Flying Low

Indian Airlines (IA) – the name of India's national carrier conjured up an image of a monopoly
gone berserk with the absolute power it had over the market. Continual losses over 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
resentment towards the airline.

IA's recurring human resource problems were attributed to its lack

of proper manpower planning and underutilisation of existing
manpower. The recruitment and creation of posts in IA was done
without proper scientific analysis of the manpower requirements of
the organization. IA's 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 talks for 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 the Air
Corporations Act. Indian Airlines Corporation and Air India International were established and
the assets of the then existing nine airline companies were transferred to these 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 with IA. IA's 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 in the 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.

Background Note Contd...

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 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. These initiatives 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 of these 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 company's

frequent losses. By 1999 the losses 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. IA's market share, however continued to
drop. In 1999, while IA's 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 crew's quality to major technical decisions in
which the Ministry did not even have the necessary expertise. IA had to operate 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 IA's losses over the years. As the
carrier's balance sheet was heavily skewed towards debt 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 the Comptroller 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 and abolition 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?
IA's eight unions were notorious for their defiant attitude and their use of unscrupulous methods
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 IA for 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
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-employed on 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, with many 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 the pilots, 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 IA's vulnerability. April 2000
saw another go-slow agitation by IA's aircraft engineers who were 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 in making peace with the unions than looking at the
company's long-term benefits.

'Fighter' Pilots? Contd...

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 the exodus of pilots. However,
government rejected Mody's plans.2 When Probir Sen (Sen) took over as chairman and managing
director, he bought the pilot emoluments on par with emoluments 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 these measures was met by
resorting to a 10% annual hike in fares. (Refer Table I)
 TABLE I
IMPACT OF STAFF COST HIKE IN FARE INCREASE (%)

Date of fare Impact

increase (%)
25/07/1994 16.22
01/10/1995 25.00
22/09/1996 36.00
15/10/1997 13.44
01/10/1998 8.80

Source: IATA-World Air Transport Statistics

Fighter' Pilots? Contd...

Initially, Sen's efforts seemed to have positive effects with an improvement in aircraft utilization
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 PLI scheme 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 A320s available
for service every day, PLI would be paid. This number was later
reduced to 25 and finally to 23.

There were also reports that flights leaving 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 work overtime
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 pilots was
842% and that of non-executive pilots was 134%. Even the lowest paid employee in the airline,
either a sweeper or a peon, was paid Rs 8,000 – 10,000 per month with overtime included.

'Fighter' Pilots? Contd...

TABLE II
INCREASE IN STAFF COSTS

Staff cost as
Per
Total percentage of Effectiv
Staff cost (in No. of employee
Year expenditure total e fleet
Rs bn) employees cost (in
(in Rs bn) operational size#
mn)
expenditure
1993-94 2.85 22182 0.13 20.75 15% 54
3.74
1994-95 22683 0.16 22.59 19% 58
(31.18%)*
1995-96 5.71 (52.59%) 22582 0.25 26.00 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

Source: IATA-World Air Transport Statistics

* 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 to Airline
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 loss of 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).
'Fighter' Pilots? Contd...
It was reported that the airline's 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 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 III
A COMPARISON OF VARIOUS AIRLINES

Name of Number of No. of ATKm3 (in ATKm per Employees

Airlines aircraft in fleet employees Million) Employee per aircraft
Singapore
84 13,549 14418.324 1064161 161
Airlines
Thai Airways
76 24,186 6546.627 270678 318
International
Indian Airlines 51 21,990 2113.671 398204 431
Gulf Air 30 5,308 1416.235 245831 177
Kuwait
22 5,761 345.599 92853 261
Airways
Jet Airways 19 3,722 1094.132 49756 196

Source: IATA-World Air Transport Statistics

Analysts criticized the way posts were created in IA. In 1999, Six new posts of directors were
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.

'Fighter' Pilots? Contd...

There were 30 full time directors, who in turn had their 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 the Staff 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
necessary job-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-slow and subsequent wage negotiations, IA's

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 in three 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 given to 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 to give 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.
Troubled Times
In late 1996, almost half of the executives on board of
the tobacco to hotels major ITC Ltd. were in jail on
charges of FERA and excise violations. It was at this
point that the downfall of ITC Classic Finance (Classic),
ITC's flagship financial services 49% subsidiary, began.

The scandals in ITC had a massive damaging effect on

the ITC brand and corporate image. The impact got
reflected on Classic too and it was inundated with
desperate fixed deposit holders wanting to withdraw their
funds. Funds worth over Rs 50 crore were withdrawn
within a few days after the crisis broke out. The
continuing uncertainty on fund flows into the company
and the eroded value of its portfolios began scaring off
potential investors and foreign partners as well.
International Finance Corporation (IFC), which was to
provide a credit of $ 45 million to Classic, also held back
the offer till 'things cleared up.'

Analysts were quick to raise fingers at Classic's negative

cash flows, its huge asset liability mismatch and the slow
process of divestment of stakes held by Classic in the
ITC group companies. Like the proverbial 'final nail in
the coffin,' Classic declared a Rs 285 crore loss in June
1997, which almost wiped out its entire net worth.

Meanwhile, troubles mounted as redemptions kept increasing - from Rs 750 crore in mid 1996,
deposits came down to Rs 550 crore in May 1997. From a peak level of one million depositors,
Classic was left with just six lakh. ITC gave Classic a Rs 75 crore credit line to maintain cash
flow to meet the redemption pressure. There were even reports that Classic had to take inter-
corporate deposits1 to fund the outflow. The sustained downturn in the capital markets during
1995-96 added to the company's woes and soon, key personnel began leaving the company.
Already neck-deep in legal troubles, ITC realized that it would be better off without Classic to
add to its problems. ITC then initiated discussions with Daiwa Securities of Japan and a few
Korean, British and American investment banks for a possible tie-up. A Business Today report2
claimed that ITC was desperate not to let Classic go for liquidation, as that would have reflected
badly on its brand power. ITC announced that it was even willing to infuse more funds to keep
Classic afloat.
Both GE Capital and the Hinduja Group evinced interest in Classic. Since they laid down very
stiff terms for the buy-out and valued Classic much below ITC's expectations, talks did not
proceed further. Nothing seemed to be working out in favor of Classic as there were no takers for
a company with non-performing assets of over Rs 350 crore and an investment portfolio that was
by any standards an extremely poorly executed one. At this juncture, ICICI Ltd. stepped in as the
'knight in the shining armor' to rescue Classic, taking the corporate world and the media by
surprise. All those involved in the issue kept asking themselves - What did ICICI see in Classic
that so many other companies could not?