Air India - Management Case Study (MBA) | Online Mini MBA (Free)

AIR INDIA: BACK ON THE
RUNWAY
ROAD TO RECOVERY
08/29/13 SURESH SRINIVASAN @ myBskool 1

AIR INDIA: BACK ON THE RUNWAY
WHAT WENT WRONG ??
 10 DAY STRIKE IN 2011 –FLIGHTS CANCELLED – REVENUES LOST
 ON TIME PERRFORMANCE WAS BELOW 80 %
 AI –IA MERGER HAPPENED IN 2007
 INTENSE COMPETITION, WORSENING OPERATIONAL PERFORMANCE
MASSIVE AIRCRAFT PURCHAES, ILL CONCEIVED MERGER
 TOTAL LOSSES – Rs 20000 Cr & DEBT BURDEN – Rs 43000 CrTOTAL LOSSES – Rs 20000 Cr & DEBT BURDEN – Rs 43000 Cr
 MR ROHIT NANDAN – “ No point in focusing on Market Share @ the
cost of Profitability”…..

3 REASONS AIRLINES MERGE
Additional revenue/assets
Increased connectivity and presence (size) lead to additional
revenue – additional value from:
Larger carriers achieve a disproportionate share of
revenue (S-Curve)
Better schedule optimization
Less pricing competition
Improved operating efficiencies
Strategic Acquisition

Examples of Areas of Potential Cost Synergies From a
Merger
Rental Expense (other than aircraft)
Combining space, ground equipment, etc.
General and Administrative Expenses
Combining office space, joint purchasing of supplies,
etc.
Labor costs for aircraft & traffic handling
Combining of redundant staff

Key Merger Considerations
Mergers involve four fundamental
challenges
Different systems
Different fleet types
Workforce integration issues
Cultural differences

Merger/Fragmentation Models
Two Structural Merger Models
The full operational integration model with employees
merged
No operational integration. A holding company with
operational entities (the double breasting model)
Fragmentation Models involving the sale of part of anFragmentation Models involving the sale of part of an
airlineairline
A transaction between two carriers involving assets only
A transaction between carriers involving assets and people

The Labor Element
Labor is the key element in determining successful
integration of merging companies
Labor laws need to be understood and applied across
borders for this to happen
Merging companies have to include labor in the
process
As a participant, with input into the process, not as an
observer
Without labor as a player, consolidation will not succeed

The Labor Element
Why is Labor Integration So Important To AirlineWhy is Labor Integration So Important To Airline
Consolidations?Consolidations?
Airline labor, especially pilots, are highly skilled and longAirline labor, especially pilots, are highly skilled and long
training cycles make labor a valuable assettraining cycles make labor a valuable asset
Airline labor unions often deal directly with the customerAirline labor unions often deal directly with the customer
Labor costs are a large enough portion of expenses to have aLabor costs are a large enough portion of expenses to have a
major impact on cost structuremajor impact on cost structure
Labor issues can often lengthen consolidation timeline andLabor issues can often lengthen consolidation timeline and
financially weaken the merged companyfinancially weaken the merged company

The Labor Element
Merging Seniority Lists and collective agreementsMerging Seniority Lists and collective agreements
Difficult and sensitive processDifficult and sensitive process
ALPA has a “Merger Policy” that is intended to:ALPA has a “Merger Policy” that is intended to:
Preserve jobsPreserve jobs
Avoid windfalls to either groupAvoid windfalls to either group
Maintain or improve pre-merger working conditionsMaintain or improve pre-merger working conditions
Minimize detrimental changes to career expectationsMinimize detrimental changes to career expectations

The Labor Element -Pilots
Need to review legal framework to protectNeed to review legal framework to protect
pilots interestspilots interests
Engage in bi-lateral negotiations withEngage in bi-lateral negotiations with
management, as necessarymanagement, as necessary
Meet and Develop Protocol of CooperationMeet and Develop Protocol of Cooperation
between pilot groupsbetween pilot groups

