Balance Scorecard for Air India The Process of Turnaround

Introduction

Air India is the prime and oldest Airline of India. It is the State carrier which currently connects to rest of the world such as the Americas, Asia, Europe, etc. It is headquartered at Nariman Point, Mumbai in the Air India Building. It is the 16th largest Airline in Asia & serves out of two major Domestic hubs in India at the Indira Gandhi International Airport, Delhi & CST Terminal, Mumbai. The airline started its journey with the Maiden flight from Karachi Airport to Mumbai Airport via Ahmedabad in July 1932. It was founded by JRD Tata and later on acquired by the State.

Air India has two subsidiaries and two affiliated carries. Together Air India, Air India Cargo, Air India Express, Indian and Air India Regional form the National Aviation Company of India Limited. It currently serves 11 countries across the globe apart from the various domestic destinations.

Air India Cargo

It serves as the cargo operator for the airline serving in conjunction with on ground truck-transportation systems and achieving synergies to increase returns. The carrier also is allowed to carry dangerous (hazardous cargo) & animals under IATA rules.

Air India Regional

The airline previously known as alliance air serves the interior small airports domestically to serve the needs of such regions with smaller aircrafts. The hub for this is at the IGI airport in Delhi.

Indian

It focuses on the domestic touch points for the airline. It serves various destinations in the country with two major hubs at Delhi & Mumbai.

Air India Express

The airline subsidiary was formed in 2005 to serve the low cost space in the South east Asia and the Gulf region. This is a no frills airline which focuses on the low cost travel mind space for its consumers.

Tangible Assets

Fleet and Material Resources

Air India has continuously being trying to improve its Aircraft fleets. It has recently added 17 new aircrafts which include B777’s- Long range aircrafts and it has also procured some 15 new airbus aircrafts to serve its domestic destinations. Currently the Air India fleet stands at a strong 136 aircrafts. Air India serves various international destinations such as in the USA which includes Newark, JFK & Chicago with its non-stop Boeing Long range aircrafts. The detailed aircraft distribution is as given in the table below:

Network

Air India operates from various cities across India like Ahmedabad, Amritsar, Bangalore, Chennai, Delhi, Goa, Hyderabad, Kochi, Kolkata, Kozhikode, Lucknow, Jaipur, Varanasi, Tiruchirapalli, Gaya and Thiruvananthapuram in totality 16 cities for its international location flights. The need of boarding flights from metros for international locations has thus ceased thus providing better opportunities to other cities to develop economically and aid in the country’s growth story. The various requirements in terms of customs, etc. are directly done in these cities.

Air India also has code sharing agreements with various airlines across the world providing better accessibility to other locations.

International Hub: Air India has established its international hub at Frankfurt for better transfers and code shares across the world. It has forged partnerships with Lufthansa and is currently vying for being a part of the Star Alliance. These alliances has strengthened AI’s network in the US and Europe to a large extent.

Indian Hub: Air India has its domestic hubs in Delhi IGI Airport and Mumbai CST Airport. The firm services 64 Indian cities domestically from these locations. Out of these locations seventeen service to International flights too thereby providing seamless connectivity. The domestic locations are service by Airbus A321 aircrafts with all world class services.

Star Alliance

Air India is currently in the process for vying to become a part of the International Alliance which will connect it to 916 cities in the world and have code share agreements with 17000 daily routes across the world. Air India club members can enjoy the benefits of International lounges, code shares, loyalty programmes, etc across all the 21 top airlines across the world increasing the service levels to a new height. The alliance is pending at March, 2011.

Human Resources

Air India has a large base of human resources which makes it one of the poorest in terms of the Human resources quality and performance. The airline pays around 17 per cent of its expenditures as salaries which is much higher than the global average of around 10 per cent. There are around 31000 employees which are serviced by around 14 unions in Air India which creates a huge scope of non-improvement of its current strength of employees. Post the merger the unions have introduced their intent of cooperating with NACIL towards achieving a better way ahead for the airline however issues pertaining to retrenchment and privatization are still serious concerns which the unions take very seriously and are averse to compromise on.

