Corporate Restructuring of Air India PDF

A PROJECT REPORT ON A STUDY ON CORPORATE RESTRUCTURING OF AIR INDIA

Submitted to University of Mumbai in partial fulfillment of the requirement For M.Com.( Accountancy) Semester II BY MISS.GAURI MORE Roll No: -15-9526

DSPM’S K.V.PENDHARKAR COLLEGE, DOMBIVLI (E)

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DECLARATION

I GAURI MORE

Roll No. 15-9526, the student of M.Com.(Accountancy)

Semester II (2015), K.V.Pendharkar College, Dombivli, Affiliated to University of Mumbai, hereby declare that the project for the subject STRATEGIC MANAGEMENT titled STUDY ON CORPORATE RESTRUCTURING OF AIR INDIA” submitted by me to University of Mumbai, for semester II examination is based on actual work carried by me. I further state that this work is original and not submitted anywhere else for any examination.

Place: DOMBIVLI

Signature of the Student

Date

Name

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ACKNOWLEDGEMENT

It is a pleasure to thank all those who made this project work possible.

I Thank the Almighty God for his blessings in completing this task. The successful completion of this project is possible only due to support and cooperation of my teachers, relatives, friends and well-wishers. I would like to extend my sincere gratitude to all of them. I am highly indebted to Principal Dr.A.K.Ranade, coordinator prof.P.V.Limaye and my subject teacher Dr.Rajshree Deshpande for their encouragement, guidance and support. I also take this opportunity to express sense of gratitude to my parents for their support and co-operation in completing this project. Finally I would express my gratitude to all those who directly and indirectly helped me in completing this project. . .

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CHAPTER NAME

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INTRODUCTION

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HISTORY

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SWOT ANALYSIS

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CORPORATE

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RESTRUCTURING 5

FINDING

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RECCOMENSATIONS 6

CONCLUSION

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SUMMARY

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BIBLIOGRAPHY

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INTRODUCTION OF THE PROJECT Air India is the flag carrier airline of India and the third largest airline in India in terms of passengers carried, after IndiGo and Jet Airways. It is owned by Air India Limited, a Government of India enterprise and operates a fleet of Airbus and Boeing aircraft serving various domestic and international destinations. It is headquartered in New Delhi. Air India has major domestic hubs at Indira Gandhi International Airport, New Delhi and Chhatrapati Shivaji International Airport, Mumbai and secondary hubs at Netaji Subhas Chandra Bose International Airport, Kolkata and Chennai International Airport. Air India became the 27th member of Star Alliance on 11 July 2014. Founded in 1932 by J. R. D. Tata and later renamed to Tata Airlines, he flew its first single-engine De Havilland Puss Moth, carrying air mail from Karachi to Bombay, and later continuing to Madras. After World War II, it became a public limited company and was renamed to Air-India. On 21 February 1960, it included it first Boeing 707–420 named Gauri Shankar and became the first Asian airline to induct a jet aircraft in its fleet. In 2000–01, attempts were made to privatise Air India and in 2006 onwards, it suffered losses after its merger with Indian Airlines. Air India uses the Airbus A320 family and Boeing 787 aircraft for selected domestic routes while long distance services use the Boeing 777-300ER, 747 and 787 aircraft.

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OBJECTIVES OF THE STUDY: To study the corporate restructuring strategies adopted by Air India.  To study various factors involved in corporate restructuring. RATIONAL OF THE STUDY: To understand restructuring strategies of Air India. RESEARCH METHODOLOGY:I.

COLLECTION OF DATA:-

 Sources of data used in the research study are gathered from internet, journals, magazine, books which are secondary source. II.

RESEARCH DESIGN:-

 The study is about corporate restructuring strategies adopted by Air India.. The study is made to understand various factors involved in planning the strategies. The sources from where the data is gathered are through internet, journals which are secondary source.

