In the year 2016, after more than a decade of loss-making, Air India posted an operating profit of ₹1.05 billion. Over the years, Air India’s greatest problem has been its crippling debt. At the end of fiscal 2014-15, the airline had a total debt of ₹513.67 billion. To facilitate the revival of Air India, Ashwani Lohani, known as the “turnaround man,” was appointed Chairman and Managing Director of Air India. As he piloted Air India towards revival, efforts were being made to convert ₹100 billion of Air India’s debt into equity, a move that would substantially reduce its interest burden and give banks a major say in its functioning.
Lohani was in talks with banks and investors who could play a critical role in Air India’s debt restructuring. He mulled over the various options related to debt restructuring. It remained to be seen whether Lohani’s image as the “turnaround man” would increase investor confidence and help Air India deal with its debt burden. While Air India’s modest operating profit was good news, would it provide relief to the sick airline’s actual financials? Would Lohani’s attempts at improving employee relations with the organisation and the operational changes he was introducing to Air India help turn the tide for the ailing airline? As of July 2017, two questions remained: Had Air India really turned the corner under Lohani’s leadership? Could Air India’s short-term progress help it to overcome the huge debt that had become the “elephant in the room?”
ISBInsight: What was your objective in writing this case?
Vaidya Nathan K: Air India is ridden with debt in excess of ₹50 billion. It is unprecedented that an organisation has substantially more debt than its combined asset value and yet the organisation is not bankrupt. In corporate finance, this is theoretically not possible. The case has two perspectives—financial and managerial. We were fascinated by the unique situation where the equity is significantly negative. Is it financially feasible for a company to turn around from this situation or is it more like boiling the ocean? On a lighter vein, when I first read the turnaround plan charted by SBI Capital Markets for Air India, I read it the same way I read science fiction. I got to the end and thought, “Well, that’s not going to happen.”
Yet, Air India posted an operating profit for the first time after a decade under Ashwani Lohani’s leadership. So, from a managerial perspective, we were fascinated by the turnaround that he had orchestrated in the limited time span. He had considerable experience in turning around many sick organisations such as Ashoka Hotel and Madhya Pradesh Tourism. So, we were trying to understand if managerial expertise and leadership could rescue Air India from a point of financial no-hope.
What were the unexpected takeaways from this case study during class discussions?
Vaidya Nathan K: In my limited experience in teaching this case, I found that asking the right questions in Air India’s financial context was of great consequence in achieving satisfactory teaching and learning outcomes. During case discussion in class, I had a slightly different set of questions for the PGP students and the Executives in the Advanced Management Programme for Infrastructure. I found that the depth of case analysis is often correlated with the extent of work experience.
One question that generated a lot of debate in both classes was about reducing the two major expenses in Air India— employee salaries and interest expense. This question steered the student to address areas which they might otherwise have missed or avoided. I had also wanted students to delve into future financing needs assessment —a method they had learnt in the course.
The students came up with innovative solutions on how to reduce the two major expenses. One suggestion was to pay a portion of the salary of Air India staff in equity as they sometimes do in start-ups. I hadn’t expected executives who are part of senior management in Public Sector Units (PSUs) to make this suggestion. Their rationale was that such salary structures would make Air India employees more entrepreneurial while simultaneously reducing the cash outflow on salaries.
In the infrastructure finance course, there were suggestions on how debt repayments can be restructured to make it a win-win for both Air India and the banks. One suggestion was to give banks an optionality that if Air India turns around, then there would be large step-up in the coupons for a lower interest rate in the immediate future. There were suggestions on restructuring existing debt so that it acquires features of mezzanine financing. So, an unexpected take-away was that mezzanine financing is better suited than unsecured credit to turn-around situations.
What could be the case study takeaways from an industry perspective?
