CHAPTER-3

GROWTH OF INDIAN DOMESTIC AVIATION INDUSTRY

DURING PRE-PRIVATIZATION ERA

3.1 Growth of Domestic Aviation Industry in India 59

3.2 Growth & Operations of Indian Airlines (lA) 63

3.3 Growth & Operations of Air India (AI) 75

3.4 Vayudoot Services 79

3.5 Launching of the Air Taxi Scheme 81

3.6 Privatization of the Indian Aviation Industry 81

 CHAPTER - 3

GROWTH OF INDIAN DOMESTIC AVIATION INDUSTRY

DURING PRE-PRIVATIZATION ERA

Air travel has been perceived to be an elitist activity right from the beginning of civil

aviation in India. This view arose from the "Maharajah" syndrome where, due to the

prohibitive cost of air travel, the only people who could afford it were the rich and

powerftil. Though, the elitist image of civil aviation still lingers, it has changed recently

with the introduction of low cost carriers (LCCs). Aviation by its very nature is a critical

part of the infrastructure of the country and has important implications for a) the

development of trade and tourism and other allied industries b) opening up of

inaccessible areas of the country and c) stimulating business activity and economic

growth of the country. The civil aviation in India has witnessed many changes since its

beginning in tenns of the quality of services provided to passengers, development of

airport infrastructure, employment opportunities and profitability of airlines.

The evolution and growth of the aviation industry in India can be classified as a) Growth

in the pre-privatization era b) Growth in the post-privatization era. This chapter reviews

the evolution and growth of the Indian Domestic Aviation Industry (IDAI) in the pre-

privatization era i.e. since its early beginning in 1911 until 1994.

3.1 Growth of Domestic Aviation Industry in India

a) Domestic Aviation Industry in India - A Historical Perspective

Commercial aviation in India began on February 18, 1911 when Henri Pequet, a French

pilot set a world record by flying the world's first air mail from Allahabad's industrial

59
and agricultural exhibition ground to Naini, a distance of 8 miles. Regular air mail

services were started subsequently by the Royal Air force on January 24, 1920 between

Karachi and Bombay with a night stop at Rajkot. The operations, however, were

terminated after six weeks due to losses suffered.

On October 1, 1915, the Government of India sanctioned the setting up of a central flying

school at Sitapur (UP), under the control of Army Headquarters. At the end of the First

World War, an 'Air Board' was formed to advice on ways of assisting and encouraging

civil aviation. Detailed rules governing registration of aircraft, licensing of personnel etc.

were promulgated in the year 1920 and in 1924, work was initiated for the construction of

civil aerodromes at Calcutta (now Kolkata), Allahabad and Bombay (now Mumbai). A

separate department of civil aviation came into existence in April 1927.

One summer in 1929, late Mr. Neville Vincent, a Royal Air Force pilot came to India

fi-om Britain on a tour during which he surveyed a number of possible air routes. He saw

the immense potential for aviation in India. Mr. J.R.D. Tata, a young Indian, was the first

to get his A-license in India. In 1929, an entirely Indian owned company, 'Tata Sons',

(later known as 'Tata Airlines') submitted its plans to the Government of India to operate

air services between Karachi and Mumbai (then known as Bombay). On October 15,

1932, a small plane called 'Puss Moth' took off from Karachi on its flight to Bombay via

Ahmedabad. At the control of the tiny plane was Mr. Tata, operating the first scheduled

air service in the country.

In 1933, when the Tata Airlines completed the first year of its operations, it had flown

1,60,000 miles and carried 155 passengers and 10.71 tonnes of mail. In the next few

60
years, Tata Airlines continued to rely for its revenue on the mail contract, including a

considerable quantity of overseas mail brought to Karachi by the Imperial Airways for

different destinations in India. On the Karachi-Madras route, frequency was stepped up to

twice a week in 1934, and a year later, a weekly service was started between Mumbai and

Trivandrum (now known as Thiruvananthapuram) with stops at Goa and Carmanore. In

1937, the frequency was increased further to two per week and another flight between

Bombay-Delhi via Indore, Bhopal and Gwalior was started.

In early 1930s, (1933-34), a number of airlines viz. 'Indian Trans Continental Airways',

'Indian National Airways', 'Madras Air Taxi Services' came up. Aviation activities

expanded and a number of new routes viz. Karchi-Jodhpur-Delhi-Allahabad-Gaya-

Kolkata-Akyab-Rangoon (Burma) etc. were introduced. The difficulties of the Second

World War led to the exploration of possibilities for manufacturing aircraft in India and

the 'Hindustan Aircraft' was established in December 1940 by Walchand Hirachand in

association with the then Mysore Government at Bangalore. India's first aircraft - the

'Harlow Trainer', a single engine aircraft was rolled out for test flight in July 1941.