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HISTORY OF AIR INDIA Air India had its origin in Tata Sons, founded by J. R. D. Tata in 1932. Tata won a contract to carry mail for Imperial Airways in April 1932 and the aviation department of Tata Sons was formed. On 15 October 1932, Tata flew a singleengine De Havilland Puss Moth carrying air mail from Karachi to Bombay and the aircraft continued to Madras piloted by Vincent. The airline fleet consisted of a Puss Moth aircraft and a Leopard Moth. Initial service included weekly airmail service between Karachi and Madras via Ahmedabad and Bombay. In its first year of operation, the airline flew 160,000 miles, carrying 155 passengers and 10.71 ton of mail and made a profit of 60,000 rupees. Later, the airline launched a domestic flight from Bombay to Trivandrum with a six-seater Miles Merlin. In 1938, it was re-christened as Tata Air Services and later as Tata Airlines. Delhi and Colombo were added to the destinations in 1938. After World War II, regular commercial service was restored in India and Tata airlines became a public limited company on 29 July 1946 under the name AirIndia. After the Indian independence, 49% of the airline was acquired by the Government of India in 1948. On 25 August 1953, the Government of India exercised its option to purchase a majority stake in the carrier and established Air India International Limited. The domestic services were transferred to Indian Airlines as a part of restructuring.

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On 21 February 1960, Air India International inducted its first Boeing 707–420 named Gauri Shankar, thereby becoming the first Asian airline to induct a jet aircraft in its fleet. The airline inaugurated services to New York on 14 May 1960. On 8 June 1962, the airline's name was officially truncated to Air India and on 11 June 1962, Air India became the world's first all-jet airline. In 1971, the airline took delivery of its first Boeing 747-200B named Emperor Ashoka and introduced of the Palace in the Sky livery and branding. In 1986, Air India took delivery of its first Airbus A310-300. In 1993, Air India took delivery of a Boeing 747-400 named Konark (registered VT-ESM) and operated the first non-stop flight between New York and Delhi In 2000–01, attempts were made to privatise Air India. In 2000, Air India introduced services to Shanghai, China. On 23 May 2001, the Ministry of Civil Aviation charged Michael Mascarenhas, the then managing director with corruption. According to the ministry reports, the airline lost approximately ₹570 million because of extra commissions that Mascarenhas sanctioned and he was later suspended from the airline. In May 2004, Air India launched a wholly owned low cost subsidiary called Air-India Express connecting cities in India with the Middle East and Southeast Asia.

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Until 2007, Air India mainly operated on International long-haul routes while Indian Airlines operated on domestic and international short-haul routes. In 2007, Air India and Indian Airlines were merged under Air India Limited. The airline was invited to be a part of the Star Alliance in 2007. In January 2013, Air India cleared some of its debts by selling and leasing back the newly acquired Boeing 787 Dreamliners. Also, the airline posted its first positive EBITDA after almost six years On 1 March 2009, Air India made Frankfurt Airport at as its international hub for onward connections to United States from India. However, the airline shut down the Frankfurt hub on 30 October 2010 because of high operating costs. In 2012, a study commissioned by the Corporate Affairs Ministry recommended that Air India should be partly privatised. In May 2012, the carrier invited offers from banks to raise up $800 million via external commercial borrowing and bridge financing. Air India became the 27th member of Star Alliance on 11 July 2014. In August 2015, it signed an agreement with Citibank and State Bank of India to raise $300 million in external commercial borrowing to meet working capital requirements. As of 2015, Air India is the third largest carrier in India, after IndiGo and Jet Airways.

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SWOT ANALYSIS OF AIR INDIA The SWOT analysis of the Industry reveals the position of the Air India with respect to its internal and external environment. Strengths in the SWOT analysis of Air India 

Air India has been the largest air carrier in India in terms of traffic volume and company assets.

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It owns the most updated fleet and competent repairs and maintenance expertise.

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Its information systems are advanced and compatible with its operation and service.

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It has a good reputation in both international and domestic markets, quality service and the age-old Goodwill that has still kept it alive in the interests of the rescue operators.

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Has financial backing of the Government

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Weaknesses in the SWOT analysis of Air India 

Air India is operating across broad international and domestic markets competing with world leading giant airlines as well as local small operators. This lack of clarity on the strategic direction largely dilutes its capabilities and confuses its brand within markets.

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Low profitability and utilization of capacity.