Vaidya Nathan K: The takeaways are embedded in the financial data of the case. But, without getting into too much details on the finance aspects, I would like to draw upon an analogy. The process of turning around a perennially sick organisation is similar to bringing back a sick person with perennially unhealthy habits to good health. The doctor (CEO) should have sufficient autonomy and independence to completely take over the patient (sick organisation). A similar point was recently made by industrialist Anand Mahindra in relation to Air India. A lot of times, painful surgery is required which necessitates weeding out perennial and chronic inefficiencies in the organisation and may sometimes entail complete shutting down of unprofitable business units. Yet, the surgery needs to be done with care and with genuine concern for the employees. Else it may be akin to doing surgery with a hammer: painful, ineffective and designed to come to a bloody end.
Could you share some interesting anecdotes of interactions with the company and the company personnel?
Vaidya Nathan K: When I interacted with Air India company personnel, I could see that they had genuine respect for Lohani. When you speak to an employee for 15-20 minutes, they generally have good things to say about their boss. But when you speak to them for a couple of hours, invariably you get a better sense whether they are just being nice and polite about the boss or do they genuinely respect the person. I got a sense it was the latter. Almost everybody mentioned that Lohani led by example. He was one of the most hardworking employees in Air India. He genuinely cared for his staff. It wasn’t a token gesture. It was a means to turn around the organisation that he is heading.
An oft-quoted example was the way he handled the case of Shiv Sena Member of Parliament’s (MP) slipper thrashing of an elderly Air India Employee. He was completely with the employee and made sure that the MP was banned immediately not only from Air India but also from other airlines which are part of the Federation of Indian Airlines. They mentioned that he did as much as he could before the political machinery took over.
Another related anecdote that I heard was that before Lohani became the CEO, Air India would entertain requests from politicians and their family members for a free upgrade. Mr. Lohani made it a point that nobody gets upgraded, including his own family members.
What were the benefits, if any, of teaching a case on a company that is so topical, with the media regularly discussing its fortunes?
Vaidya Nathan K: One benefit I saw was that students were completely engaged in the discussion. Part of the reason was that almost everybody in the classroom had travelled in Air India. While animated and healthy class discussion is an advantage, the disadvantage is that students would go off on a tangent about their preferences for flying a certain airline during a case on financial turn-around and leadership. The other disadvantage might be that while evaluating the solutions, the actual future outcome might be completely different from what may have been discussed in the classroom. Therefore the instructor may not look smart. That being said, I found the experience of teaching a case set in India and on a prominent organisation that is facing an uncertain financial future to be much better than a popular case that may have been more than 20 years old.
During your research, did you find any similar case in an international context?
Vaidya Nathan K: Airline cases mostly focus on Strategy, such as the Southwest case, or on Operations Management, such as Emirates. There are Finance cases on debt restructuring in the United States, but the institutional issues in India are different. Also, there are very few cases which have insurmountably large debt in the backdrop or a bureaucrat at the helm of a turnaround. So, the Air India case is unique in many ways.
How would you summarise your overall experience of teaching the case in class?
Vaidya Nathan K: You can spin this case in many ways. Although I mostly teach this case from a Finance perspective, it is also suited for analysis from a Strategy and Leadership perspective. I also bring in a Human Resource/Organisational Behaviour (HR/OB) angle by asking students why the bureaucratic system in India cannot create more Ashwani Lohanis. For one of the classes, I organised a guest lecture by Lohani after the case analysis. Students were enthusiastic and excited to hear Lohani’s perspective on what it takes to turn around organisations in India. Overall, the case stimulates engaging and insightful class discussion.
About the Case Authors:
Professor Vaidya Nathan Krishnamurthy is Resident Faculty at ISB in the area of Finance.
Catherine Xavier is a Research Associate at the ISB.
About the Writer:
Nikhila Chigurupati is a Content Associate at the Centre for Learning and Management Practice at ISB.
About the Case:
Vaidyanathan Krishnamurthy; Catherine Xavier (2018). Air India: Maharaja in Debt Trap. Indian School of Business case. Harvard Business Publishing: https://hbsp.harvard.edu/product/ISB101-PDF-ENG