The Tata Airlines was converted into a Public Limited Company on July 29, 1946 and

named 'Air India International Ltd'. Around this time, the airline moved its operating

base from Juhu to its present location at the Mumbai Airport. After India became

independent in 1947, the aim of the Indian Government was to promote the development

of indigenous industry and agriculture along capitalist lines. To achieve this, the State

actively intervened in the economy in order to a) ration scarce resources b) direct the

resources to planned uses c) curb the power of monopoly houses and d) limit the

penetration of foreign capital.

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At the time of independence, the capitalists were unwilhng to invest in the development

of infrastructure. Firstly, because they did not have the massive amount of capital needed

for investments in infrastructure. Secondly, due to the longer gestation period and low

returns, the capitalists were more interested in investing in areas like consumer goods,

where the gestation period is relatively short and the profit margins are high with

comparatively little investment. So, the large-scale projects in the sectors such as energy,

transportation, steel, oil, telecom and other areas of the infrastructure were set up in the

public sector.

After the Second World War, the aviation sector got a big boost. A number of airports

were constructed as part of the war efforts and at the time of India's independence in

1947, the civil aviation department operated forty four (44) airports. The techniques of

flying and communication were improved over a period and the civil aviation in India

was established as a safe, efficient and comfortable means of transport. The licensing

system for Air Transport Services was introduced. The availability of cheap, war-surplus

Douglas-DC3 aircraft gave rise to many new airlines, opening up more routes across the

country.

In spite of large growth of the aviation industry during the initial period, the financial

condition of many airlines was deteriorating around 1947. Due to poor financial

conditions, Jupiter Airways went into liquidation in 1948 while Ambica Airlines had to

close down its operations in 1949. Eight airlines were still operational till 1953. They

were i) Air India ii) Airways India iii) Air Services of India iv) Bharat Airways v)

Deccan Airways vi) Himalayan Aviation vii) Indian National Airways and viii) Kalinga

Airlines. Due to the soaring prices of aviation fuel, mounting salary bills and

62
disproportionately large fleet size, these airlines were incurring huge losses. The financial

health of these airlines kept declining despite liberal Government patronage. In order to

survive, airlines were asking the Government for more and more subsidies. To diagnose

the problems of these airlines, the Government of India appointed Rajadhyaksha

Committee. Having studied the problems of these airlines in depth, the Committee

reported that the main reason for dissatisfactory condition of the airlines was the

existence of too many airlines in the market, operating with multiplication of resources.

To address this problem, the Goverrmient of India took an important decision to

nationalize these eight airlines.

b) Nationalization of Airlines

With the "Air Corporations Act 1953" all the assets (and liabilities) of the then existing

private airlines were transferred to two new national carriers viz. Indian Airlines and Air

India. Indian Airlines (lA) started its operation on August 1, 1953. It was entrusted with

the responsibility of providing air transportation within the country as well as to the

neighboring countries in Asia. Air India (AI) offered international air services only. The

"Air Corporations Act 1953" prohibited any person or company to operate any scheduled

air transport services from, to or across India. Thus, this Act conferred monopoly in air

transport services on Indian Airlines and Air India.

3.2 Growth & Operations of Indian Airlines (lA)

Right from the beginning, Indian Airlines always focused at strengthening its dominance

in the domestic circuit and providing world-class services to its international passengers.

63
Indian Airlines inherited a fleet of 99 aircraft including 74 Douglas DC-3 Dakotas,

12 Vickers Vikings, 3 Douglas DC-4s and various smaller types from the eight airlines.

The jet age for the Indian Airlines began with the introduction of the 'Sud Aviation SE

210 Caravelle' in 1964, followed by Boeing 737-200s in the early 1970s. Between 1962

and 1972, Indian Airlines was called upon to support the military in several campaigns,

first in unplanned fights with China, and later with the wars with Pakistan.

Indian Airlines reported a loss of Rs. 45 million in 1972. The next year, the company had

several incidents of aircraft damage or loss. Labor unrest, high fuel costs, political

burdens, and built-in inefficiencies added to the company's problems. However, these

were met with such resolve that IA had the confidence to order its first wide-body jets.

Airbus A300s, in 1975. A program to produce ground support equipment in Indian

factories was a part of the deal. In 1976, lA started operating new routes like Kabul,

Afghanistan in the northwest, and the Maldives Islands in the south. The first

three Airbus A300 wide-body jets were introduced in April 1976.

The Indian Airlines was doing well till 1989-90, however it started incurring losses

thereafter. To examine the causes for the losses and to come up with the turnaround

strategy, the Government of India constituted a Committee on February 13, 1995. The

Committee chaired by Dr. Vijay Kelkar - the then Secretary, Ministry of Petroleum &

Natural Gas, Government of India, published its report titled 'Report of the Committee of

Experts on Indian Airlines' in November 1996. The salient features of this report are

discussed hereunder.

