Air India buying spree attacked

14 Sep 2011 2079 | World Travel News

India’s government has hit back at claims by the national financial watchdog that state-run carrier Air India botched a multi-billion-dollar aircraft purchase, putting the firm’s future at risk.

The Comptroller and Auditor General (CAG) said in a report that the “risky” acquisition of 111 new Boeing and Airbus jets was mistimed and imposed “an undue long-term financial burden on the carrier”.

But Civil Aviation Minister Vayalar Ravi said late last week that it was a collective decision by government and Air India management to buy the aircraft and was designed to strengthen the ailing airline.

The 68 Boeing and 43 Airbus aircraft are costing the crisis-hit airline about 455 billion rupees (nearly US$10 billion).

The CAG said the entire acquisition, to be funded through debt, “was a recipe for disaster” and it should have raised alarm bells for the ministry and India’s top government policy think tank, the Planning Commission.

Assumptions that the new planes would lead to an increase in Air India’s market share were “unduly optimistic” and “not validated”, it added.

However Ravi’s predecessor, Praful Patel, who oversaw the acquisitions, said the move was essential to keep the national flag-carrier afloat, amid increasing competition for passengers from private airlines.

“Air India was functioning with planes that were 20 years old,” Patel was quoted as saying by the Times of India newspaper on Friday.

“If we wanted to do well we needed new aircraft, but were also aware that the company’s financial situation would not have permitted it.

“It was a Catch-22 situation.”

About 30 of the 68 Boeing planes are yet to be delivered.

Bureaucratic hurdles and a multi-layered decision-making process often lead to delays in executing strategic plans for Indian state-owned firms.

The CAG’s report is likely to intensify public mistrust of the Congress party-led government, which has been under intense political pressure for months after a string of corruption scandals.

Air India has been in the red since 2007, when it merged with domestic carrier Indian Airlines, and has seen its share of passenger traffic fall due to competition from private, domestic low-cost airlines.

Mounting debts have left it struggling to pay staff, as it awaits a further government cash injection and a turnaround plan.

Yet at the same time, a younger fleet would make it more efficient, improve flight punctuality and make it less prone to technology-linked risks.

The CAG recognised the dilemma but indicated another solution was required, warning that “piecemeal infusion of small amounts is merely going to at best delay the certain closure of the airline”.

Air India declined to comment on the CAG report, with a spokesman describing it as “an observation from one government agency on another”.

Aviation analysts said the carrier could still survive if it manages to reduce its ballooning debt burden.

Mahantesh Sabarad, from Fortune Equity Brokers in Mumbai, insisted the company has a future, despite the intense competition.

“All is not lost, but it needs to lower its debt burden quickly, which could happen if it decides on hiving off non-core assets like land, property and renegotiates its debt interest rates,” he added.

Air India, which is not a publicly-listed company, is estimated to have suffered a pre-tax loss of 70 billion rupees (US$1.52 billion) in the last financial year ending March, with debts of more than US$7 billion.

Source - ttrweekly