Hanlon (1996) suggests that air transport is a big industry in the world. Supporting this idea, International Air Transport Association (IATA) has 230 airline members across 120 countries.
Hanlon (1996) enlightens that the transport via air saw its birth in the year 1919 after the end of World War-I however, the industry bloomed post the Second World War. According to Hanlon (1999), the aviation industry has continuously flourished after the end of World War-II. He also claims that the airline operations have since plunged just once in the year 1991 during which times the world was hit by the Gulf War, International terrorism and the global downturn. After the end of the Gulf War there was a swift recuperation from the air traffic loss. In support with the loss of air traffic shown by Hanlon (1999), Hanlon (2007) suggests that after the recovery of the industry post Gulf War, the airline business again saw a dip in its revenues and turnover due to the 9/11 World Trade Centre attacks in the US which also saw an increase in the international terrorist activities.
Contributing as a major chunk to the worlds Gross Domestic Product (GDP) and portraying constant development. (Hanlon, 1996) (Global Airlines part 1. Page-1)
In lieu of Hanlon's (1996) suggestion of the development of the Air Travel Industry, Oum et al (2000) shows that the economy around the world is being contributed by the Travel and Tourism sector which is consistently spreading its wings. He also claims that the travel and tourism segment is aided by Air Travel in particular the international tourist's destinations.
To clarify the claim by Oum et al (2000), supportive figures from a research conducted by Datamonitor (2009) about the air travel industry profile are stated here. Datamonitor (2009) state that the airline business around the world earned incomes totalling to $467.4 billion in the year 2008 carrying a total number of 2.1 billion passengers.
It is suggested that this income will increase to $609.3 billion in 2013 year end (Datamonitor, 2009).
The industry forecasted the revenue of $536 billion in the year 2008. http://www.iata.org/nr/rdonlyres/44d17c46-9cb7-4187-b0fd-72aca6396f4c/0/industry_times_december2008.pdf
"As a global economic downturn re-shapes the world's financial industry, policy makers must also understand the change is needed in air transport. Unlike the finance industry, airlines are not asking for handouts. Commercial freedom, efficiency and a fair treatment in taxes are needed." Bisignani (Director General and CEO,IATA) http://www.iata.org/nr/rdonlyres/44d17c46-9cb7-4187-b0fd-72aca6396f4c/0/industry_times_december2008.pdf
According to International Airlines Travel Association (2009), the estimated loss for the year 2009 is $2.5 billion. The number of travellers taking up the air route is predicted to decrease by 3.0% which saw an increase of 2% in the year 2008.
The air transport rolls out 29 million vacancies (Air Transport Action Group, 2005 cited in Hanlon,2007) including crew members, check-in and ground personnel, retail and food out-let employees, workers from aircraft manufacturing companies, securities, energy and IT segment, indirect tourism consumption jobs and others (Hanlon, 2007).
According to Hanlon (2007 and 1999), airline industries has failed to achieve expected gain percentage increment even after the number of passenger travelling have increased. The International Air Transport Association (IATA) members (airlines) have faced a dip in the 'airline profit margins' totalling up to $36 billion from the year 2001 to 2004 resulting in the profit being less than other industries' average. This loss was further estimated to be $6 billion in the year 2005 (Bisignani, 2005 cited in Hanlon, 2007). Hanlon (2007) suggest the possible number of reasons for the decrement of profit margins being as scoring fuel prices, heavy investment and surplus resources in the industry.