64
a) Performance of Indian Airlines

The perfonnance of any airline in a given timeframe (per quarter or per annum) can be

indicated by parameters such as a) the number of passengers it carries (PAX), b) the

passenger load factor and c) the Revenue-Passenger-Kilometers (RPK). It is obvious that

if the above mentioned parameters show a healthier trend with respect to the previous

year, it can be said that the performance of the airline has improved over the previous

year. The first parameter is self explanatory. The meaning of the other two parameters

viz. 'load factor' and 'RPK' is as follows. The passenger load factor or simply known as

load factor (LF) of an airline is a measure of how much of an airline's passenger carrying

capacity is used. Load factor is a ratio of total number of seats occupied by passengers to

the total number of seats available in all aircraft of that airline in a given period and is

expressed in percentage. Thus, the performance of an airline improves with the increasing

load factor. The revenue obtained from passengers depends two factors a) the number of

passengers and b) the distance (in kilometers) they traveled. Thus, RPK of an airline is

obtained by multiplying the number of passengers carried and the kilometers traveled by

them in a given period. Higher the RPK better is the performance of an airline.

The data in the following table shows the performance of lA in terms of a) RPK b) PAX

and c) LF during 1984-1996.

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 TABLE 3.1: PERFORMANCE OF lA DURING 1984-1996

Year RPK PAX (Million) LF (%)

(MUlion)
1984-85 6676.5 8.5 69.2
1985-86 7336.4 9.1 69.4
1986-87 8036.3 9.9 69.1
1987-88 8666.0 10.4 72.9
1988-89 8677.8 10.1 76.4
1989-90 8622.1 9.8 72.8
1990-91 7199.8 7.9 75.5
1991-92 7990.3 8.9 69.8
1992-93 7200.7 7.8 70.9
1993-94 7246.0 7.9 65.8
1994-95 7014.3 7.6 66.9
1995-96 7323.7 7.7 69.1
(Source: Report of tl:le Committee of Experts on Indian Airlines, November 1996)

The data in the above table shows that the performance of lA was improving till 1988-89.

It started declining since 1989-90.

b) Aircraft Utilization

The principle asset for an airline is its aircraft fleet and the use of this resource is critical

to the performance of the airline. The following table shows the aircraft utilization

(annual flying hours per aircraft) of IA during 1984-1996 for different types of aircraft.

TABLE 3.2: ANNUAL FLYING HOURS OF lA'S AIRCRAFT

Year A300 A320 B737
1984-85 2624 - 2761
1985-86 2733 - 2970
1986-87 2887 - 3054
1987-88 2872 - 3185
1988-89 2964 - 3062
1989-90 2901 2080 2607
1990-91 2520 980 2654
1991-92 2391 1776 2556
1992-93 2135 1937 1942
1993-94 2130 2291 1903
1994-95 1947 2357 1657
1995-96 2182 2148 1629
(Source: Report of the Committee of Experts on Indian Airlines, November 1996)

66
The data in the above table shows that lA was achieving higher aircraft utiHzation till

1988-89, however the utilization of A320 aircraft declined drastically in 1990-91 mainly

due to the grounding of A320 fleet for almost 10 months for various reasons explained in

the document below. The utilization of A300 and B737 was improving continuously till

1988-89, however it started showing a downward trend from 1989-90, mainly due to the

exodus of pilots from lA during that period.

c) Profitability of Indian Airlines

The following table shows the profits earned / loss incurred by lA during 1984-1996.

TABLE 3.3: PROFITS / LOSSES OF lA (AFTER TAX)

Year Amount (Rs. Crores)

1984-85 52.84
1985-86 63.22
1986-87 38.74
1987-88 30.10
1988-89 10.68

1989-90 -15.24
1990-91 -64.59
1991-92 -198.85
1992-93 -195.16
1993-94 -258.45
1994-95 -188.73
1995-96 -110.00
SUBTOTAL OF LOSSES 1,031.02
(Source: Report of the Committee of Experts on Indian Airlines, November 1996)

The data in the above table shows that lA had been a consistently profit making

organization till 1988-89. During this period, the performance of the airline, both in terms

of physical and financial parameters achieved new heights. The trend changed from

1989-90 and lA started incurring financial loss. From this year till 1995-96, lA incurred a

total loss amounting to Rs. 1,031.02 crores, leading to an erosion of its reserves.

67
The report states various reasons responsible for the declining performance of lA since

1989-90. They are discussed below.

• Grounding of A320 Aircraft

The fleet of new A320 aircraft (which were inducted from June 1989) was grounded from

February 19, 1990, following the crash of one A320 aircraft at Bangalore on February 14,

1990. The fleet remained grounded till its use for the Gulf evacuation operations in

September-October 1990 during the Gulf War. The Government allowed re-starting the

services with A320 on international routes from October 28, 1990 and on domestic routes

from December 3, 1990. lA suffered a loss of Rs. 197 crores on account of the prolonged

grounding of A320 fleet.

