Indian Airline Casestudy

7/28/2019 Indian Airline Casestudy

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FLYING LOW

Indian Airlines (IA) the name of Indias national carrier conjured up an image of a

monopoly gone berserk with the absolute power it had over the market. Continual lossesover the years, frequent human resource problems and gross mismanagement were

just some of the few problems plagued the company.

Widespread media coverage regarding the frequent strikes by IA pilots not only reflected

the adamant attitude of the pilots, but also resulted in increased public resentmenttowards the airline. IAs recurring human resource problems were attributed to its lack of

proper manpower planning and underutilization of existing manpower.

The recruitment and creation of posts in IA was done without proper scientific analysis ofthe manpower requirements of the organization. IAs employee unions were rather

infamous for resorting to industrial action on the slightest pretext and their arm-twisting

tactics to get their demands accepted by the management.

During the 1990s, the Government took various steps to turn around IA and initiated talksfor its disinvestment. Amidst strong opposition by the employees, the disinvestment plans

dragged on endlessly well into mid 2001.

The IA story shows how poor management, especially in the human resources area, could

spell doom even for a Rs 40 bn monopoly.

BACKGROUND NOTE

IA was formed in May 1953 with the nationalization of the airlines industry through theAir Corporations Act. Indian Airlines Corporation and Air India International were

established and the assets of the then existing nine airline companies were transferred tothese two entities. While Air India provided international air services, IA and its

subsidiary, Alliance Air, provided domestic air services. In 1990, Vayudoot, a low-

capacity and short-haul domestic airline with huge long-term liabilities, was merged withIA.

IAs network ranged from Kuwait in the west to Singapore in the east, covering 75

destinations (59 within India, 16 abroad). Its international network covered Kuwait,

Oman, UAE, Qatar and Bahrain in West Asia; Thailand, Singapore and Malaysia in

South East Asia; and Pakistan, Nepal, Bangladesh, Myanmar, Sri Lanka and Maldives inthe South Asian subcontinent. Between themselves, IA and Alliance Air carried over 7.5

million passengers annually. In 1999, the company had a fleet strength of 55 aircraft 11

Airbus A300s, 30 Airbus A320s, 11 Boeing B737s and 3 Dorniers D0228.

In 1994, the Air Corporation Act was repealed and air transport was thrown open to

private players. Many big corporate houses entered the fray and IA saw a mass exodus of

its pilots to private airlines. To counter increasing competition IA launched a new image


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building advertisement campaign. It also improved its services by strictly adhering to

flight schedules and providing better in-flight and ground services. It also launched

several other new aircraft, with a new, younger, and more dynamic in flight crew. Theseinitiatives were soon rewarded in form of 17% increase in passenger revenues during the

year 1994.

However, IA could not sustain these improvements. Competitors like Sahara and Jet

Airways (Jet) provided better services and network. Unable to match the performance ofthese airlines IA faced severe criticism for its inefficiency and excessive expenditure

human resources. Staff cost increased by an alarming Rs 5.9 bn during 1994-98. These

costs were responsible to a great extent for the companys frequent losses. By 1999 thelosses touched Rs 7.5 bn.

In the next few years, private players such as East West, NEPC, and Damania had to

close shop due to huge losses. Jet was the only player that was able to sustain itself. IAs

market share, however continued to drop. In 1999, while IAs market share was 47%, the

share of private airlines reached 53%.

Unnecessary interference by the Ministry of Civil Aviation was a major cause of concern

for IA. This interference ranged from deciding on the crews quality to major technical

decisions in which the Ministry did not even have the necessary expertise. IA had tooperate flights in the North-East at highly subsidized fares to fulfill its social objectives

of connecting these regions with the rest of the country. These flights contributed to the

IAs losses over the years. As the carriers balance sheet was heavily skewed towardsdebt with an equity base of Rs 1.05 bn in 1999 as against long term loans of Rs 28 bn,

heavy interest outflows of Rs 1.99 bn further increased the losses.

IA could blame many of its problems on competitive pressures or political interference;but it could not deny responsibility for its human resource problems. A report by theComptroller and Auditor General of India stated, Manpower planning in any

organization should depend on the periodic and realistic assessment of the manpower

needs, need-based recruitment, optimum utilization of the recruited personnel andabolition of surplus and redundant posts. Identification of the qualifications appropriate to

all the posts is a basic requirement of efficient human resource management. IA was

found grossly deficient in all these aspects.

FIGHTER PILOTS?

IAs eight unions were notorious for their defiant attitude and their use of unscrupulousmethods to force the management to agree to all their demands. Strikes, go-slow

agitations and wage negotiations were common.