"While aviation is a catalyst for social and economic development around the world, it is also a source of pollution. While aviation's total emissions are modest compared with other sectors they are not expected to decrease in the coming years." (Assad Kotaite, 2006)
"Unjustifiable state aid to flag-carriers is the greatest obstacle to the emergence of a viable, competitive airline industry." (Sir Michael Bishop, Chairman, British Midland Airways)
Doganis (2006) suggested that the main reasons of airlines being owned by the government was, that government realised that there was a need of developing a one established airlines of its own, moreover after the bilateral agreement of air services agreements that each state have to come-up with an airline which should operate on the assigned route. Due to this necessity many times government had to support the airlines financially and regulate them. This made government more interested towards airlines (Doganis, 2006)
Even Hanlon (2007) has supported Doganis (2006) by showing how airlines became a crucial element for the government. According to Hanlon (2007) after the World War it was difficult for the airlines to operate without the government financial (perk) help. They needed financial help to maintaining the aircrafts and to continue to exist in the restricted market of the world at that time when every country was involve in the trend of proving its ownerships in the nation. Government invested money into the airlines so that they can keep operating there business as usual, so that employment of the particular nation can be secured with developing tourism and trade to the country. Beside, being an income resource airline was also a 'flag carrier' of that country. For government, 'flag carrier' was important as a nation's reputation then an income resource, mostly in developing countries.
Airlines have been considered as a public utility and mostly regulated by the government as air transport. Airlines are the crucial element for the government, especially international airlines as it generates peripheral benefits. After World War-II airline business was mostly conquered by the government and was called the 'flag carriers'. The airlines became the icon and status of the nation. For government, the airlines became a tool to promote the nations goodwill, this goodwill helped developing foreign trade and investments, foreign exchange and developing tourism. Gradually airlines are moving toward privatisations and most of the airlines have been privatized during 1985 to 2002. Privatisations were in the form of fully or partially where some percentage of the ownership remains with the government.
According to Doganis (2006), most of the airlines were either privatized or in the process of being privatized during the 21st century. It helped airlines to clear their debts and improve the services in the competitive world. Later government also understood that privatization and "strategic partner" can help airlines to survive and will be the solution of the financial problems of the national carriers. Strategic partners are generally other international airlines who share that financial strategies and routes with one international carrier to help each other to operate the business smoothly. But it is not easy for a state owned airline to sell them as most of the state owned airlines have faced constant losses during the years and still on a big debt. This becomes a challenging job for the airlines to show themselves financially attractive for the buyers and to prove potentially strong.
Doganis (2001, 2006) suggested that most of the 'state owned airlines' experience because of the political and administrational problems which is why they have failed to achieve their set goals. He has referred the condition of these airlines to be facing 'Distressed State Airline Syndrome'.
This syndrome is elaborated further by Doganis (2006) using the example of 'Olympic Airways' and 'Alitalia' during the periods of 1990's and from 2002 to 2004. He suggests that similar was the case for other partial 'Privatized Airlines' like the Tunis Air.
Doganis (2006) has categorised some of these issues using certain examples from around the world. These are as follows:-
Severe monetary issues: Doganis (2006) illustrated the losses incurred by the Air France in the 1990's to focus on the financial difficulties even after it was supported by the 'State-aid'. Similarly, Olympic Air saw periods of great losses consecutively every year for almost two decades. It only saw profit after it was reorganized in 1995. However, according to Doganis (2006), it again saw losses in the following couple of years. The oil crisis of the 2000's led the state owned airline to suffer up to a greater extent than the private owned or part private owned airlines. He suggests that the possible reason for the government operated airlines confronting excess loss during these years could be the rate of speed of taking decisions by the government authorities and management. This mismanagement, exempt from paying certain rents and taxes to the government and even the reduction from the government subsidiaries led some government owned airline to incur losses up to a $1,550 million during the 2000 - 2003 crisis. For instance the Alitalia, operated by the Italian Government suffered a total loss of $1,550 million after tax deduction.
Doganis (2006) points out that such state aid airline companies had been enjoying various reduced prices for services of the government subsidiaries and were even exempt from paying rents for office spaces and check in counters of the airlines. They did not pay for any domestic landing fees and even received 'aviation fuel' from the government operated oil companies either free or at a very low cost.
Another reason for the losses of the state owned airlines is that they consistently are under huge debt from government sources. Some of the debts that are faced are the 'Aircraft lease liabilities'. This had led Alitalia to pump funds from the Italian Government in 2004 (Doganis (2006)).