The grounding of the fleet curtailed lA's capacity, which reduced traffic carriage and

consequently its revenue earning. This happened at a time when it needed to enhance

revenue generation, in order to meet higher costs arising from, the financing of the new

fleet.

• Uneconomic Routes

lA was operating on routes in the North-East, Jammu, & Kashmir (J&K), and Andaman

Nicobar (A&N) islands which were traditionally loss making, but considered vital by the

Government due to their locations and social significance. lA subsidized these routes

from surpluses on its profitable routes. However, with the advent of private operators, the

lA market share on its traditionally profitable trunk routes dropped to nearly 50 per cent,

severely affecting lA's ability to generate surpluses for subsidizing. The losses suffered

68
by lA on account of operating on uneconomic routes alone amounted to about Rs. 325

crores during 1989-1995.

• ATF Pricing

lA uplifted ATF within the country at two price levels; viz. duty paid fuel for domestic

operations and bonded fuel for international operations. In mid-1994, the Government

had allowed import of Aviation Turbine Fuel (ATF) against special import licenses,

which could have meant a saving of approximately Rs. 150 crores annually for lA. The

Government however imposed surcharge on ATF for subsidizing kerosene and LPG

which is used by the vulnerable sections of the society. Thus, lA lost the opportunity of

cost savings. In the case of bonded fuel for international routes, lA was charged a rate,

which was 42 per cent higher (excluding sales tax) than Air India and foreign operators.

The additional burden due to the higher charge for bonded fuel for lA was estimated to be

of the order of Rs.l3 crores annually.

• Low Aircraft Utilization

The principle asset for an airline is its aircraft fleet and the number of hours it flies per

day becomes critical to the performance of the airline. During its period of profitability,

lA was achieving higher aircraft utilization of around 2800 hours aimually per aircraft (as

shown in Table number. 3.2), however the aircraft utilization declined to an average of

2200 hours aimually per aircraft during 1990s. This was far below the desirable levels.

• Pilot Exodus

lA had invested huge amount of money and time over a period to create a large pool of

pilots and other skilled manpower critical to its operations. The numerous start-up

69
airlines found a readymade reservoir of pilots with lA. They lured them away from lA

with attractive salary packages. For instance, 124 commanders left lA between 1992 and

1994. The effect of exodus of pilots was felt directly by the decline in aircraft utilization

during this period.

• Market Share

For a long time, lA was the sole carrier of domestic traffic except for a small percentage

carried by Vayudoot and Air India. The Government's policy of liberalization enabled

the entry of a large number of private airlines. With substantial capacity additions by

private airlines during 1992-1995, lA lost about 40 per cent of its market share to private

airlines, mainly on the trunk routes.

• Vayudoot Merger

The decision to take over Vayudoot in May 1993 did not make business sense for Indian

Airlines. The merger of Vayudoot with lA added a burden of about Rs. 20 crores per

annum as operating expenses. lA also had to take care of the outstanding liabilities of

Vayudoot, to the tune of Rs.l85 crores.

• Foreign Exchange Fluctuations

For purchase of 31 A320 aircraft, at a cost of Rs. 3,500 crores, lA entered into financing

arrangements with foreign banks. The interest on loan coupled with the devaluation of the

rupee was one of the main reasons for lA's financial loss since 1989-90. (Source:

"Nafional Airlines and Demonopolization", Hemant Kumar, Economic and Political

Weekly, February 17, 1996)

70
• High Debt to Equity Ratio

Increased debt servicing obligations arising from the A320 acquisition, requiring an

outlay of over Rs. 600 crores per annum for principal and interest payments, together

with the increase in foreign exchange rates placed lA's cash position under severe strain.

lA's debt-equity ratio of 114.4 to 1 in 1995-96 was alarmingly high and indicates its poor

financial health.

• Industrial Relations

lA operations were frequently disrupted by declared or undeclared industrial action by

sections of its employees. Major disruption took place in 1989, 1991, 1992, 1993 and

1994. The open sky policy, which allowed private airlines to operate in the domestic

sector, increased the bargaining power of the unions/associations, especially the technical

category.

II) Turnaround Strategies Recommended by the Committee

Having studied the problems of lA and understood the reason for its poor financial

performance, the Committee felt that a restructuring of lA is necessary over the entire

cross section, ranging from its fmancials and route network to marketing / customer

services and the organization of the personnel. The turnaround strategies suggested by the

Committee in its report are discussed below under three heads viz. a) Financial

Restructuring b) Organizational Restructuring and c) Route Rationalization and

International Operations.

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1. Financial Restructuring

The Committee felt that the key to a turnaround for lA lies in financial restructuring. This

can be achieved through a contribution made by the following stakeholders - a) The

Government b) Indian Airlines c) Employees of Indian Airlines.

