In an ironic way, being on the verge of collapse might be the best thing that happened to Air India. For the first time, conversations with its owner and only saviour, the government, are not centred around tinkering here and there, but around a complete overhaul. An overhaul of its fleet, people, processes, accounts and plans. An overhaul that is not merely largesse that will keep it going until the next crisis, but one that is linked to creating an organisation that is truly professional and capable of flying by itself.

By no stretch is it an easy task to smack into shape an airline with accumulated losses of Rs 7,200 crore, a staff strength twice its requirement and a market acceptance next to all. But it has been done before. Several governments ran their state-run carriers into the ground, only to lift them up again and set them free. Britain did it with British Airways in the eighties, Germany with Lufthansa in the nineties, Malaysia and Italy are doing it now.

There are many gleanings for the government and Air India from these four stories:

• Any fix has to be a permanent one.
• A strong hand has to be cherry-picked, and given a clear brief and complete backing.
• Mistakes have to be acknowledged.
• Hard decisions like job cuts and wage cuts have to be taken. But employees and trade unions should be taken into confidence.
• Cost structures need to be made competitive. Processes need to be benchmarked against rivals to improve operational efficiency.
• Privatisation is a must, even if it is through the public equity route. It increases accountability and responsiveness, besides making more funds available.

These measures worked, or look like they will work, for BA, Lufthansa, Malaysia Airlines and Alitalia...

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Lufthansa

In September 1991, IN his 25th year with the group, Jurgen Weber took over as Chairman and CEO of Deutsche Lufthansa AG. That was the year Lufthansa posted its first loss since 1973, of 426 million deutsche marks, as the Gulf War and price wars among airlines in Europe took a toll. It followed this with a loss of 391 million marks in 1992. The airline had cash for 15 days of operations and nothing to pay its 63,000 employees. Banks were unwilling to lend.

He (then CEO Jurgen Weber) initiated a transparent dialogue with labour unions and they realised the need to change.— Alex Hilgers, Director, South Asia, Lufthansa

Over the next two years, Weber initiated a series of cost-cutting measures: a 12-month wage freeze, 8,000 job cuts, grounding of 23 aircraft, phasing out of loss-making routes and asset sales. Between 1992 and 1994, Lufthansa’s staff strength dropped 17% and cost per seat 15%, and spurred a 31% increase in productivity. The airline returned to profits (302 million marks) in 1994.

Next, Weber created smaller, manageable, market-oriented business units. He put in place competitive cost structures and benchmarked processes to rivals. Spread over a three-year period, these measures changed Lufthansa’s DNA from a public sector company to one focused on customer and competition.

Alex Hilgers, who joined the group in 1986 and is currently Director, South Asia, Lufthansa, was witness to the change. “People were given more responsibility,” he says. Weber went about his job with transparency and took people into confidence. “He initiated a transparent dialogue with labour unions and they realised the need to change,” adds Hilgers.

With the airline soaring, the government sold 37.5% in Lufthansa to the public in October 1997 through a $2.7 billion initial public offering. By then, Lufthansa was one of the most profitable airlines in the world, posting a net profit of 1.1 billion marks that year. Weber, who stepped down as Chairman and CEO in 2003, put it best in one of his many communications to employees: “Acknowledging and rectifying wrong decisions is a strength that has helped us repeatedly over the past 12 years.”

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British Airways

The script for British Airways’ (BA) turnaround and eventual privatisation was written in the late-70s and coincided with Margaret Thatcher taking over as Prime Minister of Britain in 1979. The need to turn around the airline gathered steam in 1981, when it declared a $1 billion loss. Qualitatively, too, it was grounded—a survey in 1980 by the International Airline Passengers Association put BA at the top of the list of “airlines to be avoided at all costs”.

Thatcher handpicked John King, Chairman of engineering firm Babcock International, to lead BA. The problem was big, as was his response. King first slashed the workforce from 59,000 to 36,000 through a $530 million voluntary retirement scheme, partly funded from the sale of surplus aircraft and real estate holdings in London. Next, he revamped the board of directors, bringing in high-profile corporate executives.

 
Help Desk: BA’s 40,000 employees went through a reorientation programme.

Concurrently, he was hunting for a CEO to run the airline. His brief to headhunters was to find someone who understood service. Colin Marshall joined BA as CEO in 1983, with a reputation of being an aggressive and hands-on manager. More changes followed, intended to boost employee morale. Staff uniforms were redesigned—the first time in 20 years for men. Around 40,000 BA employees attended Marshall’s ‘people first programme’, which reoriented service levels of cabin crew and ground staff. All aircraft got a new paint job. Between 1980 and 1985, BA replaced half its fleet.

