13 1157.18 38,689.60 11,942.90 NA

Finance Cost/ Interest
Expense 2013-14 1366.15 40,713.40 10,836
2014-15 1,635.39 40,282.80 9,204.70 1,155.32
2015-16 1,153.93 NA 8849.8 1,348.53

2011-12 -6,057.68 -75,597.40 -14,201.30

2012-13 -1910.76 -54,901.60 -7,798 NA
Profit/Loss for the
2013-14 -10,032.44 -62,796.00 -41,297.60
Year
2014-15 -6,870.54 -58,599.10 -20,974.10 13,041.72
2015-16 4,071.99 NA 12,116.50 19,897.20

2011-12 7,442.94 320261.2 93,180.50

2012-13 15,645.03 397358.1 73,845.50 NA
Non-current
2013-14 13,917.78 378630.4 71,610.30
Liabilities
2014-15 13,306.40 363568.7 80,292.60 73,985.23
2015-16 12,279.12 NA 74,890.80 71,989.60

2011-12 13,732.77 270.886.6 112,411.40

2012-13 17,309.52 232,355.20 127,979.20 NA
Current Liabilities 2013-14 25,621.65 263,879.00 141,239
2014-15 26,065.90 280,678.90 154,009.20 29,490.27
2015-16 27,037.91 NA 150,192.20 39,858.74

Note: As IndiGo went public in November 2015, publicly available financial information for that company was available
only from 2015.

Source: Annual Reports of SpiceJet, Air India, Jet Airways and IndiGo.

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EXHIBIT 4
AIR INDIA’S OPERATING PROFITS (LOSSES) FOR 2014 AND 2015

2014 (INR billion) 2015 (INR billion)

Operating revenue 183.7096 198.0171

Operating loss 21.8563 6.4259
Finance costs 40.7134 40.2828
Net loss 62.796 58.5991
Borrowings (as on March 31) 483.5928 495.6195

Source: Air India.

EXHIBIT 5
COMPARATIVE FINANCIAL NUMBERS OF DIFFERENT AIRLINES (IN INR MILLIONS)

Airlines Air India Jet Airways Spicejet

Financial Year 2014-15 2015-16 2014-15 2015-16 2014-15 2015-16
Operating Revenues (in INR billions) 206.13 205.26 201.32 219.22 52.43 50.88
Fuel Expense (in INR billions) 65.96 49.26 67.02 50.31 24.10 13.92
SG&A and Other Expenses (in INR 166.53 154.95 135.46 146.76 35.77 33.82
billions)
Operating Profit (in INR billions) -26.36 1.05 -1.16 22.14 -7.43 3.15
Operating Margin -13% 1% -1% 10% -14% 6%
Fuel Expense as % of Revenue 32% 24% 33% 23% 46% 27%
SG&A and Other Expenses as % of 81% 75% 67% 67% 68% 66%
Revenue

Source: Air India.

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