• Government of India's Contribution

The report submitted by the Committee states that "The Government is the largest

stakeholder in lA and should contribute the most. The Government has a heavy

responsibility to help lA out of its difficulties. It should provide lA with necessary

finances and support, and yet avoid the temptation to get involved in its day-to-day

issues, or of tying down the assistance with various conditions. The Government has to

find difficult balance in giving autonomy to lA without shunning its own responsibility.

In order to successfully implement the turnaround strategy, the Government should allow

and enable lA to alter its shareholding pattern. The Government should reduce its equity

to 49 per cent (rather than keeping it at 50% or 51%), as it is critical for the financial as

well as managerial turnaround of lA".

• lA's Contribution

The report mentions that lA should raise incremental resources to the extent of Rs. 363

crores till FY 98-99 through a mix of commercial debt, sale of old aircraft, lease back of

existing aircraft and sale / refinancing of assets.

• Employee Contribution

The Committee felt that it is important for the employees of lA to participate in the

turnaround strategy. It would help raise the morale, commitment levels and productivity

72
of employees to desirable levels. lA employees should therefore be offered an Employees

Stock Ownership Plan (ESOP). The equity shares of face value of Rs. 50 crores at par

with a lock-in period of at least 3 years should be offered to lA employees.

ii. Organizational Restructuring

In order to increase the efficiency of the policy and decision making process, the

Committee felt the need for the reorganization of the corporate structure of lA and

suggested the following guidelines a) lA should function essentially as a Board managed

company, and it would be desirable to have a Board of manageable size to be effective b)

Its members should be persons of eminence, qualifications and experience and should be

able to devote sufficient time to the airline c) To enhance the efficacy of the Board,

officers of lA, particularly from the pivotal departments should be nominated to the

Board d) It would be desirable to have only a single post of CMD at the top instead of

having Chairman and Managing Director as two separate positions e) A more horizontal

organization structure, with fewer hierarchical levels is necessary f) Frequent changes of

Chief Executives should not be allowed, as they result in corporate philosophy changes

which are not conducive to the growth and stability of the organization.

• Industrial Relations (IR)

The management should attempt to build better industrial relations, based on fair-play,

transparency, objectivity and discipline. In these efforts, the Government must provide

ftiU and visible support but no negotiations should be carried out above the Board level or

promises / commitments made.

73
In times to come, it was felt that the Unions must become vital contributors, not threats,

to the Management process. Unions have access to a large fund of knowledge, ideas, and

opinions. The top management should make use of it.

• Human Resource Management

The Committee expressed the need for the lA management to pay greatest attention to

training and re-training of its employees at all stages and build values, corporate ethos,

and generate a sense of participation and pride for the employees in belonging to lA.

iii. Route Rationalization and International Operations

Route rationalization is an essential component of any operational and turnaround

strategy of the airline, and should be aimed at optimizing the resource utilization. If the

Government feels that lA should fly on certain routes (which are non-remunerative) for

the pursuit of any public purpose, it would be only fair that the airline is fully

compensated for the loss incurred / profit foregone on this account.

lA's network expansion on international routes should continue, with the thrust on

destinations in the nearby countries. South East Asia, and the Middle East. This is only

logical, as lA has the appropriate aircraft fleet in terms of size and range of operations.

This will also enable and equip lA to develop as a truly regional airline, and release the

resources of Air India for long-haul international operations.

It would be an absolute must for lA to rely upon and strengthen, computerized systems

for route planning, scheduling, monitoring, appraising and responding to the day to day

requirements of the market with reliability and assurance.

74
The Committee sincerely felt that if the turnaround strategy recommended by it is

implemented religiously, lA would have a healthy balance sheet; it would command a

significant market capitalization, would become Asia's premier airline and enable the

Government to make significant gains on its investment in lA. It is also important to note

that the Committee had NOT advised a merger of lA and AI. This was based on the

assessment that the problems and complications resulting from a merger would far

outweigh the likely benefits. The Committee however suggested that a useful strategy

for lA and AI would be to enter into certain strategic arrangements and alliance with each

other, as also with other airlines.

3.3 Growth & Operations of Air India (AI)

Following the end of World War II, regular commercial service was restored in India and

Tata Airlines became a public limited company on July 29, 1946 under the name Air

India. In 1948, after the Independence of India, the Government of India acquired 49 per

cent of the share of the airline, with an option to purchase an additional 2 per cent in

future, if required. In return, the airline was granted status to operate international

services from India as the designated flag carrier under the name 'Air India

International'. On June 8, 1948, a Lockheed Constellation L-749A named 'Malabar

Princess' took off from Bombay for London via Cairo and Geneva. This marked the

airline's first long-haul international flight, soon followed by service to Nairobi via Aden

in 1950.