Political interference: According to Doganis (2006), the government owned airlines are surrounded by political disturbances and unrest. He explores the reason for which the state owned airlines are caught up in the miscalculated steps and decisions of the government. He states that the government does not do any good by expecting to get gains as well as keep an overall management running as it pleases. It is suggested that the government lacks in guaranteeing possible 'support' in terms of elevation from the annual discrepancy of funds or relief from the loans required to purchase airliners or jets. It is also advised that the government wishes to have a control over the management of the airlines and also want to restrict the risk they take in their businesses by applying various compulsive and regulative parameters. Doganis (2006) highlights that in order to accomplish these two targets, the governing bodies repeatedly changes the airline authorities which hardly get time to establish themselves before being replaced again.
This situation is better understood by the example of the Olympic Airways taken by Doganis (2006) where he explains that the airline had thirty three chairpersons during the period of 1975 and 2004. This period saw an in and out inflow of many chairmen who didn't wish to work for the airlines after being appointed due to 'lack of political support'. Doganis (2006) himself had been a Chairperson and a CEO for fourteen months during which time the Board of Directors were replaced three times. This course was followed by every change in the Ministry of Transport even if they belonged to the same 'political party'. It is argued by Doganis (2006) that favouritism played a role in appointment of these authorities as the Ministers were supportive of the chairmen of the members of board of directors who were politically influential or were supportive to the Minister's party.
Doganis (2006) also points to the reason for the appointment of such authorities of the airlines. He highlights that these appointments are generally to 'pay off political debts' or use the connections to attain 'political or internal success' instead of aiming to secure the future of the airlines.
The Governing bodies' goal of making better their near futures or securing their 'short-term political objectives' can be better understood by an example of Alitalia illustrated by Doganis (2006). He states that in the year 2003, when Alitalia had been facing grave losses, the managing body of the airlines planned to use the 'turn-around strategy' focused on achieving a profit by the year 2005. They resorted to reducing the number of employees by down-sizing and cutting the job posts and making redundancies and non following of the scheduled increment of wages. According to Doganis (2006), this step was highly criticised by the members of the union with flaring demonstrations and condemnation of the decision. The then Italian Government seeing its near future elections in the next eight months in 2004, sensed the possible dangers, sticking to this decision could cause to their parties' reputation and the political turbulence it could create leaving negative scar on their status. The then government arrived on a decision of carrying out negotiations regarding the steps the airline could take to overcome the situation. It led to a delay in implementation of the job cuts as well as giving away of the timely pay hike to make their political standing strong. The situation led to the forced resignation of the CEO of the Alitalia due to non performance (Doganis, 2006).
Doganis (2001) discusses the case of the Olympic Airways which in 1976 due to state intervention agreed on flying an aircraft early morning just to deliver the newspapers to different places. At the same point the international newspapers were carried within Greece at a standard price which was higher than the price agreed upon by Olympic Airways. It is estimated that the airlines continued to fly early mornings for many years even after bearing losses each year due to few number of passengers on board the early morning flight (Doganis, 2001).
Doganis (2001) argues that the airlines which take a measure of operating at a very low fare end up increasing the loss margin as compared to other flights running on normal fares. He enlightens that the low fare airlines or budget airlines may result in making a few routes on the network suffer a loss due to non generation of revenue. It could also create an increased demand resulting in facing stress from the political parties to add aircrafts on these routes so as to meet the increased demand and finally adding on to the already loss facing airline.
Union Power : Doganis (2001) cites an example of the airlines in Europe to show the stress and involvement of Unions on the decision capability of the airline management. He states that the members of the Union have strong networks and influence management's decision by threatening them to perform strikes. It is seen that the Olympic airways were against any changes in terms of introduction of the 'sleeper seats in business class' on the flights carrying passengers of a long journey. However, Doganis (2001) states that the introduction of the more comfortable and sleeper seats in the business class were a part of the strategy to renovate the product and increase its saleability.
