The Comptroller and Auditor General (CAG) criticised the decision to acquire 111 planes by Air India, saying it was "a recipe for disaster" and should have raised alarm in the government.
In a report, which was tabled in Parliament on Thursday, the national auditor said the aircraft acquisition through debt had "contributed predominantly" to the airline's massive debt liability, which stood at Rs 38,423 crore as on March 31 last year.
In the report, CAG also called the merger of two erstwhile state-run carriers - Air India and Indian Airlines - "ill-timed" and said that "the financial case for the merger was not adequately validated prior to the merger".
"The entire acquisition (for both Air India and Indian Airlines) was to be funded through debt (to be repaid through revenue generation), except for a relatively small equity infusion of Rs. 325 crore for Indian Airlines.
"This was a recipe for disaster and should have raised alarm signals in Ministry of Civil Aviation, Public Investment Board and the Planning Commission", the report said.
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The CAG has recommended "a total hands-off approach (by the government) with regard to the management of the airline".
The report dealt with several aspects of the ailing national carrier's losses, fleet acquisition, merger, huge debt burden, delay in joining the global airline grouping Star Alliance and its financial and operational performance.
The CAG also questioned the "speed" at which the acquisition process for 68 aircraft proceeded. Observing that many assumptions for the revised plan were "flawed", the CAG said the negotiation process was "irregular and adversely affected the transparency of the process".
Noting that the fleet acquisition process took an "unduly long time", the auditor said the initial proposal was made in December 1996 and its examination continued "in fits and starts" till January 2004 when a plan was made to buy 28 planes, which was revisited and later a decision taken to acquire 68 aircraft.
It said the revised plan saw "a dramatic increase" in the number of planes to be purchased and maintained and the sequence of events up to November 2004 clearly demonstrated that the pre-merger AI "hastily reworked" its earlier plan.
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"This increase in numbers does not withstand audit scrutiny, considering the market requirements obtaining then or forecast for the future, as also the commercial viability projected to justify the acquisition. The acquisition appears to be supply-driven", the report said.
Maintaining that "no benchmarks" relating to comparable prices and commercial intelligence were set, it said, "Consequently, in the absence of such benchmarks, the effectiveness and efficacy of negotiations and the reasonableness of the price arrived at is difficult to ascertain".
The public audit body also took the Civil Aviation Ministry to task for liberalising the bilateral air traffic entitlements with other countries in a manner which "did not provide a level playing field to AI (and to a lesser extent other Indian private airlines)".
"These (bilateral) agreements, besides not affording adequate time to AI/IA (Indian Airlines) to set their houses in order and gear up for a highly competitive environment, very evidently worked to the detriment of the national and Indian private carriers", the CAG said. "At this stage, Indian carriers (including AI) will have to tackle renewed and serious challenges to compete effectively with established international 'mega carriers' ".
Terming the merger "ill-timed", the report said this exercise was undertaken "strangely from the top (rather than by the perceived needs of both these airlines), with inadequate validation of the financial benefits".
The merger was also carried out "without adequate consideration of the difficulties involved in integration (notably in terms of HR and IT, among other areas)".
The report cited many factors responsible for the "critical" state of affairs in AI, including "chronic operational deficiencies, a weak financial position, grossly inadequate equity capital and undue dependence on debt funding providing little or no cushion for the financial shock when it came".
"The airline is in a crisis situation. Salary payments and ATF obligations are becoming difficult. If the airline has to survive, the management and employees will have to set personal interests aside and undertake some harsh decisions, till the health of the airline improves", the CAG emphasised.