On August 1, 1953, the Government of India exercised its option to purchase a majority

stake in the carrier. With the "Air Corporations Act 1953", which nationalized the air

75
transportation industry in India, Air India International Limited was nationalized. At the

same time, all domestic services were transferred to Indian Airlines.

Air India flew its glory days in the 1950s and 1960s. It was one of the most glamorous

airlines in the world. Al set standards for style with sari-clad airhostesses, exotic food and

excellent service. By mid-fifties, Air India had replaced its fleet of Constellations with

larger, faster and more modem Super Constellations. New destinations - Singapore and

Hong Kong in 1954, Tokyo in 1955, Sydney in 1956 and Moscow in 1958 were added to

enhance its geographical coverage.

The jet age was already looming on the horizon and heralded revolutionary changes in

the air transport industry. Air India was keeping a sharp eye on the latest developments

and decided to order Boeing 707 in the late fifties. The first Boeing 707 was received in

February 1960. This marked the airline's entry into the jet age. This enabled Air India to

extend its Bombay-London service to New York in May 1960. This was a major step in

the airline's steady expansion into new markets.

As the Sixties closed, Air India, in keeping with its tradition of ordering the latest and the

best planes available, placed an order for the Boeing 747-200s, the first of which was

delivered in April 1971. Over the next nine years. Air India received nine more planes at

regular intervals, thus achieving the biggest ever expansion of its fleet and capacity in its

history, with simultaneous expansion of all other facilities.

Air India went through difficult times during late 1970s and early 1980s. It suffered a net

loss in three financial years between 1976 and 1985. The downturn in the world economy

had a significant effect on air travel throughout the world, and India was no exception. In

76
addition, the Government kept a number of unprofitable routes open simply for prestige

purposes - a strictly commercial airline would have closed those routes. Its flights to New

York, for example, resulted in losses for a number of years, even though the load factors

used to be satisfactory. This was because only about ten percent of Air India's passengers

to New York were business travelers who would buy the more expensive seats. Flights to

Canada were even less profitable, flying at around 55 percent of capacity. Another factor

responsible for Air India's financial problems was that, it had to compete with American

and European airlines and to face the competition; it had to offer discounts on many

routes. This had an adverse effect on Air India's financial health (Source:

http://www.answers.com/topic/air-india)

The Gulf routes were the most profitable routes for Air India. Flights to the Persian Gulf

accounted for 35 to 40 per cent of Air India's traffic in the mid-1980s. Working with Gulf

Air, Air India operated 60 flights each week between the Gulf and India. But even these

routes saw profits fall, as revenue in the Gulf States declined. Another problem was the

shortage of tourists traveling to India. Communal violence and the assassination of Indian

Prime Minister Indira Gandhi in 1984 kept tourism down. In addition, to combat the

terrorism that was becoming a major problem at many of the world's airports, the

Government imposed heavy restrictions at airports, giving tourists another reason to stay

away (Source: http://www.answers.com/topic/air-india')

The darkest note in Air India's history was the tragedy that took place in June 1985 when

one of its 747s, on a flight from Toronto to Bombay, crashed to the sea with 329

passengers aboard. A Canadian Safety Board Report, addressing an inquiry concluded

that an explosive device was the probable cause of the crash. The board reported that an

77
X-ray machine at Pearson International Airport in Toronto had broken down before the

entire luggage was checked. This incident tarnished the image and creditworthiness of

Air India (Source: http://www.answers.com/topic/air-india').

Despite these problems, Air India's productivity was high. By acquiring large-body

airliners, its productivity almost doubled during 1974-1984. In 1985, Air India flew 8.1

billion passenger-kilometers (multiplication of total number of passengers carried and

kilometers traveled by all aircraft of AI during this period), a figure that prompted the

International Air Transport Association (lATA) to rank Air India 15th out of 136 member

airlines with respect to passenger-kilometers on scheduled services.

While there has been no significant decrease in Air India's passenger carriage to/from

India, its market share came down from 24.5 per cent in 1990 to 20.4 per cent in 1993.

The main reason for the fall in market share was attributed to enhanced level of

operations by foreign carriers. As of April 1995, 46 foreign airlines were operating

scheduled international air services to India. On the other hand, there were 41 countries

where India had traffic rights to operate but Air India was not operating due to capacity

constraints. There was lack of co-ordination between the management of lA and AI for

optimum utilization of each other's capacity. While the capacity with the Indian Airlines

was lying idle. Air India could not utilize the international traffic potential due to severe

shortage of capacity. (Source: "National Airlines and Demonopolization", Hemant

Kumar, Economic and Political Weekly, February 17, 1996, Page 389).

The following table shows the profit made / loss incurred by Air India during 1984-1996.

