Air India rot runs deep amid understating losses, bleeding international ops

(Editor's note: This story has been updated with Air India's clarification)

New Delhi: Air India has been under reporting losses for at least four years, says the country’s top auditor. This under-reporting is not any insignificant amount but a sum of over Rs 6,800 crore between 2012-13 and 2015-16. The airline has, as expected, said it did not do any under provisioning while asserting that its Rs 105 crore operating profit in FY16 was indeed a profit, never mind the observations of the Comptroller & Auditor General (C&AG) that the airline actually posted an operating loss of Rs 321 crore last fiscal.

Since the two erstwhile airlines (Air India and Indian Airlines) merged to form the present entity, the measly Rs 105 crore operating profit was the first time in a decade that the word ‘profit’ was used for Air India in any form. Now even this figure has been called into question, raising doubts about the accounting standards followed by the state-owned carrier. As the airline and the C&AG continue to differ over what ‘provisioning’ actually means in standard accounting practice, it is interesting to examine the detailed explanations and instances C&AG has given in its report, of Air India’s operational blunders during the four years under review.

Reuters

Reuters

Remember, the airline was in deep financial trouble when the UPA government, in its infinite wisdom, decided to offer it equity support of a whopping Rs 42,182 crore for a 20-year period till 2031-32. Since the government is this ailing airline’s sole owner and taxpayers’ money is being spent in such a large amount to keep this white elephant afloat, the C&AG audited the airline’s workings for the four years under review. What the auditor found is startling, to say the least. It has now recommended that the equity support to the airline should be reduced – something the government seems to have agreed to - but there is no clarity on the quantum by which the promised funds’ infusion will be lessened.

Bleeding international ops: India might take pride in saying that Air India is its international airline of repute, but financially the airline’s international operations have bled it dry. As per C&AG, the deficit in recovery of total costs on international operations was Rs 3,755 crore in 2015-16 versus a much lesser Rs 1,759 crore in domestic operations. The airline operated 68 international service, 154 domestic services. Contribution of services to the USA was the highest in international segment; they also brought in a fair share of the losses.

Highest loss was by the Ahmedabad-Mumbai-Newark flight at Rs 2,411.46 crore – this is the deficit the flight incurred in not meeting its total costs. Three other services also brought in losses but it is interesting to see that the San Francisco service, launched with much fanfare in December 2015, was also bringing in a deficit of Rs 43.74 crore vis-à-vis total cost within just three months of operations. USA operations alone brought in cumulative loss of Rs 6,685 crore in FY16.

On-time flights: Between January 2012 and March 2016, 9,808 Air India flights were delayed; 10,037 flights were re-scheduled and 554 cancelled due to non-availability of pilots and cabin crew. This, when the personnel department of the airline noted there were excess pilots besides excess personnel in the in-flight services and operations department. This was contradicted by the H R Department. Anyway, Air India went in a hiring spree for pilots, cabin crew etc. all of last year so it is clear that deployment of manpower is a huge issue for this airline, which has the staff but is unable to utilise it properly.

C&AG found that up to 78 percent of A320 pilots flew less than 72 hours a month; remaining pilots flew more than 72 hours during the same period. So some were being made to fly much more than others – this of course points to mismanagement of the pilot strength available with the airline, leading to huge delays and re-scheduling of flights.

Jet beats Air India: Two major Indian airlines, Air India and Jet Airways, operated international flights on a network mode. In 2009-10, Jet carried less international passengers than AI but as the Maharaja lagged, Jet zoomed ahead. Within two years, it had left behind AI in international passengers and saw an increase of a whopping 32.3 lakh international passengers between 2009-10 and 2014-15. During the same period, Air India’s international passenger number increased by a mere 63,4881. So while Jet carried 86 percent incremental passengers, Air India only saw an increase of 13 percent. In its defence, Air India has said it was unable to add capacity as fast as competitors and therefore capacity share reduced.

Loans take away bailout benefit: The bailout package for Air India in 2012 comprised Rs 42,182 crore equity infusion till 2031-32. But the airline’s short-term loans kept rising to more than four times the limits laid down in the turnaround plan, due to “failure in generating projected revenue, mainly on account of non-achievement of asset-monetisation target, increase in staff costs," the C&AG said in its report. It said Air India failed to meet its cash-credit limits, leading to short-term loans rising to Rs 14,551 crore as on March 31, 2016 against the target of Rs 3,645.9 crore. C&AG has now recommended that “the company and the ministry (Of civil aviation) may need to reassess the requirement of funds envisaged in the turnaround plan. Remember, till March last year, the government has already released Rs 22,280 crore equity to Air India.

H Pradeep Rao, Deputy C&AG said in a news conference that while Air India has said that it has reported an operating profit in fiscal 2016, based on observation of statutory auditors and subsequently by the CAG the airline has not made provisions it should have as per the standard accounting procedures resulting in under reporting of the loss. He further said the airline had made inadequate provisions for payment of various liabilities including out standings to the Airports Authority of India, payment of liability to employees en-cashing leave and also made excess valuation of one of the two properties that it has in Delhi.

While the airline and its auditors slug out over what has been provisioned for and what has been omitted, perhaps the government will examine the dismal operational efficiency of Air India and figure out a way to enhance its revenues, turn it around. Since the NDA government has been categoric about not privatising the airline, this is the only other option.

Air India clarifies: Air India has prepared its accounts for the year 2015-16 in line with the generally accepted accounting principles and accounting standards in force issued by the Institute of Chartered Accountants of India.

Government Audit during their supplementary audit had made a few observations. The first and the main observation was on non provision of depreciation amounting to Rs 306.43 crores on nine B 787 aircraft which were transferred by Air India to Current Assets under the head of Assets held under disposal.

In this connection Air India had already clarified to the Govt Audit that depreciation is to be provided for fixed assets and not on current assets. This is in accordance with. AS 10 which clearly states that if Assets are held for disposal no depreciation need to be provided.
The Board of Air India had already approved the sale of the nine B 787 aircraft before 31st March 2016 and the mandate for sale was also given before 31st March.

The sale actually took place in the first quarter of this year after the balance sheet date but before the accounts were signed and more importantly the sale was at a value higher than the acquisition cost of the aircraft.

There is no disagreement in classifying the Aircraft as current assets under the head "Assets held for disposal" as the carrying amount of the asset was to be recovered principally through a sale transaction rather than through continuing use.

It is also pertinent to note that had the depreciation been accounted in the previous year the profit on sale of Asset would have increased by the same amount as ultimately the aircraft was sold at a value higher than the acquisition cost and would have increased the income in the current year by Rs 306.43 crores.

The other observation was on non provision of service tax amounting to Rs 15.24 crores on the Revenue sharing arrangement with AIATSL. It is to be noted that a major portion of the same would be taken as input credit and would not affect the loss position.

The operating profit earned in the year 2015-16 of Rs 105 crores is calculated on the basis of reducing the total expenditure excluding only the financing costs from the total revenue. It is therefore the equivalent of Earnings before Interest and Tax (EBIT ) and includes provision of Rs 1867.78 crores of depreciation. Had depreciation been excluded from the Expenditure the operating profit would have significantly increased.

Air India maintains that the observations of Govt. Audit have been adequately replied to and the operating profit of Rs 105 crores is as per the generally accepted accounting Standards.


Published Date: Mar 11, 2017 02:16 pm | Updated Date: Mar 14, 2017 05:59 pm