The SBU structure which has been brought about in the organization further increases the woes of the Airline as well as the management. The organization has been split into smaller units which are responsible for better management of resources. However the reporting structure is a big catch. A Mumbai Airport Manager is reviewed by the ED of west zone but reports to his SBU head which is in no way related to his performance appraisals. The award of International postings is carried out by a third party who in no way is related to the current chain of reporting and is a commercial director who sits in the HO at Mumbai.

Such an organizational structure calls for low performance and lack of accountability from the employees which will lead to non-performance from the organization in the long term.

IT & Technology resources

IT is one of the most critical resources for the success of organizations in the modern times. The merger synergies would have IT as a critical input. One of the major exercises is to have a common airline code which would also help in the eligibility to the Star Alliance. As a measure the airline has contracted the IT serviceability to SITA (Society International Telecommunications Aeronautics) which has had more than 50 years of experience with the airline systems in Air India. The deal worth 845 crores is for a period of 10 years and is aimed at establishing network connectivity at all domestic and international locations for Air India, fare management, baggage tracing and reconciliation system, online booking engines, automated boarding control systems, check-in, air to ground communications, etc. SITA will also provide its horizontal passenger service system.

Currently SITA provides its facilities to 140 airlines all over the world serving over 120 million passengers across the world to provide seamless connectivity to Air India to International routes and carriers. It would help to strengthen strategic partnerships for AI across the globe. Air India has also been invited to participate in the SITA’s horizon board in India which is a partnership between SITA and airlines to develop the next generation passenger service systems across the globe. All these developments would help AI to establish itself as a brand in the PSS system delivery across the globe. SITA in India works with its strategic partners Mindtree & NIIT to implement its technological systems and has a workforce of more than one lac employees.

Low Cost Resources

Livery

The new livery which was launched after the merger has characteristics of both the descendants namely AI and IA both. The livery consists of the flying swan and the Konark chakra placed inside it.

The Air India brand is mentioned on the tail of the Aircraft in hindi proudly depicting India’s national language. The aircraft colour is ivory with streaks of red retaining Air India’s colour. Also the red and orange streaks presence on doors signifies the merger of the two giants into one single entity.

Maharajah

Maharaja is the most reminiscent figure which is associated with the airline. It was designed by the duo of Bobby Kooka, AI’s Commercial Director and Umesh Rao, J.Walter Thompson Ltd. Way back in 1946 primarily as a memo symbol; however it has translated into much more than that over the years.

The maharajah has won various awards around the globe for its uniqueness and antics. The first word customer’s associate with AI is the puns and antics of the Maharajah. The maharajah is a unique brand proposition created by the Airline which has served it as a brand ambassador across the world.

In- Flight Entertainment

Air India has a variety of channels which cater to both the audio and video entertainment of its passengers. The customers have a variety of Indian channels such as popular music, ghazals, bhajans, etc. There is also a variety of English music channels having various genres like rock, pop, jazz, alternative rock , classical , etc. There are also a variety of regional channels available in Indian regional languages such as Malayalam, Tamil, etc. and also movies in similar languages are available for flights connecting the South Indian regions to the Gulf and South East Asia.

On Ground Facilities

Air India has its own exclusive lounges at Delhi, London, Hong Kong and New York in addition to the one in Mumbai. At other international airports, Air India has tie-ups with other international airlines or local Airports Authorities for lounge facility.   There is a lounge for unaccompanied minors as well. 

Online Booking

The quick, easy and convenient way to book AI tickets online through the Air India website. An e ticket will be generated and the details with the e ticket link will be emailed to the passenger.    Air India has extensive facilities for Web check in and Tele check in for its passengers to provide ease of facilities.

Dining

Air India has a variety of menus to cater to a variety of tastes for its passengers. There is a choice of Indian, Continental, Western and Asian cuisines. There are certain special cuisines available on some routes like Japanese cuisine on the Tokyo route, etc. The special requirements of certain passengers also met with a variety of more than twenty six dishes available. There is a large assortment of wines and drinks to choose from giving the passenger a world class dining experience.

