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It may be time to dust up the Kelkar report

It may be time to dust up a 15-year-old report prepared by former finance secretary Vijay Kelkar who had made a forceful case to disengage the government from Air India through a carefully crafted privatisation process. Chanakya writes.

columns Updated: Oct 13, 2013 00:22 IST

This is not the usual merry festive month. Job openings are shrinking and salaries are not rising fast enough to cover for inflation that remains worryingly high. Everybody from tycoons expanding their businesses, to students mining their pocket money and the government are coming around to a mood of trading down or austerity seeing the writing on the wall.

As I waited at the departure lounge for an early morning Delhi-Mumbai flight to take off (the summer rains have stayed on well into autumn affecting the odd flight), I began to notice wisdom in the civil aviation minister Ajit Singh’s recent remarks favouring privatisation of Air India. In this season of parsimony, why shall one particular enterprise be an exception, especially because budgetary support to public enterprises shows up as expenditure in the government’s books?

It is sometimes constructive to divide India’s public sector universe into three broad groups: companies that are making healthy profits and boast of strong balance sheets; companies that are making losses but have the potential to yield profits by straightening a few bends; and companies that have turned sick by turning in losses year after year.

How would one classify Air India in this categorisation?

Let us look at a few bare facts. The company’s accumulated losses totalled more than Rs 30,000 crore. The balance sheet is riddled with debt holes of more than Rs 43,000 crore. The airline is losing Rs 11 crore every day – meaning, on an average, it earns at least Rs 11 crore less than what it spends.

Other variables also do not compare well with Air India’s private sector peers. The national carrier’s aircraft-employee ratio currently stands at 243:1. This means that there are 243 employees to service every aircraft. This is highly inefficient when placed against a comparable quotient of 150:1, or even less, for many international and domestic carriers.

Punctuality also has not been Air India’s forte. Its average on-time performance ranges just above 80% compared to the more than 90% that some private carriers routinely clock.

Air India’s market share now stands at less than 20% mirroring how over the years the airline has ceded space to new players.

Given these rather feeble financial and operational prospects one would be tempted to place the Maharaja in the third grouping of state-owned companies — perennially loss making firms with remote chances of a turnaround. Contrary to this more obvious line of thinking I would, however, hazard a risk by saying that there appear to be some light at the end of the tunnel for the Maharaja.

The balance sheet maybe still drowned in deep red, but there are early signs of it moving towards black. Earnings before interest, depreciation, taxes and amortisation (EBIDTA) has turned positive for the first time since the controversial merger of Air India with the one-time Indian Airlines in 2007.

There is also some merit in the argument that some of the operational parameters too should start looking up in the coming months. For one, the airline should be able to substantially pare its employee base to less than 20,000 from more than 30,000 now once it successfully hives off the non-core areas such as cargo, aircraft maintenance and ground handling into separate subsidiaries. This, besides making the aircraft-employee ratio comparable with the best carriers, will also sharply bring down the wage bill of the flagship operations.

Privatisation of State-owned companies, or disinvestment as we call it in India, has always been a touchy political question. But, there are compelling reasons for the government to take its hands off companies that have dug themselves into an unending hole of mounting losses and perpetual debt. As a one-off, increasing the floating stock of companies will shore up the government’s balance sheet by lowering their demands for capital expenditure. Purists might argue that disinvestment is faux privatisation — the managerial efficiencies built into the latter do not obtain in the former.

To be sure this QSQT phenomenon brings in tighter scrutiny of market players. (No,I am not talking about the Aamir Khan-starrer 1980s super-hit Qayamat Se Qayamat Tak here; rather I am referring to the focus on efficient of stock market listed companies that leaves little time to relax between quarters and hence the epithet quarter-se-quarter-tak). The QSQT obedience is all the more important for an enterprise such as Air India, which, in my view, can survive only if it functions like an airline, not as a political operation.

It may be time to dust up a 15-year-old report prepared by former finance secretary Vijay Kelkar who had made a forceful case to disengage the government from the Maharaja through a carefully crafted privatisation process. That a former would-be suitor is now its competitor in India’s crowded firmament tells the tale of the Maharaja’s rapid descent. It needs a new owner.