The daylight rape of the public interest

COVER STORY | Aviation | petition versus praful patel | PART - I

The daylight rape of the public interest

gfiles prayerfully brings to the Supreme Court’s attention, in two parts, the inside story of how a national resource – as well as a powerful symbol of modern Indian ingenuity and enterprise in the public sector – has been systematically emasculated in order to pave the way for vested interests to dominate a vital segment of the Indian economy. In addition, we also document how, as part of a larger conspiracy, prime land worth Rs 98,000 crore belonging to the Government of India was gifted for profit to a consortium of vested interests in the name of “airport development”.

For suo moto cognizance

THE HON’BLE SUPREME COURT OF INDIA AT NEW DELHI
(Extraordinary Civil Writ Jurisdiction)
In the Matter of

Citizens of India through gfiles

(A magazine on governance)
(Registered with Registrar of Newspapers for India)
Regn. No. DL Eng/2007/19719

VERSUS

Praful Patel
Minister for Civil Aviation
Govt of India
Rajiv Gandhi Bhavan Safdarjung Airport, New Delhi
V Thulasidas, former Chairman & Managing Director,
and his team, NACIL (Indian Airlines & Air India)
K Ramalingam, former Chairman, Airports Authority of India
KN Srivastava, Joint Secretary, Ministry of Civil Aviation
Sanjay Narayan, former Joint Secretary, Ministry of Civil Aviation,
and now Director in MIAL
RK Singh, former Joint Secretary, Ministry of Civil Aviation
PS Nair, former ED, Airports Authority of India
Ajay Prasad, former Secretary, Civil Aviation

Your Lordships,
This is not a polemic or ideological argument for or against free enterprise or competition or modernization. In India’s growth story, these precepts carry intrinsic value. It is, rather, the shameful tale of how a Union Minister, Constitutionally sworn to protect the interests of the Indian state, has instead been a prime mover in what we can only describe as its plunder.
What is sad is that this ransacking has taken place in full public view, complaints and protest notes based on public documents and actions have been filed, and yet the Minister has escaped from being held accountable. Your Lordships, we believe that because the Constitutional instruments have failed to implement basic checks and balances that are designed to safeguard the national interest of our Republic and to protect its Treasury against profligate mismanagement, we have no choice other than to ask for judicial intervention and activism in order to restore the sanctity of balance in governance.
Without delving into circumstantial conjecture or suppositions –but based on documented verification – we have compiled, for the first time ever, a comprehensive record of how Civil Aviation Minister Praful Patel – a former director of Jet Airways, with whose owner he still has cherished relations – first systematically bankrupted India’s national flagship carrier, Indian Airlines, and paved the way for Jet Airways to acquire primacy, and later approached the Government of India for a Rs 50 billion bailout from taxpayers’ money to keep afloat the very airline he had so tactfully destroyed.

PART- I

DELIBERATE DESTRUCTION OF A NATIONAL RESOURCE

THE destruction of Indian Airlines, as we will demonstrate, was craftily calibrated with the connivance of bureaucrats who are supposed to be the steel frame of protective governance. In the name of privatization”, “modernization”, “open skies” and other such buzzwords and mantras, Indian Airlines, in a series of moves, was deprived of its revenue sources through unreasonable and unviable fleet expansion, budgeting, cutting off commercially viable international routes in the garb of “route rationalization”, unjustifiable leasing arrangements, quietly opening passages for foreign airlines on profitable sectors, siphoning off baggage handling activities to other conglomerates, and destroying the Indian Airlines brand by first obliterating its 50-year-old logo after renaming it “Indian” and then by merging it with the unviable Air India.
In short, Mr Patel ensured the annihilation of the Indian Airlines brand by a virtual obliteration of a level playing field for Indian Airlines.

We back this conclusion with the following facts:

• Mr Patel, the former Jet Airways director-turned-politician, took oath as Civil Aviation Minister in May 2004. (His personal fortune as a businessman is valued at Rs 1,500 crore.) At that time Indian Airlines was earning a profit of Rs 65.61 crore (source: Government of India Press Release dated December 26, 2005). Four years later, on November 11, 2009, NACIL (the company formed after the merger of IA & AI) declared a post-tax loss of Rs 5,548.26 crore! Mr Patel informed reporters on November 12, 2009 that the airline would have to generate Rs 20 billion through cost cuts and revenue gains.
• When Mr Patel asked the Government of India to pump in an equity of Rs 5000 crore, every frontal union of workers of the newly formed NACIL wrote strong letters of protest regarding the decisions that led to the seeking of the bailout and merger of Indian Airlines with Air India. They included Air Corporations Employees Union (wrote on 23.06.09); All India Cabin Crew Association (wrote on July 21, 2009); Indian Commercial Pilots Association; All India Aircraft Engineers Association; Indian Airlines Officers’ Association; Airlines Ground Instructors Association and Airlines Radio Officers & Flight Operations Officers Association.
• Their letters, addressed privately to the Prime Minister of India and top politicians and rulers of our country, fell on deaf ears.