The Labor Element –Pilots Phase 2
Develop Transition Agreement covering the followingDevelop Transition Agreement covering the following
terms:terms:
Status of Pilot Signatory Unions and Collective AgreementsStatus of Pilot Signatory Unions and Collective Agreements
at _____ and _____ during this Agreementat _____ and _____ during this Agreement
Separation of Aircraft and Personnel during this AgreementSeparation of Aircraft and Personnel during this Agreement
See Attachment ASee Attachment A
No Layoff of Pilots during Term of this AgreementNo Layoff of Pilots during Term of this Agreement
New Hires during Term of this AgreementNew Hires during Term of this Agreement
New Aircraft during the Term of this AgreementNew Aircraft during the Term of this Agreement

The Labor Element – Transition Agreement
Seniority Integration Process and Procedure
Designation of Merger Representatives
Preparation of Employment Data
Exchange of Employment Data
Negotiations/Mediation/Arbitration
Relative Position on Pre-Merger Lists Maintained
Preservation of Rights
Reimbursement of Merger-Related Expenses

The Labor Element – Transition Agreement..contd
Company Acceptance and Implementation of the
Seniority List
Process to Negotiate Combined Collective Agreement
for the Combined Companies
Resolution of Disputes arising under this Agreement
Enforcement of Arbitration Decisions under this
Agreement
Mutual assistance during this Agreement
Duration of this Agreement

The Labor Element – Post Integration
Implementation of final integratedImplementation of final integrated
seniority listseniority list
Implementation of combined working
agreement
Establishment of an appropriate UnionEstablishment of an appropriate Union
structurestructure

The hurdles not recognized in a nut shell – 3 Main :
IGNORES THE COMPLEX LABOR DIMENSIONS
THE ACQUIRER DOES NOT UNDERSTAND THE BUSINESS
MODEL OF THE ACQUIRED AIRLINE ..and
FALL VICTIM TO LAPSES IN PLANNING & EXECUTION

The NEW CEO’s Checklist – 3 Main :
 Customers
Operations..and
Integration of labor/management

The AIRLINE MERGER INTEGRATION: 2 PART

The AIRLINE MERGER INTEGRATION: LAST PART

The PARTNER SELECTION

The PARTNER SELECTION
3. Realize Significant efficiencies and Economics of Scale

MERGER INTEGRATION TEAM
STRUCTURE - Proposal

MERGER INTEGRATION TEAM STRUCTURE - Proposal

FIRST 100 DAYS - Phased Integration Approach

FIRST 100 DAYS - Drivers Of Revenue Synergies

Conditions under which Mergers work??Conditions under which Mergers work??
• Bring in Labor as early as possible.
• Recognize & let the Pilots “Own” the Integration issue.
• Clear Incentives for Finalizing the deal.
• Transparency.
• Costs of Incentives are offset by the synergy of Operations.
• Quick “Exit Gate” gateways.
• ONE Airline feeling.
• Compatibility of the 2 Airline’s CRS & IT Systems – ease to
passengers/travel agents /Hotels etc
• Effective and Interactive “Fleet” and “Operational Systems”
Compatibility.

• Passenger point of view:
• Cabin interior changes
• Cutlery & Crockery
• In-flight Entertainment
• Rapid Check –in’s
• Rapid Exits
• Hassle free bookings & onward connections –Integration of
All Airport Operations
• Price Stability of tickets
• FFP
• CVA
• Finally..”Under sell & Over Deliver” Strategy !!!Finally..”Under sell & Over Deliver” Strategy !!!

• Employee point of view:
• Retaining the STARS
• Giving the top “Stars” freedom to work, take decisions etc
• Constant Communication
• Use of alternate tools for communication –web sites,
meetings, news letters etc
• Clear Incentives for TOP Performers
• “What’s in it for me” ??...Employees BUY IN Important
• Finally..”Under sell & Over Deliver” Strategy !!!Finally..”Under sell & Over Deliver” Strategy !!!