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Growing Competitor base and entry of Low-Cost Carriers (LCC’s)

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The airline’s high-cost structure and the compulsions of being a public sector unit are the reasons and it had been making a loss and shall continue to make losses for some more quarters.

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Opportunities in the SWOT analysis of Air India 

India airline industry is growing faster and will continue to grow as the GDP increases, and the trend is predicted to continue once the slowdown recedes.

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Worldwide deregulations make the skies more accessible; the route agreement is easier to be achieved. The number of foreign visitors and investors to India is increasing rapidly.

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Complementary industry like tourism will increase demand for airline service. The Civil Aviation Ministry’s strong regulation and protection provides opportunities for consolidation and optimization.

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Customers are getting wealthier, tend to be less price-conscious and prefer to choose quality service over cost.

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Best time for introducing LCC’s

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Threats in the SWOT analysis of Air India 

Air India faces imminent aggressive competition from world leading airlines and price wars triggered by domestic players.

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The Indian Railway Ministry has dramatically improved speed and services in their medium/long distant routes, attracting passengers away from air service, with prices almost at par with the low cost carriers

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CONCEPT OF CORPORATE RESTRUCTURING Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why restructuring may take place and what it can mean for the company. Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share.

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However, financial restructuring may take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time. Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company. With this type of restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand. Corporate restructuring may take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place. In general, the idea of restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually the hope that what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability. 15

Types of Corporate Restructuring 

Mergers / Amalgamation

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Acquisition and Takeover

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Divestiture

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Demerger (spin off / split up / split off)

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Reduction of Capital

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Joint Ventures

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Buy back of Securities

Merger / Amalgamation: A merger is a combination of two or more businesses into one business. Laws in India use the term ‘amalgamation’ for merger. Amalgamation is the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company. 

Merger through Absorption:- An absorption is a combination of two or more companies into an ‘existing company’. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL).

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Merger through Consolidation:- A consolidation is a combination of two or more companies into a ‘new company’. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Acquisitions and Takeovers: An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. When an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover. Divestiture: Divestiture means an out sale of all or substantially all the assets of the company or any of its business undertakings / divisions, usually for cash (or for a combination of cash and debt) and not against equity shares. In short, divestiture means sale of assets, but not in a piecemeal manner. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

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Demerger:Demerger is a form of corporate restructuring in which an entity’s business operations are segregated into one or more components. Demerger can take three forms: 

Spin-off

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Split-up

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Split-off

Reduction of Capital: Reduction of Capital is a process by which a company is allowed to extinguish or reduce liability on any of its shares in respect of share capital not paid up, or is allowed to cancel any paid-up share capital which is post or is allowed to pay-off any paid –up capital which is in excess of its requirements. Joint Venture: Joint Venture is an arrangement in which two or more companies (called joint venture partners) contribute to the equity capital of a new company (called joint venture) in pre-decided proportion. For e.g. Maruti Suzuki Buy back of Securities: When a company is holding excess cash, which it does not require in the medium term (say three to five years); it is prudent for the company to return this excess cash to its shareholders. Buy-back of securities is one of the methods used to return the excess cash to its shareholders.

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RESTORATION EFFORTS The attempt to resurrect Air India began in 2009, when the merger of 2007 was concluded as not helping recover the airline’s losses. Alternatives to better the situation, such as privatization, lease-outs, fleet-downsizing and Government bailouts were offered. Other suggestions, such as corporate revamps of the organizational policies and employee-cuts were also made. Of these offered solutions, Government bailouts have been critiqued under the media’s scanner for most of the last three years, and not without good reason.

Air India in 2009 was asked by the Government to undertake a restructuring exercise before getting any financial assistance. The cash-strapped national carrier was asked to restructure its board and get leaner and trimmer.A panel of secretaries headed by Cabinet secretary K M Chandrasekhar was to review the cost-cutting exercise and the performance of the airline every month. SBI Caps was appointed to prepare short, medium and long term growth plans for the carrier, and predicted after researching the company’s financials that it would take at least two years to breakeven, given certain economic and industry performance-related factors. Air India, which was then losing an estimated Rs 250 crore a month chalked out a turnaround plan aimed at generating Rs 3,000 crore through internal accruals by the end of 2009. The short-term target was to achieve a breakeven in the next six months.

