Air India asks Booz to cut fees for cost reduction consultancy

Mumbai: National Aviation Co. of India Ltd (Nacil), which runs national carrier Air India, has issued an ultimatum to management consulting firm Booz and Co. Inc. to lower its fee for advising the ailing carrier on cost reduction and revenue maximization techniques.

Air India may go with its own cost restructuring measures in case Booz is not willing to lower its fees, according to a senior government official who did not want to be identified.

Booz is one of the three consultants that have been working with the national carrier.

Nacil had appointed Accenture Plc in 2007 to advise on the merger of Air India and Indian Airlines, and oversee the integration process. The cash-strapped airline continues to pay Accenture for its services.

Reviving revenue: An Air India aircraft at the Mumbai international airport. The national carrier may go with its own cost restructuring measures in case Booz is not willing to lower its consultancy charges. Abhijit Bhatlekar / Mint

Investment bank NM Rothschild and Sons Ltd, too, is advising the national carrier. Both Booz and NM Rothschild have been appointed recently, but the Nacil board has not yet cleared the financial terms of the appointments.

An Air India spokesperson clarified that different advisers are needed for different roles. According to him, the roles of these advisers do not overlap. The spokesperson declined to discuss the fees of the consultants, claiming this was an internal issue.

In November, Booz proposed at least 70 cost-cutting and revenue enhancement measures that could generate up to Rs5,000 crore for Air India in the next 18 months. The plan is yet to be implemented.

Air India chairman and managing director Arvind Jadhav confirmed that the company has asked Booz to lower its fees. Under a non-disclosure agreement signed with Nacil, Booz will “not be able to share information regarding any matter related to the said assignment”, Booz said in a statement.

“We have asked Booz to slash the fees. Also, the fee would be directly linked to cost savings that we will derive by implementing its suggestions,” added the government official cited in the first instance.

Air India is the country’s largest loss-making state-owned firm, posting a Rs5,548 crore loss in 2008-09, the biggest among domestic airlines.

The national carrier, which has posted an accumulated loss of Rs7,774 crore till now, appointed Booz in October.

“Cost-cutting measures should not be at the cost of quality of service,” Jadhav said.

Jadhav heads the panel that has been chalking out the strategy for turning around the carrier.

“Slowly, things are changing at Air India. In the first eight months of the current fiscal, between April and November, passengers carried by Air India increased by 10.1% over the corresponding period last year,” he added.

Air India’s domestic market share in November rose to 18.8%, from 16.6% in August.

Jadhav said Air India will soon enter the largest operating grouping of global carriers, Star Alliance. This is expected to increase its international revenue by 3-4%, to Rs400 crore—after a complete integration of its operations with the alliance’s member airlines.

Air India passengers will be able to redeem passenger miles on any of the other 19 member carriers, including Deutsche Lufthansa AG, Singapore Airlines Ltd and US Airways Group Inc.

Air India’s Star Alliance entry has been on the cards for some time, but has got delayed due to operational issues.

“There is not much of a significant airline operations’ value-add (that) consultants can give except, may be, build efficiencies and, therefore, Air India needs to look more inward in how they will manage the airline, to being more focused on being profitable, efficient, traveller-centric and aggressive in terms of competition,” said Mark D. Martin, former head of the aviation practice at audit and consulting firm KPMG.

“Since entering Star Alliance is round the corner, Air India should be more focusing on how it can change its operations to the standard of other Star Alliance members,” added Martin, who is now chief commercial officer of RwandAir, the national carrier of Rwanda, and was most recently SpiceJet Ltd’s head of airline strategy, planning and operations.

Source : Livemint.com