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Air-India buys its way into losses

New Delhi, May 12: Even before the dust settles over the controversy surrounding the recent aircraft purchases by the two state-run airlines, there’s another brewing.

It now transpires Air-India will stand to lose money hand over fist during the entire lifespan of the 50 Boeings it is slated to buy.

Rival Airbus won’t be able to cry foul because internal assessments made by the negotiating committee show Air-India would have lost more if it had bought Airbus planes. Airbus has alleged extra-commercial considerations in Air-India’s decision to buy Boeings.

Confidential minutes of the committee show that over a lifespan of 17 years, the three Boeing models being purchased at a cost of $6.9 billion will lead to a combined loss of Rs 15,851 crore.

If Air-India is unable to subsidise operations of these three kinds of planes from operations of its newly started low-cost carrier ' Air India Express ' losses in flying these planes are likely to mount to Rs 23,378 crore.

The losses in flying competing Airbuses would have been Rs 28,350 crore after Express’s subsidy, according to figures computed by the committee which had virtually most of Air-India’s directors as members.

“Blame it on inept price negotiations,” says Dinesh Trivedi, Trinamul MP and member of the parliamentary consultative committee on civil aviation. “If we were able to knock down the prices by 20 per cent, we would have a different scenario ' a win-win situation,” Trivedi contends.

The MP, who has written to Prime Minister Manmohan Singh seeking a probe into aircraft purchases and award of international routes to private airlines, points out that Air-India has based its purchase price on “a tender which is old and stipulates cost escalations based on delivery schedules”.

While it is difficult to compare aircraft purchases of one airline with those of another, even if it is the same product, because of strict confidentiality treaties, media reports indicate that the UAE’s Etihad Airways is buying five Boeing 777-300ERs for $1.09 billion, or about $218 million a plane.

Air-India’s internal notes reveal the asking price for the 15 B777-300ERs was $4.273 billion, or $284 million apiece. That is a difference of $66 million on each aircraft.

Prices can vary because of differences in the offered package of after-sales service, spares and financing.

A more fundamental question that remains unanswered is whether Air-India should have ordered such a large number of aircraft at one go. Earlier, it had planned to buy up to 35 aircraft for about $2.2 billion. A new strategy was adopted at last November’s board meeting, which called for buying a larger number of aircraft.

Air-India’s stated strategy at that meeting was to expand at 12 to 14 per cent annually ' at a rate higher than the expected long-term traffic growth rate of 7 to 8 per cent.

Questions have also been raised about the pricing of the Airbus deal Indian Airlines has signed. Airbus was the better buy, according to the evaluation done by Indian Airlines.

Congress Rajya Sabha MP V. Narayanasamy has asked the Prime Minister to examine a New Straits Times report that Airbus has offered 40 short-haul aircraft at $1.2 billion to Air Asia, a low-cost Malaysia-based airline, compared with the $2 billion negotiated for 43 Airbuses by Indian Airlines.

Civil aviation minister Praful Patel defended the deal in Parliament today, saying it was approved by the public investment board.

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