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AI turnaround plan: Restrict competition on global routes to return to profit

Domestic airlines will be able to operate on foreign routes only if Air India refuses.

Written by Smita Aggarwal | New Delhi | Published: May 24, 2011 12:51:30 am

The government will not enter into any bilateral agreements with foreign carriers till 2014-2015 when the loss-making national carrier,Air India,hopes to turnaround and report profits.

This is one of the key assumptions for the carrier to gain market share in the international sector according to the turnaround plan prepared by SBI Caps and vetted by Deloitte Touche Tohmatsu India (DTTIPL). Air India has projected Middle-East,South-East Asia and Western Europe to contribute around 80 per cent of its international passenger traffic over 2010-2015.

The success of the plan largely depends on restricting competition for the flag carrier on the international side,by allowing it to continue exercising the Right of First Refusal (RoFR) on utilisation of Indian bilaterals with various countries. This means that other domestic airlines will be able to operate foreign routes only if Air India refuses. Also,other foreign airlines will not be able to add more capacity to or from India until the ailing airline utilises a significant portion of its target bilaterals. This assurance,as per the review,was given by the then civil aviation minister Praful Patel in meeting held in January,2011. The report laid out that any change in the above mentioned assumptions which is “an important input” may lead to a lower passenger growth rate for the carrier.

As of now,the carrier under-utilises its designated flying quota on these three international routes — Middle East,South-East Asia and Western Europe. Under the plan,the airline has said that it intends to offer 9.83 million seats in the Middle-East and 2.71 million in the South-East Asia region by 2014-15. DTTIPL has said in its review that the airline may be able to achieve its targets in these region “benefitting from the capped growth of competing airlines,” which may not be the case in Western Europe as foreign airlines may add capacity giving the carrier a stiff competition. The review report noted the airline’s competitors like Jet Airways,Kingfisher Airlines,may be constrained to operate with their existing capacities,unable to cater to the growing markets. On the domestic front,the airline has said it will enhance its market share from 17 per cent in November 2010 to 21 per cent in 2014-15,with a Passenger Load Factor of 75 per cent.

“The growth in domestic traffic targeted by Air India is higher than the overall market growth rate of 12-13 per cent,” noted DTTIPL. The review has termed these projections to be “ambitious” and reflecting the “best case scenario.” The airline is already in middle of negotiating with bankers for conversion of debt into equity,but so far banks have shown their reluctance.

While the airline’s total staff costs,as per the review,may come down by 51 per cent in 2011-12 as half of them get absorbed in its subsidiaries,they are likely to rise beyond 2011-12. DTTIPL has noted that a smooth staff transfer to its subsidiaries may be “challenging” given the involvement of employees’ unions and negotiation required to freeze terms of transfer and employment in the new entity.

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