Balance Scorecard at Air India

The balanced scorecard is a holistic design of looking at an organization. It helps align the activities of the business to the vision, mission and the strategy of the organization. It helps improve communication, both internally and externally as well as measure the performance against said goals using proper metrics. Balanced Scorecard concept was started by Dr. Kaplan and David Norton as a means of measuring performances of organization. It was a measurement framework, which for the first time added non-financial metrics along with the traditional metrics that gave managers a better view of the performance of the organization.

Over the years, balanced scorecards were refined to become a complete planning and management system for strategy. It helps operationalize vision and mission documents; progress on which can be monitored daily.

The airline industry is cyclical in nature. Demand fluctuates seasonally; while planning for capacity and investments have to be done long term. This means that airlines usually go through sessions when they are operating in the red financially. Hence, it makes perfect sense to use a Balanced Scorecard to evaluate the performance of the organization. It gives a better indication of the health of the organization as well as helps create proper milestones for evaluating the progress towards strategic goals.

Air India has been facing turbulent times recently. A lot of reorganization, restructuring with regards to the organization, finances and fleet have taken place. The company is deep in the red and there have been calls to divest this ‘white elephant’. As Air India struggles through this mess, using a balanced scorecard will give clarity to their goals and help them focus their efforts in achieving the said goals.

Balanced scorecard has been implemented in several airlines, the most documented one being the Balanced scorecard implementation at Southwest Airlines.

Southwest Airline is a USA based low-cost airline company and is also the world’s largest no-frills airline. It is headquartered in Dallas, Texas. Southwest has among the largest fleet of passenger aircraft among all of the world’s commercial airlines, operating more than 3200 flights daily. Southwest is also a very profitable airline, having posted profits for 37 consecutive years.

The balanced scorecard implementation at Southwest airlines has gone through a series of iterations and they are currently in their 3rd generation.

We suggest a similar balanced scorecard for Air India. For the balanced scorecard we must have:

Vision

Mission

Core Goal

Activities and Outcomes

Vision statement is the picture of your company in the future. It forms the lynchpin around which strategy formation takes place.

Mission statement is the fundamental purpose of the existence of the company. It clarifies “Why do we exist?”

Core Goal is the goal that is to be achieved by the balanced scorecard.

Activities refer to processes that take place inside the organization, that lead to desired outcomes.

Activities consists of

Internal Processes

Learning and Development

Outcomes consists of

Financial Performance

Customer Satisfaction

Activities are internal to the organization, while the outcomes in terms of financial outcomes and customer outcomes are visible outside the organization.

Also internal processes, Learning and Development are long-term goals while financial and customer outcomes are more short-term goals. However they act as leading indicators of the changes happening in internal processes and Learning and Development.

These show that the activities that were internal to the organization has reached a point of maturity that they have started impacting the customer and financial outcomes.

As shown in the balanced scorecard given below, activities and outcomes interact with other activities and outcomes and hence no item can be looked at in isolation. The interactions between the strategic goals in each of these four divisions (2 activities and 2 outcomes) have been identified and dwelled upon in the balanced scorecard.

The internal processes which must be measured for the scorecard that we identified were:

Faster Turnaround of flights

Increased Utilization of fleet

Adherence to Schedule

These will help rationalize workforce, fleets and bring in incremental improvements in operational efficiencies, bringing down costs and making Air India more competitive vis-à-vis low cost carriers.

Adherence to Schedule will help Air India rebuild customer confidence in the ability of the Airline to perform.

The Learning and Development initiatives that need to be taken up and measured are:

Alignment of employees with company goals

Cross Functional Training

Team work

Cross functional Training and teams will increase the efficiency of the organization allowing it to make decisions faster and hence respond more quickly to changes. This is very important for Air-India as the general perception is that the company is slow to change and lethargic in decision making.

The financial outcomes from these activities are:

Profitability

Lower Costs

Increased Revenue

Fewer Planes

The customer outcomes are:

Lower Prices

On-Time flights

Frequent flights

Friendly Service

Given below is the pictorial depiction of the balanced scorecard for Air India.