HOW THE DAMAGE WAS DONE

1. Ramping up the premerger AI fleet acquisition plan from 24 to 68 aircraft to bankrupt the airline

• This one act shows how Mr Patel systematically began his agenda to ground the national carrier.
• Air India’s original fleet plan was for 24 aircraft to be inducted over a five-year period. This was suddenly enhanced to 68 aircraft within a period of 24 weeks, with a change of aircraft from Airbus to Boeing, including induction of an aircraft that was still on the drawing board (the B787). The Ministry of Civil Aviation as well as Air India’s Board ignored the fact that they were burdening an airline that has a turnover of only Rs 7,000 crore per year with an aircraft order worth Rs 35,000 crore. Air India was expected to service a debt and interest repayment of Rs 6,000 crore annually for the purchase, an outgo of 86% of its annual turnover.
• Where then would the resources for essential expenditure come from? Why was the decision regarding such huge purchases taken even without a full business plan and informing the Cabinet? Who initiated this move? Why was there no inquiry into how Air India would bear the burden of these new aircraft?

To support international plans of Jet and Kingfisher, entitlements far in excess of the actual traffic demand on many routes to and from India were exchanged with many countries.

• Why was the decision shifted from Airbus to Boeing (B787, which was at drawing board stage)? This has never happened with any airlines in the world – placing an order for an untested aircraft.
• Will Mr Patel inform the nation of any revenue plan for the induction of 68 Boeings? Can he deny that this is one of the main reasons that the airline is now reeling under a working capital deficit of Rs 15,000 crore?

2. Giving disproportionate access to/from India to foreign airlines

• Between 2004 and 2009, the Ministry was very liberal in the exchange of bilateral entitlements with many countries. It is alleged that in order to support the international operation plans of Jet Airways and Kingfisher Airlines, entitlements far in excess of the actual traffic demand on many routes to/from India were exchanged with many countries. The increase in traffic entitlements benefited mainly foreign airlines, and they were quick to capitalize on the Indian air travel market, increasing their seats from around 35,000 to 90,000 per day over the past four years or so. Airlines of many countries were fully utilizing their entitlements prior to the economic downturn. Comparatively, on the Indian side, Air India and Indian Airlines could only marginally enhance capacity while Jet Airways deploys only 12,000 seats per day on international routes.
• The revenue earning opportunity was thus skewed heavily in favour of foreign airlines, allowing privileged private Indian operators to fly international routes.
• Air India and Indian Airlines’ international market has also been opened up to competition from certain favoured Indian private airlines. A propaganda campaign was started during Mr Patel’s tenure that Al and IA were not fully utilizing the bilateral entitlements available to the Indian side, and hence private airlines such as Jet Airways should be allowed to operate international services.
• What was conveniently glossed over was the fact that Al and IA were operating services to places where demand existed, such as Dubai, Sharjah, Singapore, London, US, Canada, and so on. The only real constraint that AI and IA faced was lack of aircraft capacity to be able to ramp up services to important markets. However, instead of clearing Al and IA’s long-pending aircraft purchase plans, the ground was allegedly laid to allow Jet Airways to commence international operations. On its part, Jet Airways commenced operations on commercially viable routes – to only those established destinations which were already linked by AI and IA!

Permission to private airlines to operate internationally was structured to favour Jet Airways.

• The permission to Indian private airlines to operate international operations was also structured in such a manner that it favoured Jet Airways. Criteria were decided such that, apart from Jet Airways, only Air Sahara (which Jet Airways eventually acquired) qualified to operate international services, keeping the other domestic airlines at bay for a period of 3-4 years. Also, the move to allow Jet Airways to operate international services was further supported by the Ministry of Civil Aviation, by granting capacity entitlements to operate flights to London. The processes were put in place in a great hurry to enable Jet Airways to commence operations to London just a few days prior to their IPO which made Jet Airways owner Naresh Goyal a richer man than he already was.
• The complicity was so blatant that Jet Airways applied for slots in Singapore and London within the first month of Mr Patel’s tenure at Rajiv Gandhi Bhavan (a fact reported in newspapers in June 2004) – a full six months prior to the Government of India announcing the change in policy, permitting private airlines to fly on international routes, in December 2004.
• This policy change ostensibly emanated from the Naresh Chandra Committee report. Strangely, this is probably the single instance when the Ministry of Civil Aviation tabled and the GOI adopted just one single recommendation out of an entire policy document. Interestingly, the draft Civil Aviation Policy which was framed in 2004 is yet to see the light of day.
• It is also alleged by the All India Airlines Retired Personnel Association (AIARPA) that start-up airlines such as Air Arabia of Sharjah have in fact gained significant market access with Mr Patel’s support, simply because they appointed his long-time friend and hatchet man, Deepak Talwar, as their GSA in India.

