After years of constant government bailouts, Air India still finds itself struggling with the predicament of financial strife. Saddled with an outstanding debt of $7.69 billion (550 billion rupees), the national carrier has been maneuvered by private aviation companies in India’s highly competitive aviation industry (Karnik, 2017). This paper intends to prepare an official report detailing Air India’s economic position within the global aviation market.
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The report will start by discussing the organization’s balanced scorecard to pinpoint the performance objective. Then, the paper will isolate and discuss three critical points suggested by the comptroller and auditor general in Air India’s financial statement for the year 2018. The next section of the report will discuss how regular capital infusion by the government of India affects the performance of private players in the domestic aviation sector. The ensuing section discusses the Open Skies dispute between American and Gulf Airline companies. To sum up, the last segment discusses how Air India can improve its performance management structure.
Air India Balanced Scorecard
The balanced scorecard represents a combination of performance objectives and results pertaining to four measures of performance, including; financial, internal processes, innovation, and customer (Massingam 2019, p. 70). The scorecard simply recognizes that companies have a responsibility to live up to their expectations to stakeholders such as customers, suppliers, shareholders, and employees. Based on a 2017-2018 performance review by the government of India, Air India employed a strategic plan that focused on enhancing financial support and increasing operational efficiency (Sinha 2018). The use of these approaches is evident in the management report.
First, Air India received an additional equity capital totaling Rs.18000 million in 2017-2018 (The Economic Times 2018). The company has continuously received support from the government after a failed divestment attempt in 2017. Air India has been struggling with a financial debt of more than Rs 50000 million (The Economic Times, 2018). Thus, the company primarily survives on government bailout packages. Also, the analysis report reveals that the company has managed to stay afloat by selling and leasing some of its national carriers.
Secondly, Air India focuses on improving its operational efficiency through two approaches which include improving employee performance and enhancing the functioning of internal processes. The company undertakes annual employee appraisals and pays out performance-linked bonuses to its most productive workers, and further pays out commissions to its Agents within India. The company also awards long-serving employees with a memento, and during the year 2017-2018, 1301 employees out of a total staff of 10887 received the accolade (Management Discussion and Analysis Report 2018, p. 29). The company further enhances its operational efficiency through the automation of internal processes. Implementation of a Fuel Uplift Application (FUA) in 2017 and Passengers, Aircraft and Crew Connection (PACCA) in 2018 ascertains transparency and accountability of information to all stakeholders (Management Discussion and Analysis Report 2018, p. 27). Other forms of IT integration include; E-boarding and self-service Check-in kiosks to facilitate the movement of passengers across the terminal. Additionally, the use of a Document Management System (DMS) allows for the search, retrieval, and distribution of information across all departments and strategic business units.
Thirdly, reports indicate that Air India has invested in innovation as observed in the company’s launch of new services such as the maharajah direct aimed at improving the business class experience (Management Discussion and Analysis Report 2018, p. 20). The launch of premier clubs such as the maharajah club and golden Edge club is designed to attract wealthy individuals. The flying returns program further offers regular flyers a number of benefits such as increased baggage allowance and priority baggage handling.
Fourthly, the management report shows that Air India fulfills client expectations by offering competitive fares, developing of flight safety website aimed at disseminating safety-related data in a timely and cost-effective manner. Air India is also able to meet customer expectations through adhering to quality management standards such as ISO 9001:2015, which sets out the guidelines for quality management systems. An ISO renewal audit conducted by the Bureau of Indian Standards in 2017 confirmed NIL non-conformities (Management Discussion and Analysis Report 2018, p. 26). Moreover, the certification of Air India’s subsidiary company, Air India Express, in 2018 is a clear depiction of the compliance with the safety guidelines set out by the IATA Operational Safety Audit.
Critical Points for Air India’s Annual Performance for 2017-2018
Based on section 139(5) of India’s company act, the statutory auditors appointed by the Auditor General and Comptroller are endowed with the responsibility of expressing an opinion regarding financial statements taking into account the auditing standards described under section 143(10) of the act. In the case of Air India, the auditor general and the comptroller under section 143(6) B of the companies act exemplified three significant matters pertaining to the organization’s profitability, financial position, and disclosure.
Observation on Profit
Air India failed to charge medical benefits amounting Rs 7924 million to the current 2017-2018 financial period but instead charged the amount to the previous 2016-2017 period. This action, according to the comptroller and auditor general, fails to comply with the Indian Accounting Standard (Ind S) 8, which culminates in an understatement of the current year’s overheads and loss, plus an overstatement of the previous period’s overheads by Rs 7924 million. In other words, the accounting chose to charge medical benefits for the current financial period to the previous period simply because the company lacked statistics containing a list of beneficiaries.
