Air India-Indian Airlines merger: A study on how not to merge two entities

Anatomy of a failed merger

     Print Edition: June 24, 2012

No public enterprise in recent memory epitomises the adage "the government should not be in the business of running a business" as much as Air India.

From being a market leader on domestic routes in 2001 - the operation was called Indian Airlines then, before it merged into Air India - to becoming an also-ran today, the airline makes for a case study on how not to merge two entities. Many insist the 2007 merger was doomed long before the latest strike.

Geetanjali Shukla lists the factors that have dragged the airline down and possible fixes based on conversations with experts:

1. LEADERSHIP
Praful Patel, the aviation minister who led the Air India-Indian Airlines merger in 2007, has been keeping a low profile since a pilot strike stalled the airline's cashmaking international operations.

Current Aviation Minister Ajit Singh pulls his punches when he talks of coalition colleague Patel: "In retrospect, it is easy for people to say things. At the time of the merger it must have seemed the right thing to do."

But others point out Air India has had four chairmen in the last six years with no one biting the bullet on tough decisions.

 "How can you think of achieving success with such instability at the top," asks Kapil Kaul, CEO-South Asia, Centre for Asia Pacific Aviation.

For full interview, go towww.businesstoday.in/ajitsingh

SOLUTION:
Appoint a professional CEO backed by a strong board of directors and give him a free hand (Accenture, the consultant at the time of the merger, had recommended a minimum five year tenure). In effect, the government will have to cede control of day-to-day running of operations and appoint independent directors (an experiment attempted earlier).


2. BLOATED HEADCOUNT
The merger brought together two disparate entities and created a behemoth with 30,517 employees - 214 per plane. Singapore Airlines has 161 while British Airways has 178.

Air India's high employee-aircraft ratio is expected to come down to 110 per aircraft once 19,000 employees are transferred to two new proposed units - one for ground handling and the other for maintenance, repair and overhaul (MRO) operations. But, even here, workers want to be deputed rather than transferred.

SOLUTION:
Carry out the planned spin-off of the ground handling and maintenance, repair and overhaul operations. Offer a voluntary retirement scheme if still necessary.


3. HR INTEGRATION
If the jumbo-sized staff was not enough of a headache, the way the management went about integrating the workforce made for a perfect storm.

No attempts were made to standardise hiring policies for the rank and file. Air India has a five-day week; Indian Airlines has a six-day week. Indian Airlines pilots were promoted unconditionally once in six years while Air India pilots complained they got their turn after 10 years - if there was a vacancy. The ground handling teams of the two airlines continue to operate separately...

"Before the merger, due diligence on HR issues was very poor," says CAPA'S Kaul. Some of the gaps are being addressed but the process has been painfully slow. Five years after the two airlines merged, staffers below the level of deputy general manager have still not been integrated.

FULL COVERAGE:Air India crisis

Even before the report by the Dharmadhikari Committee, set up to look into Air India's HR issues, was released, Air India CMD Rohit Nandan told BT: "It will not be an easy report to deal with." The panel has suggested uniform working hours and pay scales, among other things. But that, at best, is a beginning.

SOLUTION:
Air India will have to cut layers of management, align staff by role, bring in lateral hires, overhaul customerfacing functions, and implement a massive training exercise. And, rein in pilots and engineers, even if it means a partial lockout. Minister Singh's answer was a noncommittal "I hope not", when asked about such a possibility.

What we learn from Air India, Indian Airlines merger

4. AIRCRAFT, TICKETING
Look at any modern airline operation and you notice the obsessive attention to pare costs. And, one way airlines have success full yworked at eliminating expenses without hurting the service experience is to have a fleet with a single aircraft type.

After the merger, Air India continues with both Boeing and Airbus-made planes: the international operations are run mostly by wide-body Boeing 777 jets, while domestic routes mostly use A320S. The result: high operations, maintenance, and manpower costs.

Air India was also hurt by the delay in integrating the two airline reservation systems. A single system allows it to sell tickets under one airline code, join alliances and ink code-share agreements. It took until February 2011 for a common reservation system to come up.

SOLUTION:

There are airlines that run successfully with two or more aircraft types. But India is a price-sensitive market, and a model built around a single aircraft-type makes compelling sense.

IndiGo, India's only profitable airline, uses 56 Airbusmade jets to fly to places as diverse as Bangalore and Bangkok. Airline mergers the world over have had abysmal success rates.

Even the Delta Air Lines and Northwest Airlines merger in the US, considered successful, took more than two years to start operating as a single carrier.


5. LEAKY FINANCIALS
No business enterprise, not even one backed by the sovereign, can survive years of losses with no turnaround visible. The airline's total debt, as of financial year 2011, was Rs 44,000 crore. About half of that is from long-term loans for aircraft purchase.

A CAG report termed the purchases a "recipe for disaster" . While acquiring some 110 new planes may have made strategic sense for the national carrier in the mid-2000s, Air India did not have the financial health to sustain a spend of Rs 40,000 crore.

SOLUTION:
Turning Air India around will be a long haul. The government and the airline should be clear that the odds of its survival are slim. But together with incentives, a charismatic leader and conditional support from the government, Air India could fly again.

The flag carrier did so well in the 1960s and 1970s that a certain fledgling airline from Singapore came visiting to learn from it and grew into the feted Singapore Airlines of today.

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