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The route rationalization, leasing out of aircrafts, entry management, fuel saving contracts, renegotiating catering contracts helped the airline to reduce costs upto Rs 400 crore by the end of 2009. The biggest cost reduction they planned for 2010 was Rs 300 crore in human resources. Thus, the restructuring plan applied in 2009 worked in Air India’s favour. The Union cabinet in 2010 approved the first bailout for the ailing national carrier in the form of an Rs 800-crore equity infusion the same fiscal year.However, the Government with this bailout had clearly spelt that any further financial help would depend upon Air India meeting various targets essentially those pertaining to cost-cutting. The whopping bailout -Rs 7,000 crore as a soft loan and Rs 5,000 crore as equity infusion-was demanded to cover Air India's fleet expansion at a time when most commercial airlines were leasing out aircrafts that have been grounded due to shrinking load factors. Air India had used its’ working capital to purchase aircrafts so far. The Government’s bailout meant an extension of the carrier's working capital by Rs 1,000,crore taking it to Rs 16,000 crore till the next bailout came through.Given the airline’s intentions to buy over 100 aircrafts –at an estimated cost of Rs 50,000 crore over the next several years, despite all its’ working capital already exhausted-would lead to yet another fund infusion over and above the one then-recently given. Thus, the decision to extend this mammoth sovereign guarantee at a time when Air India was facing proactive

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competition from domestic airlines, and was simultaneously burdened by its’ enormous employee –maintenance costs,came across as a high-risk/low-return move on the Government’s part. After Air India lost about Rs 5,200 crore in the 2009-10 mainly due to weak demand, low yield and under-utilization of resources, the struggling flag carrier claimed release of the second installment of the earlier approved Rs 5,000-crore bailout package from the Government mid2010 this time, an Rs 1,200-crore infusion. In 2011, a consortium of banks was, according to minister for heavy industries and public enterprises Praful Patel, willing to participate in financial restructuring plan of the national carrier Air India after ICICI Bank's move to refinance long term debt. Corporate debt restructuring plan worth Rs 18,000 crore and decided to provide a fresh cash credit of Rs 2,200 crore. Of the Rs 18,000 crore plan, Rs 7,400 crore worth of non-convertible debentures, guaranteed by the Government, are reportedly to be issued. The 13-bank consortium, led by State Bank of India, has also agreed to give Rs 2,200 crore worth of fresh working capital loan to the ailing national carrier. A call on infusing an additional equity worth Rs. 6, 600 crore is also likely to be taken soon. Later in 2011, a panel of secretaries in the Government voted in favour of providing support of Rs 30,000 crore to Air India.The plan forbade the carrier to induct any new aircraft, except Boeing 787 and if required, the aircraft could be acquired on lease. Also, the fresh induction would be possible only when the profitability of the route was established.

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Then-Civil Aviation Minister Vayalar Ravi’s categorical statement that Air India would not be privatized is to be considered in respect of this infusion. The sale of the Air India’s stake in 2001was seen as a litmus test of the Government's ability and willingness to privatize. Political opposition to privatization, bureaucracy and the global slowdown -which made companies less willing to part with their cash -were all thought to have conspired against the privatization process. Thus, the capital pumping into the ailing airline by the Government in 2011 was once again questioned, as the denial of privatization clashed with its’ constant support to the sick-PSU, which made the Government seem as though it were helping out the airline with the masked intentions of selling its’stake later to private parties.

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RESTRUCTURING STRATEGIES OF AIR INDIAN 1. Network visioin:  Hubs: Delhi has been established as Air India’s primary hub effective from Winter’10 Schedule. Currently, Air India offers a total of 610 weekly flights and 1,05,600 weekly seats from Delhi to 21 international destinations and 44 domestic destinations. The Hub at T-3 provides for a flawless integration of international and domestic operations so as to provide passengers with a seamless, integrated experience. The Hub operations at Delhi have given rise to about 3000 transfer passengers per day which include sixth freedom traffic generated notably between Bangkok /Kathmandu and Europe/UK.

