Belt tightening: Air India on its way to profitability this fiscal

New Delhi: If a top official in the ministry of civil aviation is to be believed, Air India is on its way to profitability at the operational level this fiscal, which means it will become EBIDTA positive for the first time since 2007.

This official said the airline has been EBIDTA positive for the nine months ended December and should declare profits at the operational level for 2012-13. But a lot still needs to be improved.

Earlier this month, Civil Aviation Minister Ajit Singh castigated the airline over the estimated monthly average cash flows which showed a net shortfall of Rs 404 crore per month with inflows being Rs 1,348 crore and outflows estimated to be Rs 1,752 crore. The minister had emphasised that the revenue generated should meet the costs incurred.

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[caption id=“attachment_576447” align=“alignleft” width=“380”]  Ajit Singh as asked AI to go into minute operational details to cut the costs including costs incurred on overseas offices, salaries, fuel and office expenses. Reuters[/caption]

There is no doubt that Air India’s performance on all parameters has seen a remarkable turnaround in the last six months. It has regained the third slot (after IndiGo and combined Jet and JetLite) in market share and now, one in five domestic passengers travel Air India. The airline’s on-time performance is at its peak and load factors (number of seats occupied against number of seats offered) match private players.

But to actually post net profit anytime soon, the airline needs to tighten its belt significantly. Singh has suggested stringent cost cutting measures for the airline so that its revenues exceed outflows. The minister has asked AI to go into minute operational details to cut the costs including costs incurred on overseas offices, salaries, fuel and office expenses. Also, he has asked for an assessment of the necessity of deputing staff abroad for assisting Air India/ embassies for ticketing etc since now- a-days these facilities are available online.

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Already, there is a move to get AI the same concessions on jet fuel from oil marketing companies which other private airlines enjoy.

Singh pointed out today that these oil marketing companies are already taking interest on dues of AI so there is no reason why they should not extend the same discounts to AI which are extended to private airlines.

According to a story in Mint newspaper recently, AI is expected to post a net loss of Rs 4,270 crore this fiscal which is much lower than the Rs.7,853 crore loss it posted in 2011-12. Air India had posted a loss of Rs.6,865 crore in 2010-11.

The story quoted the airline’s financial estimates which it has submitted to the ministry to say that it is expected to register a turnover of Rs 16,600 crore with pure passenger sales of Rs 13,000 crore in 2012-13. The story also said that from 35,000 employees on its payroll in 2011, the number has reduced to 28,500 this year.

If Air India’s complete turnaround happens , it would be despite constant interference by the ministry. Till recently, AI had no freedom to decide simple things like aircraft deployment. Also, historically AI had a monopoly over all routes till liberalization kicked in and it is the influx of competition in the form of foreign and domestic private carriers which AI has been unable to handle till recently.

Till a few months back, AI was making significant operational losses due to a “huge” mismatch between the aircraft it flew and the sectors it operated in. This means AI was deploying larger aircraft on sectors where traffic potential was lower and where smaller aircraft with less capacity should have been used instead.

This anomaly is now being corrected after the induction of B787 Dreamliners which have been deployed on medium haul routes instead of the B 777 fuel guzzlers.

Till last fiscal, all destinations in North America, Europe and UK with the exception of New York and Chicago were loss making for the airline and just 13 overseas routes which AI has been flying for decades accounted for 80% of its total cash the losses in 2011-12. These anomalies are being corrected.

The Mint story quoted an estimate by consulting firm Capa to say that Air India may have suffered a loss of $280-320 million (Rs.1,526-1,744 crore today) in the second quarter ended September and is expected to incur a loss of $189-226 million in the third quarter ending 31 December.

The government in April approved a Rs 30,000 crore package to bail out the airline. This includes an upfront equity infusion of Rs 6,750 crore and assured equity support of Rs.23,481 crore till 2020-21. Banks have since recast their exposure to the airline, resulting in savings of Rs 1,000 crore a year.