In 1987, the government privatised BA through an IPO of $1.4 billion. The government also gave the management greater freedom. So, they didn’t need the government’s nod to lease or buy aircraft or form joint ventures with airlines. Soon enough, BA swallowed the second largest airline in the country for $458 million.

In 1988, BA became the largest global airline, connecting 166 cities in 80 countries. It posted revenues of $7 billion and a net profit of $284 million. Its share of the lucrative North Atlantic market had grown from 29% in 1983 to 38% in 1988. It was controlling 90% of flights in and out of Britain.

A decade of doing had made the difference.

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Malaysia Airlines

In 2005, thE 60-year- old airline plunged into its worst financial crisis after posting a loss of 1.2 billion ringgit. It had cash for three-and-a-half months. The Malaysia government brought in Idris Jala as CEO. Although it was his first airline job, Jala was seen as a turnaround specialist.

We will fail without a business transformation. The airline is yet to reach a state of sustainable growth and profitability.— Idris Jala, CEO, Malaysia Airlines

In his first look at the airline’s P&L statement, Jala identified three grey areas: low revenue yield, inefficient network and low productivity. The airline was overstaffed. Many of its routes didn’t make commercial sense. In his first board meeting, Jala announced a turnaround blueprint, which was also posted on its website and discussed publicly. He exited unprofitable routes, raised fares on some others and sold the airline’s headquarters in downtown Kuala Lumpur for 130 million ringgit. That sale provided cash for 20 days.

He undertook a staff survey. “Staff morale was at an all-time low,” says Jala in a presentation on the airline’s website. He set up small groups of 10-15 employees, with different backgrounds, to tackle specific problems. It was result-oriented. For instance, one group was asked to improve yields on a particular route. If it failed, the route would be closed, and members would lose their jobs. The employee base did fall by 15% (3,000 people), but mostly due to mutual separation, retirement and contract expiry. The airline cut costs by 1.3 billion ringgit in 2006 and 2007.

The three-year turnaround plan was achieved in two. The target was 500 million ringgit in net profit in 2008. In 2007 itself, net profit touched an all-time high of 851 million ringgit, before the airline industry went into a tailspin. Malaysia Airlines posted a net loss of 694 million ringgit in the first quarter of 2009.

In the next phase of organisational transformation, the net profit target is an ambitious 2 billion ringgit. There’s no going back. Says Jala: “We will fail without a business transformation. The airline is yet to reach a state of sustainable growth and profitability.” For Jala, the journey has just begun.

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Alitalia

Alitalia takes great pride in the fact that it is the Pope’s preferred airline. But had it not been for a consortium of Italian investors that bailed it out in late-2008, the Pope would have been forced to look for a new carrier. Losing $3 million a day since 1999, the state-owned carrier was surviving on bailouts from the government.

By some estimates, the government had pumped in around €4.3 billion into the airline. It owed €1.28 billion to lenders. And its cash reserves, at €282 million, could fund operations for just a few months. Competition from nippy, no-frills carriers and a decade in crisis added to Alitalia’s woes.

In December 2006, the Italian government put its 49.9% stake up for sale. British Airways, Lufthansa and Air France were interested, but labour unions were opposed to any large-scale restructuring. In early-2008, Alitalia filed for bankruptcy, succumbing to years of labour strife, high costs and mismanagement. It was set to be grounded as unions, representing about 18,000 employees, resisted job cuts and sizeable corrections in salaries and perks.

Break Up: The profitable parts of Alitalia have been kept, the rest will file for bankruptcy.

However, Italian Prime Minister Silvio Berlusconi prevailed over a group of Italian investors to buy the profitable parts of the company. The rest would file for bankruptcy protection. The new owners came on board in January 2009. They announced 1,600 job cuts and unveiled a restructuring plan to break even in the next two years.

Alitalia is merging with the country’s second-largest airline, Air One, which is owned by one of the new investors. It has reduced its coverage (47 foreign and 23 Italian destinations). Meanwhile, Air France-KLF, after years of courtship, has picked up 25% in the new company for $429 million, giving both airlines the opportunity to leverage each other’s networks to gain market share. However, it will not be easy to regain lost ground, as airlines like Ryanair profited when Alitalia floundered. Alitalia has to shape up, and do it quickly, lest the new shareholders lose patience. They will be less tolerant than the government.