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 TABLE 3.4: PROFIT / LOSS OF AIR INDIA DURING 1984-1996

Year Profit / Loss (Rs. Crore)

1984-85 44.69
1985-86 66.00
1986-87 30.16
1987-88 -43.31
1988-89 43.31
1989-90 70.89
1990-91 81.23
1991-92 145.84
1992-93 333.14
1993-94 201.90
1994-95 40.80
1995-96 -271.84
1996-97 -291.94
(Source: Malhotra Committee on Transport and Tourism, February 1, 1999)

The data shows that during 1984-1997, Air India consistently made profits, barring a few

years. The airline incurred heavy losses in 1995-1997 because of the three main reasons:

a) introduction of wet leased aircraft b) expansion of fleet size and c) repayment of loan.

Based on the discussion above, it can be concluded that the two airlines (lA and AI)

lacked co-ordination even though they have been under the direct control of the Ministry

of Civil Aviation. Improved co-ordination between the two airlines could have helped

both the carriers in overcoming their problems.

3.4 Vayudoot Services

Another national airline, 'Vayudoot', was established on January 20, 1981, as a

subsidiary of Air India and the Indian Airlines. Vayudoot was originally conceived to

serve the North-East regions of India, where the surface transport facilities were

inadequate. Vayudoot was set up to provide air transportation link to such areas, which

were geographically cut off from the rest of the country and were earlier linked by slow

means of transportation and poor communication facilities. Vayudoot was tasked with

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carrying feeder traffic from India's smaller communities. It was serving more than 100

destinations within India by 1990. The Government of India also set up a helicopter

corporation under Vayudoot to serve off-shore oil fields. Vayudoot also had an Agro

Aviation Division which was involved in aerial spraying operations, seeding and

forestation operations. It had a fleet of one helicopter and sixteen aircraft.

Somewhere in the late 1980s, Vayudoot re-started India's night air-mail service. This

service was originally started in 1949 with four aircraft carrying mail from Delhi,

Mumbai, Chennai and Kolkata to Nagpur, exchanging mail and going back. The

Vayudoot also carried passengers sometime, at a discounted rate on the following routes:

• Delhi-.Jaipur-Nagpur

• Kolkata-Varanasi-Nagpur

• Mumbai-Nagpur

• Chennai-Hyderabad-Nagpur

• Chennai-Neyveli-Pondicherry

Vayudoot's financial performance was not satisfactory and so it was merged with Indian

Airlines in 1993. Thus, it became a wholly owned subsidiary of the Indian Airlines. On

April 1, 1997, its flight operations were transferred to Indian Airlines and its employees

were transferred to Air India and the Indian Airlines. Most of the services Vayudoot had

operated could not be taken over by the Indian Airlines because of inadequate runways at

the airports and traffic demands were not suitable for the type of aircraft used by Indian

Airlines. Thus, the decision to take over Vayudoot made no business sense for the Indian

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Airlines. The acquisition of Vayudoot adversely affected the financial performance of the

Indian Airlines.

3.5 Launching of the Air Taxi Scheme

By late 1980s, lA was not able to cope with the growing passenger traffic. The

Government of India realized that if the domestic civil aviation industry is to succeed, it

is high time to promote competition, so in 1986, private Air-Taxies were allowed to

provide chartered and non-scheduled services. The Air Taxi operators were not permitted

to publish time schedule and issue tickets to passengers. The Air-Taxi was introduced to

boost tourism and augment domestic air services. The operations of Air Taxies had

several restrictions such as a) maximum 10 seater aircraft manufactured abroad & 19

seater aircraft manufactured in India b) can fly to notified airports only c) should fly two

hours before/after schedule time of national carrier e) fares should not be less than

Vayudoot. Though air taxies helped in handling domestic traffic, their services were not

enough to handle the growing passenger traffic.

3.6 Privatization of the Indian Aviation Industry:

After India became independent in 1947, the development model implemented in India

was essentially a model of capitalist development. The aim of the Indian Government

was to promote a development of indigenous industry and agriculture along capitalist

lines. To achieve this, the State actively intervened in the economy in order to a) ration

the scarce resources and direct them to planned uses b) curb the power of monopoly

houses and c) limit the penetration and influence of foreign capital. For the private sector

to prosper, the Government of India took upon itself the large-scale projects in energy.
transportation, steel, oil, telecom and other areas of the infrastructure. Advanced

institutes for scientific and technological education and research were also set up in

public sector.

While a lot of emphasis was laid on setting up huge industries, the agriculture sector was

neglected. As a result of this, the purchasing power of more than 70 per cent of the

population living in the rural areas remained underdeveloped. Due to this, the Indian

economy became crisis ridden in the 1960s itself. In the 1970s, an attempt was made to

stimulate growth by giving a boost to capitalist development in agriculture. The Green

revolution was initiated. One of the reasons for the nationalization of banks was that the

Government could direct credit to the agricultural sector in a big way. These measures

however provided temporary relief and the crisis continued to deepen.

