State-owned carrier Air India, which operates flights to 33 countries as per summer 2016 schedule, under-utilised its allocations of international traffic rights on key routes. The utilisation of allocations by the carrier was nil for Canada, Bangladesh, Iraq, Kenya, Malaysia, Thailand and Sri Lanka. The utilisation was less than 50 per cent of bilateral entitlements in respect of Abu Dhabi, Bahrain, Kuwait, Russia and Singapore.
On the India-Oman sector and the India-Qatar sector, the Ministry of Civil Aviation withdrew its 540 seats (March 2015) and 2,615 seats (September 2015), respectively, from Air India’s allocation and transferred it to IndiGo due to non-utilisation. The airline utilised 100 per cent of its capacity vis-à-vis 13 countries but did not seek enhancements despite increase in its fleet size. While Air India earned surplus over variable cost during FY13 and FY15, it failed to generate enough surplus to meet the total cost, the deficit over total cost being Rs 5,514 crore in FY16. Operations in international sector was the major contributor to the overall deficit.
These are some of the key observations in the Comptroller and Auditor General of India’s (CAG) latest performance audit report on the turnaround plan and financial restructuring plan (TAP/FRP) of Air India. The statutory auditor also noted that the airline has witnessed a delay in its overall infrastructure revival. It said that the achievement milestones prescribed in TAP for rationalisation of staff costs, hiving off subsidiaries, integration of IT infrastructure, monetisation of assets, aircraft deployment and operational performance targets were significantly delayed.
The benefits for Air India from the financial restructuring plan, the report noted, have been largely eroded by high volume of short-term loans. Air India saw its short-term loans jump four times the limits laid down in the TAP as its mobilisation from sale of assets remained well below its stated annual target of Rs 500 crore for 10 years. Its revenue generation in FY15 and FY16 was lower than the targets in TAP by 14 per cent and 24 per cent, respectively.
The Air India turnaround plan included infusion of equity of Rs 42,182 crore over the period from 2011-12 to 2031-32 and restructuring of working capital. Till 2015-16, the Centre had infused equity worth Rs 22,280 crore.
Further, the airline sold its five Boeing aircraft to Etihad Airways below the indicative market price, and also received less than half the compensation of $710 million that was claimed from Boeing for delay in delivery of planes. For six planes that had to be grounded soon after their induction for over four months due to technical faults, Air India received only $24 million from Boeing against its claim of $50 million. This happened as the purchase agreement with Boeing did not contain any provision for levying penalty on the manufacturer in the case of inherent technical fault.
Losses on sale, grounding of aircraft
Air India, according to the report, sold five B-777-200LR aircraft to Etihad Airways at significantly lower price of $67.3 million per aircraft, in contrast to the indicative market price of $86 to $92 million per aircraft, which was obtained by the company before initiating the sale process. It noted that Air India’s basis of acceptance of sale of aircraft was a valuation exercise that was carried out after opening the financial bids. “AIL (Air India Ltd) incurred a book loss of Rs 671.07 crore on the sale of five aircraft and payment of Rs 324.67 crore towards interest on loans availed for procurement of these aircraft,” the CAG said.
Etihad Airways of UAE and German Aviation Capital, Frankfurt, had responded to the open tender for sale of these aircraft in May 2013. As the Etihad Airways’ offer of $336.5 million for five aircraft (Rs 2071 crore), or $67.3 million per aircraft, was the highest, the board of Air India approved the offer and these planes were delivered during the period from January 2014 to April 2014.
After opening the financial bid on October 3, 2013, AI obtained another valuation of the aircraft from Aviation Specialist Group who estimated the then market value at $93 million to $96 million and the realisable value to be between $65 million to $72 million per aircraft, it said. AI accepted Etihad’s offer as it was within this range.
“However, it needs to be appreciated that the basis of acceptance was a valuation exercise carried out after opening the financial bids and that the market value of the aircraft could not be realised in the sale,” the CAG noted.
The airline also incurred losses due to delay in induction of planes and six planes being grounded immediately after induction due to technical faults. The delay in induction of the B-787-800 aircraft led to the carrier operating existing inefficient aircraft on the routes earmarked for these planes. Air India lodged an initial claim of $710 million against which the company received only $328 million for compensation from Boeing.
Six of the B-787-800 medium capacity long range aircraft had to be grounded soon after induction for over four months on account of reported malfunctioning of Lithium-ion-Battery. The purchase agreement did not contain any provision for levying penalty on the manufacturer in case of inherent technical fault. In the absence of specific provision in the agreement, Air India failed to recover claim of $50 million on Boeing in full. Boeing agreed to pay only $24 million in cash and $3.4 million towards waiver of late fee on Air India.
Monetisation of assets
The CAG said Air India failed to achieve its asset sales target of Rs 500 crore per year for ten years mainly due to improper selection of properties not based on actual feasibility of monetisation. Non-realisation of adequate revenue from sale of assets led to the company having to borrow more short-term loans to meet its operating requirements.
“Four properties viz. plot at Vasant Vihar, Delhi, plots in Nerul, Navi Mumbai, buildings at Old Airport-Mumbai & land at Baba Kharak Singh Marg, Delhi listed in the TAP could not be monetised due to various deficiencies in ownership and conditions attached to the ownership. Further, four properties identified in TAP for monetisation could not be monetised as the same were being utilized by the company for its own use,” it said. The carrier had given 108 properties to DTZ International Property Advisors Pvt Ltd for valuation, out of which most of the properties had been given on lease by state government/AAI/ government agencies for specific purpose.
Further, 18 properties did not have clear title. Hence, monetisation of these properties was uncertain. Only six properties had been put up for e-auction, out of which only two properties were sold till date, the report said. Air India was able to sell only four flats at Sterling Apartments, Mumbai and land at Coimbatore at value of Rs 88 crore and Rs 19.81 crore respectively.