ARORA'S OPTIONS HIKE FARES: May help recover rising costs but difficult in a market with excess capacities and price warriors like Sahara. EXPAND FLEET: A proposal to buy 43 new aircraft for Rs 10,089 crore is pending with the Government. No immediate action likely. SEEK A BAILOUT: IA has sought a Rs 109 crore loan write-off and assistance for fleet expansion. No decision likely in the near future.

Everybody is fighting for a larger share of a shrunken cake. .. Sunil Arora, Chairman & Managing Director, Indian Airlines

Your Home In The Sky. In the coming weeks, Indian Airlines (IA) may consider changing its slogan to something more down to earth. For the airline itself may be running for shelter when it announces its results for 2001-2 sometime next month. Losses will be at least Rs 251 crore, the second highest since the airline was formed in 1953. The number of passengers flown by the airline will fall to its lowest level in more than a decade. Most shockingly, according to a Comptroller and Auditor-General (CAG) estimate, the airline's net worth-the difference between assets and liabilities-will be more than Rs 600 crore in the negative, the highest in IA's history(see boxes).

That's quite a feat for an airline entering its golden jubilee year. When ia was created 49 years ago by merging eight private airlines, its stated mission was of becoming "a world-class airline and to provide the finest service in the areas it operates". Today, it is speeding down the runway to ruin. Why?

A charitable explanation will be to equate IA's fate with the hundreds of airlines around the world that have either crashed out of the market or drifted into losses after 9/11. The combined loss of airlines across the world in the past one year is estimated to be $12 billion (about Rs 58,000 crore). IA's losses are just a drop in the ocean of red flooding the global aviation market. In the domestic market too, IA's biggest competitor Jet Airways is beset with lower traffic and profitability after September 2001. So once the travel and tourism sectors recover, most airlines should soar to profits again, and so should IA.

That's at best an aerial view of the turbulence at IA. The ground realities are grimmer. In the past 14 years, some of which were boom years for global aviation, IA posted losses in 10 years. It has lost customers with unfailing regularity. In 1993-94, the airline flew 21,619 paid passengers a day. By 2000-1 that number had come down to 16,417. IA's loss has been its competitors' gain. Jet Airways and Air Sahara, which started operations in 1993, have grabbed 55 per cent of the domestic aviation market. Jet has made profits in the same market in which IA has been bleeding.

Yet IA's worst enemy is not its competitors but its owner-the government of India. From pressures to fly on uneconomic routes and excess manpower to an unreasonably high tax burden, the fatal embrace of the government is snuffing life out of the airline. Here's how:

IA's IC7471 flies from Delhi to Jaipur to Jodhpur to Udaipur to Mumbai-all in one flight. Four times the plane takes off and four times it lands, paying landing and navigational charges at each airport. Even if the flight operates with full capacity it cannot hope to make profits. Besides, the route doesn't appeal to passengers who prefer to fly direct between two cities.

Similarly, IC7469 has to fly between Delhi and Nagpur via Raipur, an uneconomical diversion. Such politically determined unviable routes have been bleeding the airline.

Indian Airlines hasn't bought a single aircraft in 10 years. Its fleet size has shrunk from 67 to 56 after 1990. A proposal to purchase new planes is stuck with the government since 1997. Another proposal to procure 50-seater short-distance aircraft is being considered by committees and the Civil Aviation Ministry since 1993.

IA operates 46 flights to nine destinations in the Northeast-more than twice those operated by private airlines-at a loss of Rs 60 crore a year. It loses another Rs 75 crore annually in fare concessions to armed forces personnel, members of paramilitary forces, gallantry award winners and senior citizens.

Around 7,000 of the airline's 20,000 employees do the kind of work that can be done better and more cost effectively by outsourcing. But being a public-sector company, IA isn't allowed to retrench and outsource freely. It runs a 115-member Hindi section, a vigilance department and canteens-all obligations of being a government company.

In 1993, IA was forced to take over Vayudoot, an airline that made losses in every year of its 13-year operation. Vayudoot's accumulated losses of Rs 200 crore and staff of 1,023 became IA's liability.