To keep the economy growing, the Goverrmient of India resorted to increased external

borrowings in the 1980s. It also opened up the economy to a limited extent for increased

foreign direct investment (FDI). With exports less than imports, the current account

deficit of the country went up by six times in less than a decade from Rs. 1675 crores in

1980-81 to Rs. 11,382 crores in 1989-90. The only way to recover this growing gap was

to take still more loans from abroad. Consequently, the external debt of the Government

of India zoomed upwards - from $20.58 billion in 1980 to $83.7 billion in 1990. The

Indian economy was thus in deep crisis (Source: Globalization or Re-colonization, by

Neeraj Jain, published by Alka Joshi, 2001).

The western creditors sensed that the time was opportune to force the Government of

India to submit to a 'restructuring' of the Indian economy and open it up to foreign

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capital inflows and imports. The international environment was also extremely favorable

for mounting the pressure, as USSR had collapsed and disintegrated in 1989. In 1985, the

World Bank (WB) initiated an in-depth study into India's industrial and trade policies

and submitted its report to the Government of India on November 30, 1990.

The balance of payments crisis around 1991 opened the way for an International

Monetary Fund (IMF) program that led to the adoption of a major reform package.

Though, the foreign-exchange reserve recovered quickly and ended effectively, the

temporary clout of the IMF and World Bank reforms continued. The Government had to

fulfill the conditions laid down by IMF in its structural adjustment program to address

this crisis. So, the Government of India decided to privatize the public sectors in a phased

manner. Privatization implies the induction of private ownership in publicly owned

enterprises.

The World Bank-IMF sponsored Structural Adjustment Program (SAP) has two phases.

The first phase is short-term macro-economic stabilization. It is followed by

implementation of a necessary structural reforms phase. In the early 80s, most SAPs

focused on a narrow range of policies aimed at reducing account deficits.

As the debt crisis deepened, it became obvious that the stabilization programs were not

working, the US Treasury Secretary, Mr. James Baker came up with a strategy to solve

the debt crisis. This was called the 'Baker Plan'. Under this plan, the WB was asked to

impose more comprehensive conditions on the debtor countries. By 1990, majority of the

countries that had received conditional loans from the IMF also received structural

adjustment loans with harsh conditionalities from the World Bank.

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The developed countries began tightening their purse strings, putting on hold fresh loans

to the Indian Government, demanding that it first implement the requirements stated in

SAP. The following ingredients of SAP are based on the Anderson Memorandum titled

"Trade Reforms in India" dated November 30, 1990 submitted to Government of India by

the Worid Bank.

The series of policy measures launched by the Government of India are part of the SAP

in India. The Government took up following measures to implement SAP:

• Devaluation of Rupee

• New Industrial Policy allowing more foreign investment

• Part disinvestment of Government Equity in profitable public sector enterprises

• Sick public sector units to be closed down

• Reforms of the financial sector by allowing private banks to operate

• Liberal import and export policy

• Cuts in social sector spending to reduce fiscal deficit

• Privatizing State enterprises

• Market-friendly approach and less Government intervention

• Increasing excise duties and other such measures to reduce domestic

consumption, thereby forcing domestic production towards exports market

Acceptance of these conditions was not enough to release a Structural Adjustment Loan

(SAL). The recipient country had also to agree to the WB/IMF strictly monitoring its

compliance. These loans were released in installments. So that in case adequate

compliance was not forthcoming, additional loans could be withheld.

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One of the first areas thrown open to foreign investment by the Government of India was

the power sector. This is one of the most crucial areas of the infrastructure and was

hitherto entirely in the public sector. The other industries such as Banking, Insurance,

Oil, Telecom and Transport were also opened for privatization. The privatization of the

Civil Aviation sector in India in the early 1990s should be viewed in this context.

The Government took over the civil aviation industry in 1953 and managed to keep

competition away for almost four decades. By 1990, the passenger traffic had grown so

much that it became difficult for the Indian Airlines to manage it satisfactorily. Also, as a

part of the structural adjustment program, the Government was expected to privatize its

public sector industries. The Government of India realized that if the domestic civil

aviation industry has to succeed and grow, it is high time to open it to private airlines. So,

the Government of India liberalized its aviation policy progressively in the early 1990s.

The "Air Corporation Act 1953" was abolished on March 1, 1994, and the domestic

aviation market was opened to any airline that fulfilled the statutory requirements of the

scheduled services. Thus, the monopoly of the Indian Airlines in the Indian Domestic

Aviation Industry came to an end. Many private airlines started operating in the domestic

market in the post-privatization era.

The concept of privatization and its impact on the Indian Domestic Aviation Industry

(IDAI) in the post-privatization era is discussed in the next chapter, which highlights the

important developments that took place in the IDAI and various challenges it had to face

since 1994.

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