Observation on Financial Position
The statutory auditors also noted a discrepancy in the Rs 15979.4 million invested in the shares of Air India’s five subsidiary organizations. Statutory auditors failed to understand why a loss was incurred in the carrying value of an investment in Air India’s subsidiary company, Hotel Corporation of India Limited. This situation led to hesitance in the initiation of revival plans. The auditors were also clear on the fact that there exists no provision that allows the issuing of advances to subsidiary companies. However, Air India had already issued a partial advance of Rs 2281 million to Hotel Corporation of India Limited. Further, payments amounting to Rs 1666.7 million and Rs 4022.5 million were also issued to Air India Engineering Services Limited (AIESL) and Airlines Allied Services Limited (AASL), respectively.
In note 48, Air India states that though AIESL & AASL are in losses, their performance continues to improve on an annual basis. The company further explains it has not considered a loss in the value of subsidiary investments which directly contradicts the figures illustrated in the balance sheet. These financial discrepancies, according to the statutory auditors, are in direct contrast to the Indian Accounting Standard 36 on ‘loss of assets,’ which states that for every balance sheet date, a company ought to test a suggestion of loss on an asset after which the entity should approximate the recoverable amount.
Observation on Disclosure
The physical asset verification indicated inconsistencies. Audit realized that the value of APU, Aero-engine, and repairable amounted to Rs 16 438.7 million in RAMCO structure. RAMCO is an inventory management system that is not integrated with SAP. Therefore there were inconsistencies with the fixed asset catalog preserved in SAP. Also, aircraft repairable is registered as an expense under RAMCO, even though it is an asset for the company.
Impact of Regular Capital Infusion by Government of India
For years now, Air India has been surviving on government bailouts. In the year 2012, the Indian government infused an estimated Rs 26,000 crore to keep the company operating (Business Line 2018). Regular capital infusion by the government has had a significant effect on the performance of private carriers in the Indian market, such as Jet Airways and IndiGo.
India’s aviation industry is largely driven by ticket sales for seats. The increase in the number of domestic passengers has emanated from the affordability of tickets due to the intense competition among aviation companies. Many aviation experts are of the opinion that Air India does not practice rational pricing (Ghosh 2018). In fact, industry players believe that Air India is able to price below cost because the massive bailout by the government allows the company to continue running at a loss. While Air India continues receiving money from the government, the rest of the domestic aviation companies struggle to turn up a profit amidst increased fuel prices.
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Investment in Subsidiary Companies
Due to a large amount of government-infused capital, Air India is able to acquire subsidiary companies to help it minimize the cost of ground handling and maintenance. For example, Air India Transport Services Limited (AITRSL) is a wholly possessed subsidiary of Air India, which provides ground handling to 35 foreign airlines. Government-infused equity capital has allowed Air India to invest in major companies participating in the aviation industry. Air India is, therefore, able to leverage the cheap services offered by its subsidiary organizations, ultimately reducing its cost of operation.
On the other hand, private domestic aviation companies lack the capital resources to invest in subsidiary companies for ground handling and maintenance, resulting in a scenario they are forced to operate at a much higher cost, as opposed to Air India. Furthermore, some of the private aviation companies are forced to rely on crucial services provided by Air India’s subsidiary companies which end up charging high prices to the much smaller competitors.
Open Skies Dispute
Three Airlines, Etihad, Emirates, and Qatar Airways, have long been accused of unfair competition by their American counterparts Delta Airlines, American Airlines, and United Airlines. In 2015, the Partnership for Open and Fair Skies (POFS) finally managed to find compelling evidence, suggesting that the three Gulf Airlines have been receiving amounting to $42 billion since 2004 (Zapata 2017, p. 1). POFS submitted the evidence to the U.S. government, pushing for renegotiations of the bilateral Open Skies treaty with the UAE and Qatar.
The liberalized European market has particularly become a point of contention between American and Gulf Airlines. Liberalization of air transportation in Europe during the 90s relaxed preexisting restraints on where aviation companies could operate and at what prices (Mason, Morrison, & Stockman, 2016). Historically, the international routes between Europe and America have been extremely profitable since the liberalization of the European aviation market. The North Atlantic route is critical to the profitability of the three American airlines, just as it has proven profitable for the three Gulf carriers. The conflict has brought to light the Open Skies debate.