3. Establishing more private operators in the domestic market

• Mr Patel actively encouraged private players to set up shop in India, ostensibly to unleash the potential of the Indian market. Starting with Air Deccan, we have had a number of socalled low-cost carriers operating in the Indian domestic market at yields that are unsound, leading to a sick Indian airlines industry. As a result, the domestic market share and revenues of Indian Airlines and Air India from domestic operations have shrunk, adding to the woes of the airline.
• Simultaneously, demands were placed on Air India and Indian Airlines that necessitated their curtailing operations on many routes – favouring the private carriers. For instance, Air India was made to withdraw its flights to Los Angeles as well as the Mumbai-Doha, Delhi-Dhaka via Kolkata, Hyderabad-Singapore and Delhi-Hong Kong services. Its domestic operations from Kolkata to Jaipur and Ahmedabad, Chennai and Kolkata to Bhubaneswar, and Kolkata- Hyderabad also had to be withdrawn. The withdrawal and delay of operations by Air India was subtly enforced just before Jet Airways commenced operations to some of the international destinations. For instance, Air India suddenly postponed operations from Amritsar to Toronto in August 2006 to facilitate the launch of the Jet Airways flight on the same sector. Can Mr Patel inform the nation why it was done? What was the necessity?

4. Fallacious premise of the merger

The selection of Accenture was cloaked in secrecy in the Ministry. Stakeholders from Air India and Indian Airlines were neither involved in the selection process nor in the deliberations of Accenture during the build-up to the merger.
Accenture is guilty of simply pushing the Minister’s agenda for merger as he needed to show the world that he was doing something for the national carriers also, after having craftily robbed them to benefit other airlines, especially Jet Airways. The merger enabled him to make the spurious claim that he had strengthened Air India by merging it with Indian Airlines to enable them to take on the competition. As per the allegation of AIARPA, Accenture had identified a number of “imperatives of merger”. The details show how Mr Patel systematically destroyed the national carrier.
The Justification: An integrated international/domestic footprint, significantly enhancing attractiveness to customers and allowing easy entry into one of the three global airline alliances.

Increase in traffic entitlements benefited foreign airlines, and they were quick to capitalize on the Indian market.

The Facts: It is not understood as to how a merger of two airlines that were already making losses could be based on specious arguments such as these. Attractiveness to passengers comes not just from an airlines’ reach or size, operational issues such as image/perception, track record, service levels, etc. form a major part. The fact that Air India has been suffering from an extremely poor image and is virtually passengers’ last choice, especially on international routes, was conveniently overlooked. Also, entry into global airline alliance cannot be an objective for any airline, as has been claimed by Accenture to justify the merger.
The Justification: Parking bays and landing slots in an “infrastructure constrained” environment.
The Facts: It is again not understood as to how the merger would increase availability of parking bays and landing slots for the merged airline, unless it was envisaged that there would be shrinkage of operations in the merged entity, thus releasing bays and slots which would naturally then be available to Air India’s competitors.
The Justification: Potentially enable merged airline to command better valuation.
The Facts: Valuation of an airline is defined primarily by its route rights, its future revenue earning potential, its current ownership, labour policies & IR/HR status. In Air India’s case, the international route rights are no longer the preserve of Air India, having been opened up to other private airlines.
Given the fact that the minister had systematically pawned AI and IA’s silver and thrown Air India and Indian Airlines together in a cauldron of chaos, it is hard to understand how the merged entity would manage a better valuation.



