Air India Fleet Sizing Problem situation: Air India has been plagued with a multitude of problems.

The passenger numbers have dwindled due to factors such as inferior quality of service and market competition, aggravated further by the global financial downturn and rise in ATF prices. This has led to the organization exhausting its Rs. 16000 crore1 working capital limit, thus requiring equity infusion of Rs. 5000 crore2 over the next five years. Currently, Air India is facing problems of fleet sizing. Of the 111 aircraft ordered, 61 aircraft are yet to arrive3. Owing to the cash crunch, it cannot afford to expand its fleet indiscriminately. However, Air India requires newer aircraft as its existing fleet consists mostly of old aircraft, which can prove to be dangerous. We are a consultant hired to guide Air India over this dilemma and suggest appropriate solutions. Causes of the problem: Capacity utilization of the existing fleet has been low, leading to high fixed costs, hence perpetual losses. Ineffective decision making by Air India management under undue political pressure. Low economic strength due to the incessant losses incurred.

Solution Objectives: Infusion of cash into the organization. Optimisation of the fleet size and decision on timing of orders. Reduction of political influence on company decision-making.

Solution Alternatives: Fleet size optimization: Cancel the orders for aircrafts due to lack of demand. Defer the orders to a future date. Go ahead with the order, albeit for a few aircraft.

http://economictimes.indiatimes.com/News/News-By-Industry/Transportation/Airlines-Aviation/Air-Indias-privypurse-soars-to-Rs-16000-crore/articleshow/4869900.cms
2

http://www.indianexpress.com/news/air-indias-mention-in-iday-speech-may-spell-speedy-equityinfusion/502444/
3

http://economictimes.indiatimes.com/Opinion/Interviews/The-additional-loss-of-Air-India-is-on-account-ofinefficiency/articleshow/4934829.cms?curpg=2

Cash infusion and management reforms: Seek for a merger with another airline group Seek for a partnership with an interested entity Seek for a strategic investor Disinvestment Floatation of debts through bonds.

The Best Alternative: Air India should look at deferring the orders placed to a future date. Though this would invite a penalty, the penalty size for deferment would be less than that for cancellation. Moreover, this would give the airline, the time to mobilize funds and for recreation of demand in the market. Also, Air India may benefit from the touted growth figure of 8.5 percent per annum4 for the Indian aviation sector till 2015 (as per Minister of Civil Aviation). Hence, deferment seems a preferable option. For cash infusion and management reforms, seeking an interested entity (an entity keen on entering or already present in the civil aviation sector) for a partnership. This would have two-fold benefits: This would inject the much needed funds in the Air India coffer, preventing the situation for a Govt. bail-out. Also, desperate cost-cutting measures (like reduction of performance-linked pay percentages) may be eased. Arrival of a corporate would ensure a tighter management structure and policies, reduction in managerial inefficiencies and improved services. It may also help in essential brand building of Air India, which has taken a dip in the last few years. Air Indias low-cost venture plans (Air India Express) would also get a boost.

http://economictimes.indiatimes.com/News/News-By-Industry/Transportation/Airlines-Aviation/Govt-formsGoM-to-look-into-airline-woes/articleshow/4889605.cms