Air India Revamp – Time to take the tough call is now!

Air India is expected to rack up losses of over ₹22,000 crore for FY26, and considering the war situation in the Middle East and rising fuel prices, FY27 could be equally bad. The time is ripe for Air India to take up drastic reduction in losses.

Noel Tata’s concerns are not surprising

One of the most contentious issues for the board of Tata Sons has been the losses racked by Air India. In case of digital and semiconductors, one can argue that it is an investment for the future. There are no such pretexts available for Air India. The economics of Air India has to be adjusted to make it less of a drain. If you look at the 5 financial years since the Tatas took over Air India, it has racked up net losses of over ₹58,000 crore. That is not something even a big group like the Tatas can afford. Air India needs to take up a massive cost reduction and rationalization exercise to be able to justify its presence in aviation.

How bad is the situation and what needs to be done?

There are several factors that have combined in recent months. Firstly, Pakistan banning Indian flights over their airspace, has forced airlines to adopt longer routes to Europe and the US. That has added to fuel costs and worsened unit economics. Second, the ATF prices have shot up since the war in the Middle East started and one must remember that fuel is 45% of the operating cost of an airline. The impact is linear and immediate. Air India has taken up a massive expansion exercise and unit economics do not add up. For now, Air India is planning freezing of bonuses, furlough of temporary workers, reduction in flights and capacity. Apparently, Air India is not planning mass lay-offs.

What else does Air India have to focus on?

The big problem in the airline industry is that most of the challenges to performance come from factors beyond their control. However, there are areas where the airline can focus on and reduce the risk. The Dreamliner crash last year was a big loss for Air India, but air crashes are not just about aircraft engines. It is about airline protocols. For example, Qantas has not had a single major accident since 1951, while Southwest has been accident free for 55 years. Virgin Atlantic has been around for 42 years without a single major accident, as has Emirates Air. Air India needs to focus on air safety and hedging fuel risk to reduce their losses from apparently extraneous factors.

Low cost versus full-service model debate

That debate can go on, but there is a basic reality to contend with. No-frill airlines will be the preferred choice for bulk of the incremental airline customers. Air India has to focus on unbundling food, beverages, seat allotment, lounge access, and other services and look to make most of them chargeable. The market for full-service airlines in India is still very small and Air India must quickly pivot its model. It has to also focus on fine tuning its processes and increasing the aircraft churn per day. Air India can still be turned around; but it must focus on 3 key factors; cost management, financial risk management, and safety management. Air India must first focus on surviving to fight another day!