5. Destroying the Indian Airlines brand to allow private airlines to dominate the domestic market

Indian Airlines was always a strong brand with many positive attributes. Year after year, Indian Airlines was the only airline brand to be included in the top 25 brands in the Economic Times’ annual Brand Equity Most Trusted Brand survey, regarded as one of the most reliable indicators of a brand’s standing and equity in India. In 2003, 2004, 2005, Indian Airlines was first the unexpected dark horse to win and then the expected trusted brand. Strangely, in 2007, when the Indian Airlines brand ceased to officially exist, it still found mention in the survey.
Yet the Minister chose to re-brand Indian Airlines as Indian with a nameless logo, despite the fact that the merger was already around the corner. Indian Airlines was forced to spend a fortune on the re-branding, a cost which was reincurred when the airline merged with Air India. Can Mr Patel tell the nation how much public money was spent on redesigning his fantasy?
Indian Airlines’ identity was systematically obliterated to give Jet Airways a clear run in the domestic market. The merger forced Indian Airlines to market itself as Air India in the domestic and Gulf markets where the Indian Airlines name commanded a premium. Instead, a new entity – Air India Express – was forced in. It had neither Air India’s international reputation nor Indian Airlines’ trustworthiness but was a characterless, unreliable airline with no back-up support, headed by a retired General Manager.
The decision to merge Air India and Indian Airlines was taken knowing full well that mergers take at least three-four years to settle and that the entities become vulnerable in the marketplace during this time. The timing was significant since Jet Airways was taking off in a big way on the international routes and Kingfisher Airline needed to establish itself first in the domestic and then the international arena. This act of the Minister shows that he systematically opened up Indian Airlines and Air India markets to unfair competition. At the same time, Mr Patel ensured that the two airlines placed orders for aircraft that they could not service. In order to cover up the fact that he had stripped the national carriers of their markets and had saddled them with massive losses, Mr Patel conjured up the merger of Air India and Indian Airlines. The merger of the two airlines, each with a distinct ethos and work culture, became the Minister’s panacea for all ills that plagued them and was undertaken ostensibly to strengthen them despite knowing well that the merger would be chaotic for the initial couple of years at least.

6. The ingenious sale and lease back of fully depreciated aircraft of Air India and Indian Airlines

Air India has entered into sale and lease back of eight A320, three B747 and four A310 aircraft during 2007-2008. The sale and lease back transaction essentially involves sale of an aircraft to a lessor or foreign financial institution in consideration for an upfront amount to shore up revenues with an attendant agreement to lease back on dry lease basis for a specific period, at a fixed monthly lease rental (or EMI in simpler terms). At the end of the lease term (about 70 months in Air India’s case), the aircraft is returned to the lessor in a condition agreed upon. During the lease period, the airline continues to operate the aircraft and incurs all operating expenses. In addition, even after the aircraft purchase order was placed, a case was made out for Air India to lease capacity to meet its requirements till the new aircraft were delivered. Accordingly, AI leased eight B777s at very high rates without even having pilots to fly them. As a result, five leased B777s stayed grounded for months together. The number of non operational B777s would have been higher but for the fact that A310 pilots were pulled out for training to fly the B777. However, as a result of this move, three leased A310 aircraft also had to be grounded. Why was this decision taken? Can Mr Patel reveal how much of taxpayers’ money was paid to lease these aircraft?
Including insurance and mandatory modifications as if the aircraft is on dry lease, the lease rental effectively covers the repayment of capital (upfront amount paid to the airline) and the cost of capital. The resale value is realized by the lessor. The sale and lease back effectively means asset stripping to finance revenue expenditure – a back-door sale. The airline commits to pay lease rental and maintain the aircraft in an agreed manner, without any claim to the residual value of the aircraft. There is usually an unspecified – no capping, openended liability to return the aircraft to the lessor in the agreed condition on expiry of the lease term. Airlines usually need to incur significant expenses on this account so that return conditions are met. If operating margins to meet the lease rental and residual values are not realized from operations of such aircraft, the transaction is financially unattractive to the airline.

Air India’s original fleet plan for 24 aircraft was suddenly enhanced to 68 aircraft within a period of 24 weeks.

Can the Minister answer the following questions?

• Why was this methodology adopted when, clearly, these options were never exercised earlier due to the reasons explained above?
• Why was AI’s sale and lease back transacted when the airline was experiencing low fleet utilization, low load factors, cash losses on 70% of services and especially when brand new aircraft were arriving at the rate of one or two every month?
• Why did AI sell and lease back 20-year-old fully depreciated aircraft, with an out-of-production engine, instead of removing these high operating-cost aircraft from its fleet?
• Was any study conducted to see whether these aircraft were at all needed?
• Why was the entire process hurried through to meet a March 31, 2007 deadline?
• Is it a mere coincidence that the “investee” who was in regular contact with Air India bagged the deal, through a competitive e-auction at a rate known/discussed with Air India‘s finance department?
• Can the then CMD be asked to explain why there was no mention of the sale and lease back proposal in the briefing to the Board of Directors on the need and process to raise additional funding?