Open Skies agreements bind national governments to high safety standards, high security and also protect consumers from exploitative prices. Yet, the treaty is meant to protect aviation companies from low prices caused by direct or indirect government support or subsidies. Thus, it stands to reason that POFS may be right to argue that UAE and Qatari subsidies have been and still continue to violate the Open Skies treaty.
Table 1 below illustrates the alleged government subsidies given to the Gulf aviation companies between 2004 and 2014 as claimed by POFS. The figures show that a total of $36,549 million had been paid out to the three companies, and both Etihad and Qatar had previously received an allocation of $4,172 million more. Qatar Airways received the largest allocation of $16.5 billion, followed by Etihad with $13.5 billion and Emirates receiving less than half of Etihad’s amount, $6.5 billion.
In an interview, Delta Airline’s Chief Executive Officer (CEO) Ed Bastian likened the scenario to unfair competition between American airlines and Gulf regional governments. In contrast, the Gulf airlines responded by revealing that the U.S. carriers also received a “back-door subsidy” under Chapter 11 of the Liquidation Code.
Table 1: Alleged Subsidies received by Gulf Airlines between 2004 to 2014 according to POFS (Zapata, 2015).
|In a million US$ Etihad Qatar Emirates|
|Government Equity Infusions||6,291||–||–|
|Government Loans at Preferential Rates||1,375||618||–|
|Government Loan Guarantees||–||6,809||–|
|Debt Forgiveness/Fuel Hedging||4,63||7,756||2,395|
|Provision of Airport Terminal Facilities for LTAR*||–||–||1,392|
|Provision of Other Goods and Services for LTAR||–||452||1,855|
|Passenger Fee Exemptions and Credits||501||616||871|
|Provision of Airport Revenues||–||215||–|
|Assumption of Promotional Expenses||640||–||–|
|Total Received 13,548 16,488 6,513|
Modification of Air India’s Performance Management System
Need to Incorporate Ratio Financial Metrics
Air India currently measures its financial performance using the typical accounting statements such as balance sheet and profit and loss account, ignoring performance measurement metrics such as profitability, efficiency, and liquidity ratios. For example, efficiency ratios demonstrate a company’s ability to convert inventory into sales. Assessment of Air India’s efficiency ratios would help management determine the efficiency of offsetting some of the assets to raise the necessary funds for repayment of government debt. Profitability ratios may also help evaluate Return on Investment (ROI) for new products and services before and after launching them.
Need to Focus on Customer Retention and Employee Behavioral Change
According to The Economic Times (2017), Air India was ranked the third-worst performing air carrier in 2017, largely due to its poor customer service and unprofessional staff behavior. Customer satisfaction is critical to enhancing an organization’s performance. India’s aviation industry is highly competitive, and customer service is critical to the retention and attainment of new clients. Air India, for the most part, upholds quality through abiding by the current ISO standards. However, close monitoring of the ground crew, flight attendants, and the cabin crew is a necessary step towards ensuring that customers receive quality service. It is necessary to incorporate a well-articulated monitoring system in the performance management structure because such employees come into direct contact with customers, and their behavior towards customers determines the company’s reputation. The primary objective here is to retain customers and help the cabin develop customer relations skills.
Need to Invest in Smart Internet Solutions
Air India can invest in smart internet solutions to help in the automatic detection of mechanical problems and send reports to ground maintenance teams. Additional installation of sensors will help the cabin crew monitor the well-being of passengers. For instance, Virgin Airlines recently installed IoT in its Boeing carriers which ensures that every single element with the aircraft is connected to a wireless network providing real-time data on aspects like performance and maintenance (Moorman, 2016). Such a smart system would enable Air India to minimize its maintenance cost, considering that the company owns a large fleet of carriers. An IoT system would facilitate sending of real-time performance metrics to all stakeholders.
The paper discussed the performance management dynamics guiding Air India’s performance in the Indian aviation industry. From the first part, as depicted in the balanced scorecard, it is evident that Air India is a loss-making company considering that financial reports have no records of reinvested funds from prior financial periods. The statutory auditors also reveal untruthfulness on matters pertaining to assets and liabilities as well as money spent on external investment. The auditors also cited violations of multiple regulations pertaining to India’s accounting standards. From a performance management perspective, customer retention may help the company to salvage its reputation. Nonetheless, privation is undoubtedly the viable option to ascertain fair completion.
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