Doganis (2001) also argues that the union was being used by governments help appoint or promote the employees so as to have a supportive representative at influential posts. He states that the same criteria were followed in the case of Olympic Airways which faced strike threats at every unapproved promotion or recruitment in the company. Doganis (2001) suggests a possible reason for such level of involvement of the union could be the stability of the union members and their non replacement as compared to the replacement of the managing authorities. He shows that the union leaders thus had an advantageous edge over the new management recruits who helped them become influencing in the negotiations with the government and the senior management.
- Limitations of the Culture : It is suggested by Doganis (2001) that the countries which do not face a union strength, may face a bias in terms of traditions or customs.
- Employment of large number of staff : The airlines end up hiring large number of staff due to influential involvement of the government and union in decision making. The result is due to the unions being involved in the 'negotiation' of the working environment of the staff resulting in more perks, less output and many concessions (Doganis, 2001).
- An ambiguous and unclear strategy for development : The reason for an unclear development strategy is unstable managing authorities. The involvement of the government and the political parties in the decision making of the airline confuses the authority and the employees to adopt a particular approach (Doganis, 2001).
- 'Characterised by bureaucratic and overcentralised management'. Doganis (2001) states that these airlines suffer from traits of excess staffing, management replacement and other political influences make it difficult for the airline management to make a decision or take a firm step towards an issue.
- Service quality is unacceptable : Due to disorganised management, strong union roles and non capacity of filtering staff the service quality rendered is generally poor.
These issues remained persistent in every state owned airline and led to the privatisation of the airlines (Doganis, 2006).
The privatisation was considered to be a solution of pulling the government operated airlines out of the sufferings of 'distressed state airline syndrome'. The privatisation as per Doganis (2006) helped the airline management to deal and decide on important issues independently and without interference from the Governing bodies. Doganis (2001) mentioned that this led to a better structure of the airlines as they emerged out of debts due to investment of new funds. It calls for not only modern facilities and a different view of look out being incorporated but as argued by Doganis (2006) also demands a complete restructuring of each and every characteristic of the airline that helps making an airline and its services better. Some of the different factors that should be addressed by the new authorities have been discussed by Doganis (2006).
Doganis (2006) suggests that the culture of the airline should be altered. The inculcation of a feeling of working as a team and not as an individual or as a competitor needs to be injected. It is crucial to make the employees understand that after privatisation, the profit or loss and the possibility of being employed or made redundant depends to a major part on the performance of the staff on an individual or a team basis. They need to know that their employment will not be secured or supported by the government or political party intervention at any stage in case of their non-performance. According to Doganis (2006), the immediate goals of the newly recruited authorities of the airline should be to cut costs, make better use of their staff and increase staff productivity and also form a network of the employees and the services that reflect a willing to deliver customer satisfaction.
Doganis (2001, 2006) also suggests that there should be a reorganization of the funds or capital invested or required to carry out a particular activity within the airline. There is a need to redistribute the capital invested by paying off the pending debts and then using the remainder of the funds effectively so as to not waste money but use in an appropriate manner ultimately to improve the services to a satisfactory and acceptable level.
Next it is suggested by Doganis (2006) that the newly recruited management should have a firm plan of action to pull the airline out of dip and drastic conditions. This plan involved 'any debt write off', cutting the number of staff employed by giving 'voluntary retirements' by offering 'high redundancy compensation payments' and by not allowing an increment in the incomes for atleast a period of two years. This also meant making certain unproductive and less frequent routes to be abolished out of the flying network of the airline.
Marketing of the newly structured airline and the advertising of an improved products and services is also important in such cases as rightly pointed by Doganis (2006). Another important aspect that should be a part of restructuring is the regular audits to ensure that there is not any part interfered by the government and no 'hidden subsidies' of the government are utilised. Doganis (2001) points out that there is a possibility that the governments pretend their airlines are in a better shape and attractive to 'potential buyers'. In order to make the airlines purchasable, the governments keep on providing subsidised fuel prices or the rent being not necessarily paid for the usage of the airport building or facilities.