7. Creation of Air India Express – the biggest hoax in Indian aviation history

Mr Patel ensured that Air India set up a low-cost carrier to operate on the lucrative India-Gulf and India-Southeast Asia routes – routes that were well served by both Indian Airlines and Air India and were reportedly the most profitable ones for at least IA. Both Air India and Indian Airlines became losers: Air India because of ceding routes to Air India Express, with lesser revenues being earned as Air India Express operates on the low fare principle; while Indian Airlines lost overall revenues as it had to reduce fares to match Air India Express fares and other LCCs (Low Cost Carriers) such as Air Arabia that entered these markets. Air India Express was launched amid consternation in both camps – erstwhile AI managers in the Gulf feared a dip in their yields and a lowering of overall revenue, while erstwhile IA managers in the Gulf feared competition from another narrow-body fleet running on similar principles, owned by a common owner.
The Minister has to answer and also get the then Chairman to reveal the true story of Air India Express, which was touted as the success story of the new Air India – lowest fares, highest load factors, high seat factors, reliable operations and profits every year.

The Minister must answer serious questions for the public:

• What was the logic in launching Air India Express?
• Air India Express was launched as a Low Cost Carrier on the standard LCC premises – only internet bookings, no meals, no agents and therefore no commissions. Yet it offers meals and even in-flight dutyfree, and sells through agents as well as consolidators very openly. It has a tie-up with the Minister’s friend, Mr Deepak Talwar. Who gave him the contract without tenders and proper bidding?
• How did Air India Express decide to lease the B737-800 without competitive bidding?
• Is it again a mere coincidence that Air India Express later decided to purchase 18 B737-800 aircraft? How was this figure arrived at?
• Why is it that Air India Express operates – in most cases –flights at around the same timings as Air India on the same routes, at significantly lower fares? Isn’t Air India Express competing with its parent company?
• Even two years after merger, why are the schedules of Air India Express and Air India not aligned?
• Is there a transparent transfer pricing mechanism between Air India and Air India Express that has been followed consistently?
• Have the books been manipulated to show profits for Air India Express?
• Has Air India Express ever achieved its projected aircraft utilization?
• Does Air India Express have a system of compiling figures for on-time performance, passenger carriage, revenues, etc?
• How has Air India Express been allowed to take passengers booked as passengers travelled? Or is it booking fictitious revenues? If so, why? Just to keep the leased aircraft going?
• How is it that there is only one person who is capable of being the COO of Air India Express and he gets an extension beyond retirement age when there is no dearth of able officers in Air India to take on the job? Is it a reward for past favours?
• Air India Express has, however, served one key purpose – it enabled the lease of a number of B737-800 aircraft and also the expansion of Air India’s aircraft purchase plan to include 18 B737-800 aircraft for Air India Express. Air India Express also chose to induct B737-800 aircraft from Day 1 without following the normal aircraft selection process.

8. Robbing AI and IA of their existing revenue streams from ground handling of other airlines and also from their then existing commercial agreements

The Ministry forced AI to spin off ground handling activities into a joint venture with SATS, further forcing the airline to transfer all ground handling (for other airlines as well as own flights) to the JV. Pre-merger, and prior to the creation of HIAL and BIAL, AI was earning Rs 600 crore and IA was earning Rs 380 crore annually from ground handling. Not only have AI and IA lost this amount, AI is now expected to pay the JV company for handling of its own flights. The future of employees transferred to the joint venture is uncertain. Apart from robbing AI and IA of their ground handling revenue, the Minister has also ensured that the merged airline loses the revenues it earned from commercial agreements with foreign airlines. These agreements were instituted by earlier governments to ensure that AI and IA derived some benefits from one-sided grant of entitlements and operations by foreign airlines. The institution of such agreements in bilateral agreements with other countries also recognized that AI has not been able to add new aircraft for many years owing to delay in obtaining requisite approvals from the government. Along with the opening up of the Indian international market to private Indian airlines, the Ministry took a decision to phase out all such commercial agreements within 3-4 years.

9. What has been outlined above can be documented in detail

There is ample reason to deduce that Mr Patel has spearheaded nothing short of a carefully calibrated conspiracy to deprive the nation of a national asset in order to siphon off a portion of the national wealth to co-conspirators through strong-arm tactics, deceit, diktat and devious legerdemain for which the taxpayers have had to pay a heavy price.