In India, aviation turbine fuel is priced 70 per cent higher than the global level. Navigational, landing and parking charges for domestic aircraft are almost double than in most south-east Asian countries. All domestic airlines suffer high taxes, but IA feels the pinch more because of its other handicaps.

If the government hasn't been fair to the airline, IA has been a victim of its own management too. The airline's most lethal self-goal was the grant of a hefty wage hike to its employees in 1995 in the form of a productivity-linked incentive scheme. As a result, the airline's staff cost shot up by 198 per cent between 1994-95 and 2001-2-from Rs 374 crore a year to Rs 1,116 crore a year. The average annual salary of an IA's employee is over Rs 5 lakh.

The hike in wages was compounded by the creation of additional posts. According to a CAG report, IA created 543 new posts in the mid-1990s. The number of directors was increased from 18 to 30. IA has close to 400 employees per aircraft. That's more than double the aircraft-employee ratio of its competitors.

In the past, the frequent hike in fares helped IA cover its high costs and inefficiencies. In the 1990s alone, average domestic passenger fares were raised by 142 per cent. This helped IA revenues to grow in the face of falling passenger traffic. But in the long term, the price hikes harmed the airline more than they helped. Aviation experts point out that IA fares became the benchmark for its competitors-Jet and Sahara. Since private airlines had lower costs, they made huge operating profits by aligning their fares with the high IA fares. Jet's cumulative operating profits between 1997-98 and 1999-2000 were Rs 2,611 crore compared to IA's Rs 765 crore.

More inimically, IA-led frequent fare hikes scuttled the growth of domestic aviation by keeping air travel out of reach of the middle class. The domestic aviation market remained virtually stagnant through the 1990s. In 1989-90, a year before the domestic skies were opened up to private airlines, 10.8 million people travelled by air within India. Eleven years later, that number had inched up to just 13.3 million. The advent of competition in a dormant market meant private airlines snatching IA's customers. By 2000-1, the airline's share in domestic air traffic had fallen to around 45 per cent, though since then ia has been able to prevent a further loss of market.

Things may get worse for IA in the coming months. Thanks to 9/11, the domestic aviation market shrunk in 2001, with passenger traffic falling to 12.8 million from 13.3 million in 2000. But even though lesser number of people travelled by air last year, both Jet and Sahara expanded their fleets by adding new aircraft. Capacity addition in a falling market spells greater competition. "Everybody is fighting for a larger share of a shrunken cake," admits Sunil Arora, IA's chairman and managing director.

To fill up seats on their flights, Sahara and Jet have resorted to aggressive price cuts. For the time being, achieving market growth has become more important than profitability. That not only negates any chance of IA raising its fares, but has forced the public-sector airline to join the discount war. Given its high-cost operations, that would cause IA's finances to shrivel up further. The airline faces a triple whammy of a shrinking customer base, rising costs and falling prices for its services. The deepest ever fare cuts in the times of rising costs have caused concerns of industry sickness.

With a baggage of social obligations, Arora is trying his best to fight it out. In March this year, the IA board cleared the purchase of 43 new aircraft at a cost of Rs 10,089 crore over five years. Pending government approval of such an ambitious expansion, IA has leased four Airbus A-320 aircraft since November 2001. Six more aircraft will be leased by March 2003. But this does not add more seats to its capacity since the 145-seat A-320s are replacing the ageing 244-seat A-300s. The on-time performance of IA flights has improved-from 69 per cent in January to 85 per cent in August. Old planes are being refurbished and cabin staff is being trained for better service. The airline has also joined the price war with a vengeance. Six different marketing schemes are currently on to lure business and leisure travellers.

Given the odds stacked against IA, all these measures are too late, if not too little. For IA to turn around, financial assistance from the Government-however revolting that may sound-seems imminent. If not for anything else at least to partially neutralise the negative impact of taking on unviable operations at the behest of the government. The best form of help will be to add to the airlines' meagre equity capital of Rs 105.19 crore. Its low equity base is the main reason for its net worth erosion. Equity infusion should be followed by restructuring of its management and its route patterns. That should prepare the airline for the final act by the government-its privatisation at a good price. An earlier attempt to sell IA failed because of lack of buyers. That only underlines the need to restructure IA before its eventual sale. Perhaps then IA can claim to be our home in the sky.