KEY PERFORMANCE INDICATORS –TO LOOK OUT FORKEY PERFORMANCE INDICATORS –TO LOOK OUT FOR

AIR INDIA: BACK ON THE RUNWAY
WHAT AI IS GOING TO DO RIGHT ??
 REPLACE 19 PLANES THAT ARE MORE THEN 20 YRSOLDREPLACE 19 PLANES THAT ARE MORE THEN 20 YRSOLD
 HIVE OFF GROUND STAFF & ENGG SERVICES AS SEPARATE ENTITIESHIVE OFF GROUND STAFF & ENGG SERVICES AS SEPARATE ENTITIES
– SAVINGS OF Rs 1000 Cr– SAVINGS OF Rs 1000 Cr
 ANOTHER 5 YEARS, WORKFORCE NOS TO REDUCE TO 17000 FROMANOTHER 5 YEARS, WORKFORCE NOS TO REDUCE TO 17000 FROM
24000 !!!24000 !!!
 INDUCTION OF ANOTHER 27 , 787 DREAMLINERS – REDUCE FUELINDUCTION OF ANOTHER 27 , 787 DREAMLINERS – REDUCE FUEL
BILL BY 25 %BILL BY 25 %
 PHASE OUT 60 % OF 777 WHICH A/C FOR 60 % OF LONG HAUL FLEET

RUNWAY
ROAD TO RECOVERY
•HEADHEAD YEARYEAR REVENUE (Rs)REVENUE (Rs)
in croresin crores
•REVENUE 2010/11 14062
2011/12 14713
2012/13 17000
2013/14 19000 *
*- Projections

RUNWAY
ROAD TO RECOVERY
in croresin crores
•EBITDA 2010/11 -1687
2011/12 -2259
2012/13 + 19
2013/14 +1040 *
*- Projections

RUNWAY
ROAD TO RECOVERY
in croresin crores
•NET LOSSES 2010/11 (6865)
2011/12 (7559)
2012/13 (5100)
2013/14 (3990) *
*- Projections

RUNWAY
ROAD TO RECOVERY
• MARKET SHARE AS ON MAY 2013MARKET SHARE AS ON MAY 2013
• AIRLINEAIRLINE MARKET SHARE (%)MARKET SHARE (%)
• AIR INDIA 19.1
• INDIGO 29.5
•JET + JET LITE 22.5
• SPICEJET 19.8
• GOAIR 09.0
•{ AIR INDIA MKT SHARE IN MAY 2012 WAS 16.2 %}{ AIR INDIA MKT SHARE IN MAY 2012 WAS 16.2 %}

RUNWAY
ROAD TO RECOVERY
• EARN MORE, SPEND LESS IN YEARS TO COMEEARN MORE, SPEND LESS IN YEARS TO COME
• AIMS TO SAVE Rs 300 Cr in INTEREST PAYMENTS
• EXPECTS WAGE BILL TO FALL FROM Rs 3500 Cr to Rs 2500 Cr
• Wage % to fall from 25 % in 2011/12 to 14 % in 2013/14
• AIMS TO GET Rs 500 Cr FROM REAL ESTATE SALES A YEAR for 10 YEARS
• AIMS TO BE CASH POSITIVE FROM 2016/17 & EARN NET PROFIT BY
2019/20

RUNWAY
ROAD TO RECOVERY
• COMPETITON – FUTURE ???COMPETITON – FUTURE ???
•JET DEAL WITH EITHAD AIRWAYSJET DEAL WITH EITHAD AIRWAYS
•AIR ASIA ENTRYAIR ASIA ENTRY
•FURTHER TO INTENSIFY IF THE FDI RULES OF 49 % STAKES ARE INCREASEDFURTHER TO INTENSIFY IF THE FDI RULES OF 49 % STAKES ARE INCREASED

RUNWAY
ROAD TO RECOVERY
THANK YOUTHANK YOU
suresh@myBskool.comsuresh@myBskool.com
•http://www.mybskool.comhttp://www.mybskool.com
0875459912108754599121
•Questions please – Do not forget to submit your FEEDBACK !!!Questions please – Do not forget to submit your FEEDBACK !!!

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