Doganis (2006) feels that the actual value of the airline has to be calculated before being privatised and all the government aid and subsidies should be calculated so as to help the buyer decide whether they want to invest in the airline or not. It is pointed out that if this step is not taken then there always remains an indecisive factor amongst the buyer due to being insecure of the subsidies being provided by one government being taken off by another. If the hidden government support is appropriately 'quantified', it will be an easy decision for the buyer to make whether the capital needed and invested will cover any losses caused due to non availability of government support (Doganis, 2006).
In order to successfully privatise a government aided airline, it is pertinent that the government policies are made clear. Doganis (2006) states that the policies regarding air fares and routes that were earlier a symbol of the country which has been referred to as 'Flag Carriers' by Doganis (2001, 2006) need to be transparent and specific so that the new airline that will be formed as a result of the privatisation will know that their acts are within limits and with no interference from the government.
Air India is also a Government operated or a state aided airline which according to Indian express.com '... may require over $1 bn bailout'. Air India saw its birth in the year 1932 when the father of Civilisation, Mr J. R. D Tata, founded the airline. According to airindia.com (2009), Air India can be termed as being one amongst the oldest 'flag carriers' of India. Air India was run by J.R.D Tata who efficiently operated the airline until the year 1953 when it was taken over by the government. It was known as 'Maharaja', and catered mostly to the privileged and the elites. The Air India was soring high and was expanding day by day due to being the only airline which catered to the Indian aviation market back in 1960's. However, situation in the present market of Indian aviation has drastically changed due to the increased number of competitors currently struggling to be the best in the competition (http://home.airindia.in).
The airlines are rated internationally based on certain factors by Skytrax (2009), which classifies the airlines on the below mentioned aspects. These factors have classified Air India as a 3 star airliner. The aspects when considered for Air India gave the below written results:
- 'Excellent in flight service' - The skytrax international rating stated that the in flight services were ineffective and 'inefficient'. It also rated the in flight entertainment system as being on a lower side including the staff attitude and 'problem solving' skills. The skytrax also stated that the seats of the economy class were not so comfortable which will be explained later in the research by the author. It also showed that the food did not meet the quality standards and the aircraft did not meet the cleanliness standards. (www.airlinequality.com cited in the Scribd.com, 2009)
- 'Commitment to customer service/Reliability' - The staff was judged on the basis of their professionalism, 'check in, check out' and 'arrival assistance' skills. The Skytrax discovered that the airline were delayed at usual intervals, the operating skills of the staff in terms of the 'baggage delivery' and other customer related attributes made the customers think of a better option than to fly with Air India (Satish & Bharathi, 2007 cited in www.scribd.com, 2009)
- 'Reputation' - There was lot at stake with the staff non assisting attitudes, poor customer service quality, less or no maintenance of the aircraft. It endangered the repute of the airliner as it did not meet the international airline standards (www.airlinequality.com, 2009 cited in www.scribd.com, 2009)
- 'Value for money' - Air India had had its share of monopoly and was in full charge of service in the aviation market of India, thus charging high rates for its services. When compared to the international standards and the other international carriers, the price offered was as per the industry standards. However, these rates were still high as compared to the standards of the quality services they provided to the customers. It was very easy for a customer to pay that little extra to buy their peace of minds and travel with some other international carriers (Tourism India, 2007 cited in www.scribd.com, 2009)
- 'Cost Control' - This factor was considered to be a very crucial one for the Maharaja, the Air India. The airliner faced an urge pressure to cut down on costs due to high number of staff employed and being in 'full service' (DGCA (Directorate General of Civil Aviation), 2006 cited in www.scribd.com, 2009). As compared to the other domestic and international airlines of the country in 2006, the number of employees with Air India was the maximum. Fig. 1 below shows a graphic presentation of the number of staff employed by different carriers. The graph has been used by www.scribd.com citing DGCA, 2006.
- 'Control on Debt' - The 'debt equity ratio' for Air India was as high as 7.35 in the year 2006 as compared with the 'industry average' of 3.08 (www.scribd.com, 2009).
- 'People' - The human resource department of the Air India can make it possible to make it the best carrier by selecting the people with best attitudes (www.scribd.com, 2009).