For each strike there was a different reason, but every strike it was about pressurizing IAfor more money. From November 1989 to June 1992, there were 13 agitations by

different unions. During December 1992-January 1993, there was a 46-day strike by the

pilots and yet another one in November 1994. The cavalier attitude of the IA pilots was


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particularly evident in the agitation in April 1995.

The pilots began the agitation demanding higher allowances for flying in international

sectors. This demand was turned down. They then refused to fly with people re-employedon a contract basis. Thereafter they went on a strike, saying that the cabin crew earned

higher wages than them and that they would not fly until this issue was addressed.

Due to adamant behaviour of pilots many of the cabin crew and the airhostesses had to be

off-loaded at the last moment from aircrafts. In 1996, there was another agitation, withmany pilots reporting sick at the same time. Medical examiners, who were sent to check

these pilots, found that most of these were false claims.

Some of the pilots were completely fit; others somehow managed to produce medical

certificates to corroborate their claims. In January 1997, there was another strike by thepilots, this time asking for increased foreign allowances, fixed flying hours, free meals

and wage parity with Alliance Air.

Though the strike was called off within a week, it again raised questions regarding IAs

vulnerability. April 2000 saw another go-slow agitation by IAs aircraft engineers whowere demanding pay revision and a change in the career progression pattern [1]. The

strategies adopted by IA to overcome these problems were severely criticized by analysts

over the years. Analysts noted that the people heading the airline were more interested inmaking peace with the unions than looking at the companys long-term benefits.

Russy Mody (Mody), who joined IA as chairman in November 1994, made efforts to

appease the unions by proposing to bring their salaries on par with those of Air India

employees. This was strongly opposed by the board of directors, in view of the mounting

losses. Mody also proposed to increase the age of retirement from 58 to 60 to control theexodus of pilots.

However, government rejected Modys plans[2]. When Probir Sen (Sen) took over as

chairman and managing director, he bought the pilot emoluments on par withemoluments other airlines, thereby successfully controlling the exodus. In 1994, the IA

unions opposed the re-employment of pilots who had left IA to join private carriers and

the employment of superannuated fliers on contract.

Sen averted a crisis by creating Alliance Air, a subsidiary airline company where the re-employed people were utilized. He was also instrumental in effecting substantial wage

hikes for the employees. The extra financial burden on the airline caused by thesemeasures was met by resorting to a 10% annual hike in fares. (Refer Table I)
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TABLE I

IMPACT OF STAFF COST HIKE IN

FARE INCREASE (%)Date of fare increase Impact (%)

25/07/1994 16.22

1/10/1995 25

22/09/1996 36

15/10/1997 13.44

1/10/1998 8.8

Source: IATA-World Air Transport Statistics

Initially, Sens efforts seemed to have positive effects with an improvement in aircraftutilization figures. IA also managed to cut losses during 1996-97 and reported a Rs 140

mn profit in 1997-98. But recessionary trends in the economy and its mounting wage bill

pushed IA back into losses by 1999. Sen and the entire board of directors was sacked by

the government.

In the late 1990s, in yet another effort to appease its employees, IA introduced the

productivity-linked scheme. The idea of the productivity linked incentive (PLI) scheme

was to persuade pilots to fly more in order to increase aircraft utilization. But the PLIscheme was grossly misused by large sections of the employees to earn more cash. For

instance, the agreement stated that if the engineering department made 28 Airbus A320savailable for service every day, PLI would be paid.

This number was later reduced to 25 and finally to 23. There were also reports that flightsleaving 30 45 minutes late were shown as being on time for PLI purposes. Pilots were

flying 75 hours a month, while they flew only 63 hours. Eventually, the PLI schemes

raised an additional annual wage bill of Rs 1.8 bn for IA. It was alleged that IA

employees did no work during normal office hours; this way they could not workovertime and earn more money.

Though experts agreed that IA had to cut its operation costs. To survive the airline

continued to add to its costs, by paying more money to its employees. (Refer Table II).The payment of overtime allowance (OTA) which included holiday pay to staff,

increased by 109% during 1993-99. It was also found that the payment of OTA always

exceeded the budget provisions.

Between 1991-92 and 1995-96, the increase in pay and allowances of the executive pilotswas 842% and that of non-executive pilots was 134%. Even the lowest paid employee in


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the airline, either a sweeper or a peon, was paid Rs 8,000 10,000 per month with

overtime included.