 Central Planning & Control System (CPCS) : In early 2010, Air India signed a broad ranging agreement for establishing its CPCS.M/s Sabre Airline Solutions who are industry leaders in this field were selected as system provider for a range of integrated state of the art systems which cover Network Planning & Scheduling, Flight Operations Control (including integrated Operations Management & Hub Management) and a comprehensive Crew Management System.

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2. Product development:  Premier clubs: The flyng return programs has four levels of membership viz, base, silver edge club, golden edge club, maharaja club. Currently the club membership are open globally.

 Maharaja club: The maharaja club is the highest tier in the flying return programme. Membership of this club is on the basis of earnings 75000 miles in a span of twelve months. Members may also be invited to join the club on basis of their status. Membership of club entiles members to enhanced privileges which are:  30% bonus milege points  Additional baggage allowance  Priority chek in  Priority confirmation from waiting list  Lounge acess at selected airports.

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 Golden edge club: Golden edge club is the second highest tire in the flyng return programe. Membership of this club is on the basis of earnings 50000 miles in a span of twelve months. Members may also be invited to join the club on basis of their status. Membership of club entiles members to enhanced privileges which are:  25% bonus milege points  Additional baggage allowance  Priority chek in  Priority confirmation from waiting list  Lounge acess at selected airports.

 silver edge club: silver edge club is the third highest tire in the flyng return programe. Membership of this club is on the basis of earnings 25000 miles in a span of twelve months. Members may also be invited to join the club on basis of their status. Membership of club entiles members to enhanced privileges which are:  10% bonus milege points  Additional baggage allowance  Priority chek in

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 Flying return programme: Flying return programe is designed to recognized and reward frequent flyers of air india.The benefits and privilieges of flyong return include:  Increased chek-in backagae allowance, tele check in, personalized chek-in counters at selected airports, priorites for confirmation from waitlist,priority baggage handling, pooling of milage point.  Apart from earning and redeeming on air india, members can also earn and redeem on air line partners- Singapore airlines and Lufthansa german airlines.  Members can accrue miles while traveling on selected flights

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3. Marketing initiatives:  Companion free scheme:  Domestic Passengers traveling on full economy/executive/first class fares could take accompanying spouse/children/parent for free of cost in the same class and flight, while traveling on domestic sectors by paying passenger service fee/user development fee on free tickets.  International The offer was valid for travel between following countries India-UK/Canada/US/Europe  Special companion free scheme: It was launched whereby passengers buying a ticket on the highest market fares in first/ executive class between india and all international destinations, without any incentive, would be entitled to a companion ticket at 50% of same fare.  Preferred agent programme: It was launched in 2009-10.the agent were incentivized on achiving a growth in market share on air india .

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4. Future strategy: Turnaround plan/going concern: The main vision of turnaround plan was to make air india leader in indian aviation and indian ambassador to the world. The corporate vision is to deliver the highest quality of service around the world and be the epitome of indian hospitality and to be indian’s flag carrier and provide seemless travel within india and around the world.

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FINDINGS AND RECOMMENDATIONS FINDINGS: Cautious approach for the new strategic model has been adopted.  restructuring strategy is an active innovation in case of Air India.

RECOMENDTIONS: Air India require a large investment of capital.  The cost of construction, maintenance and overhead expenses are very high as compared to other modes of transport.

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CONCLUSION  Air India from its inception until now has evolved into a massive organization. Air India has seen a stagnant growth, but after the policy changes done. Air India has seen an impressive boom.  Indian turnaround is one of the greatest turnaround strategy in history of India.

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SUMMARY This project looks at the corporate restructuring that Air India had gone through. Air India has gone through every possible restructuring strategy. This project also looks at the successful restructuring strategy of Air India and the subsequent highs that the Air India achieved as it sustained its remarkable restructuring strategy strategy. The entire restructuring strategy has been divided into various parts.

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BIBLIOGRAPHY BOOKS:M.Com I- Business Policy Strategic Management WEBSITE:http://www.google.com http://www.airindia.in www.scribd.com

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