The Government can't run a Service Business : Case Study Air India

When India followed the Nehru-Mahalnobis model of a quasi-socialist economy soon after Independence, there seemed little chance that most of the large businesses in the country would not be owned by the Government. LIC became one of those mammoths that was formed by the amalgamation of several private insurance companies. 245 Indian and foreign insurers and provident societies were taken over by the central government and nationalised. LIC was formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

Air-India was founded by JRD Tata as Tata Airlines in 1932; Tata himself flew its first single-engined Puss Moth de Havilland, carrying air mail from Karachi to Bombay's Juhu Aerodrome and later continuing to Madras now Chennai. After World War 2, it became a public limited company and was renamed as Air-India.

But it was Indira Gandhi who nationalised 14 banks on July 19, 1969. Between 1974 and 1976, the Indian government fully took over the three foreign oil companies, Esso, Burmah-Shell and Caltex, all wholly owned subsidiaries of the largest oil multinationals, commonly known as the Oil Majors.

Nationalisation is one of the reasons why we offer poor service in all these sectors, because governments just can't run a service business. Why do we have a poor service in a public hospital, long queues in a nationalised bank, find the handling of our LIC policies very painful, and shabby service every time we take a flight by Air- India?

Even 25 years ago, Air-India was making losses but the truth was always masked and Air-India and the Government was in constant denial of its poor performance. For example one clever CEO kept selling Air-India's premium properties in New York, Tokyo and other major world cities in quick succession, trying to bolster up the Air -India's balance sheet year after year.

Air-India always had one of the highest employee: aircraft ratios amongst all the world airlines. The average age of their aircraft was always the oldest in the world. The Government always knew that Air India needed to do better and in the early 90s they even experimented by bringing in people from the private sector to run the airline. But so deep was the rot created by the government, that even a private sector CEO was forced to give up in frustration. Just as perhaps Ashwani Lohani might have given up, inspite of a stellar track record in other public enterprises.

Key reasons for Air-India failure

1. The Government was never able to reduce staff in Air India. Unfortunately the dictat laid by our socialist forefathers was that the public sector was to create employment. When one particular Chairman dared to address Air-India staff in a 100 day address, and mentioned the fact that Air India had too many staff, all the Union heads stood up and challenged the Chairman. They all united in a chorus to say " Its the job of the Government to provide employment". Unionisation was one of the fall outs of it being a public sector airline. A union for pilots, a union for handling staff, a union for every section of staff. No one in Air-India could lose his job however inefficient, just as in other government run business. This brought on a complacency amongst all staff except perhaps the flying crew in the airline. And complacency affected service.
2. Constant interference from the Ministry of Aviation. Both for major and the most minor decisions. From deciding the media plan to more major decisions like buying aircraft. The Civil Aviation Ministry for example bought 111 aircraft for Rs 70,000 for the airline when its profit was only about Rs 100 crores. Provinh that Governments are not good at running businesses, and especially service businesses.
3. Air-India never moved to update its practices and management. I remember in the 70s it was considered one of the best airlines in the world and Singapore Airline used to send its staff to Air India for training. Such was its reputation.
4. The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry, managers do not usually share in any profits. However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient.
5. Short Term View. A government can think only in terms of the next election. Therefore, they were unwilling to invest in infrastructure improvements which would have benefitted Air India in the long term because they were more concerned about projects that give a benefit before the election.
6. Political Interference. It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example, a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state owned enterprises often employ too many workers increasing inefficiency.
7. Fiddling with Incidentals. Through the last 25 years Air-India management has made a few attempts at changing some of the most well known institutions the brand has been associated with. The Air-India Maharajah who has been a constant mascot of the brand since time immemorial, has several threats on his life every time a management changed. Once upon a time, Indian households would display the Air-India Maharajah proudly in the living room of their homes. Somehow Air India never grasped that changing a mascot or changing a logo means very little, unless other services in the airline are upgraded.

But the tale of Air India is a sorrow one. From being the pride of India it was reduced to being an embarrassment for India. And no one but the government is to blame. An early privatisation might have helped the airline a few decades ago. But unfortunately successive governments were in a constant state of denial about Ai- India. Air-India is a great brand run into the ground now with a debt in excess of Rs 60,000 crores.

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