TABLE II

INCREASE IN STAFF COSTS

YearStaff cost

(in Rs bn)

No. of

employees

Per

employee

cost (in

mn)

Total

expenditure

(in Rs bn)

Staff cost as

percentage

of total

operational

expenditure

Effective

fleet size

1993-

942.85 22182 0.13 20.75 15% 54

1994-95

3.74(31.18%)*22683 0.16 22.59 19% 58

1995-96

5.71(52.59%)

22582 0.25 26 25% 55

1996-

97

7.10

(24.35%)22153 0.32 29.29 26% 40

1997-

98

8.17

(15.03%)21990 0.37 32.21 27% 40

1998-

99

8.75

(7.12%)21922 0.39 34.31 28% 41


* Figures in brackets indicate increase over the previous year.

# Excludes 4 aircraft grounded from 1993-94 to 1995-96 as well as 12 aircraft leased toAirline Allied Services Ltd. from 1996-97 to 1998-99.

In 1998, IA tried to persuade employees to cut down on PLI and overtime to help the

airline weather a difficult period; however there efforts failed.

Though IA incurred losses during 1995-96 and 1996-97 and made only marginal profits

during 1997-98 and 1998-99, heavy payments were made on account of PLI. A net lossof Rs 641.8 mn was registered during the period 1995-99. PLI payments alone amounted

to Rs 6.66 bn, during the same period. According to unofficial reports, arrears to be paid

to employees on account of PLI touched nearly Rs 7 bn by 1999.

Over the years, the number of employees at IA increased steadily. IA had the maximum

number of employees per aircraft. (Refer Table III). It was reported that the airlines

monthly wage bill was as high as of Rs 680 mn, which doubled in the next three years.

There were 150 employees earning above Rs 0.3 mn per annum in 1994-95 and the


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number increased to 2,109 by 1997-98. The Brar committee attributed this abnormal

increase in staff costs to inefficient manpower planning, unproductive deployment of

manpower and unwarranted increase in salaries and wages of the employees.

TABLE IIIA COMPARISON OF VARIOUS

AIRLINES

Name of

Airlines

Number

of aircraft

in fleet

No. of

employees

ATKm[3]

(in

Million)

ATKm per

Employee

Employees

per aircraft

Singapore

Airlines 84 13,549 14418.324 1064161 161

Thai AirwaysInternational

76 24,186 6546.627 270678 318

IndianAirlines

51 21,990 2113.671 398204 431

Gulf Air 30 5,308 1416.235 245831 177

KuwaitAirways

22 5,761 345.599 92853 261

Jet Airways 19 3,722 1094.132 49756 196


Analysts criticized the way posts were created in IA. In 1999, Six new posts of directorswere created of which three were created by dividing functions of existing directors.

Thus, in place of 6 directors in departments prior April 1998, there were 9 directors by

1999 overseeing the same functions. There were 30 full time directors, who in turn hadtheir retinue of private secretaries, drivers and orderlies. The posts in non-executive

cadres were to be created after the assessment by the Manpower Assessment committee.

But analysts pointed that in the case of cabin crew, 40 posts were introduced in the

Southern Region on an ad-hoc basis, pending the assessment of their requirement by theStaff Assessment Committee.

Another problem was that no basic educational qualifications prescribed for senior

executive posts. Even a matriculate could become a manager, by acquiring the necessaryjob-related qualifications & experience. Illiterate IA employees drew salaries that were

on par with senior civil servants. After superannuation, several employees were re-

employed by the airline in an advisory capacity. According to reports, IA employed 132

retired employees as consultants during 1995-96 on contract basis. With each strike/go-
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slow and subsequent wage negotiations, IAs financial woes kept increasing. Though at

times the airline did put its foot down, by and large, it always acceded to the demands for

wage hikes and other perquisites.

TROUBLED SKIES

Frequent agitations was not the only problem that IA faced in the area of human

resources. There were issues that had been either neglected or mismanaged.

For instance, the rates of highly subsidized canteen items were not revised even once inthree decades and there was no policy on fixing rates. Various allowances such as out-of-

pocket expenses, experience allowance, simulator allowance etc. were paid to those who

were not strictly eligible for these. Excessive expenditure was incurred on benefits givento senior executives such as retention of company car, and room air-conditioners even

after retirement. All these problems had a negative impact on divestment procedure.

This did not augur well for any of the parties involved, as privatization was expected togive the IA management an opportunity to make the venture a commercially viable one.Freed from its political and social obligations, the carrier would be in a much better

position to handle its labor problems. The biggest beneficiaries would be perhaps the

passengers, who would get better services from the airline.

QUESTIONS FOR DISCUSSION:

1. Analyze the developments in the Indian civil aviation industry after the sector was

opened up for the private players. Evaluate IAs performance. Why do you think IA

failed to retain its market share against competitors like Jet Airways?

2. IAs human resource problems can largely be attributed to its poor human resourcemanagement policies. Do you agree? Give reasons to support your stand.

Indian Airline Casestudy

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