Resource Based Turnaround Strategy for Air India

This part of the report deals with understanding the reasons for the near collapse of Air India and proposing a turnaround strategy for the airline. Since its establishment by the Tata Group and the subsequent takeover by the Indian Government, Air India has seen a lot of issues emerging and changes in the competitive environment in which it operates. These issues and changes have been intensified by uncertain economic conditions, various crises and subsequent recoveries in the European and Asian economies, and a general lack of confidence in professional fields. This has led to a general reduction in the average time available to the organization which seeks to affect a successful turnaround. Also, the rising competition in the field it operates has compounded the problems by making Air India fight for limited resources with players which quite often have people with greater conviction at the top and therefore can allocate a greater part of important resources to the firm’s operations.

This challenge is primarily faced by organizations which operate in industries that have high technology orientation and companies which typically have high gestation periods where an investment made in any particular area or domain impacts the company’s bottom line for a long period. Airlines business being one that is fairly high technology is characterized by factors that include product and/or process sophistication, research and development (R&D) intensity, and a large population of technical employees. High-tech firms often encounter rapid changes in technology, demand, and a competition which is overlaid by sharp and unpredictable change. Thus, the AI management must be equipped for change management in line with the changes in the airlines industry environment. Unless this happens it will continue to struggle to remain profitable. This is precisely what has been encountered in the case of Air India.’

Within this high-velocity context, any turnaround strategy is faced with unique challenges. These have been depicted in the figure below.

Business Decline

The framework that the group uses in analysing the reasons for Air India’s failure and proposing the turnaround takes a new view of turnarounds by integrating constructs drawn from existing turnaround literature with others from the resource-based view of the firm. It proposes that efficient business operations are based on a combination of factors like key resource availability, germane strategy, and appropriate implementation of that strategy through adequate resource leveraging. In this case the financial and human resource would be the resources AI must look to leverage.

Important resources within an enterprise can also act as the base for a turnaround strategy which would foster sustainable competitive advantage. Such resources are often the products of historical strategy and environmental action and are invariably capable to withstand rigorous tests of quality. A list of the key attributes of these resources is provided below:

(Refer “High-Velocity Environment Trims Time to Act … Creating a Framework for High-Tech Turnarounds” by Rolph N.S. Balgobin, Naresh Pandit; Nov 1, 2002)

Turnaround Strategy

Turnaround attempts are often the result of existence-threatening decline, there exists a lot of uncertainty with the origin of the points of change intervention and the role of the new top management. Frequently, a turnaround attempt is initiated after pressure from a significant stakeholder, such as a parent company or strong shareholder group. Air India has witnessed this quite a few times as with the ascent of every new government at the center of Power in New Delhi, the attitude towards the airline has changed. Hence pressure often came from the private players whose bids to take over the airline provided the fillip to the management of the airline to change the scheme of things at Air India.

In most cases, the need for the change happens internally, usually started by the management who sees the signals of an impending decline. Also in new age high-technology firms, turnaround need not always be a management driven effort. However, the attitude of managers is just as necessary as having new leadership in getting the turnaround efforts going.

The success of turnaround recovery plans are different from the unsuccessful ones in many ways (refer to the points mentioned below). In the cases of turnarounds that are successful, analysis-led understanding of the dynamics of the business is done using a diagnostic review. This provides a clear indication of the turnaround opportunities that are available. These opportunities have to be pursued with the goal of creating a sustainable competitive position in the market.

Successful turnaround Plan characteristics

Result from a diagnostic review (inductive rather than prescriptive)

Profitability is explicitly set as an objective

A single turnaround plan rather than competing initiatives or no plan at all

Communication with stakeholders to ensure alignment

A turnaround team develops and implements the plan

Causes of decline are appropriately addressed

The Process of Turnaround

The frameworks used to portray turnaround are often depicted as a sequential process, which starts with the management initiating the attempt, then retrenchment, consolidating and then returning to a growth stage. But in high tech turnaround process there are four distinct stages – crisis development, management change, transformation and stabilization, and return to growth.

“In the case of Air India, the Crisis Development phase started in the year 2008-2009 when the airline reported financial losses of 5000 crores. Due to this, the airline couldn’t pay the salaries of its employees leading to a massive announced by the employees in the summer of 2009. This was one of the biggest human resource crises in the history of Indian business with nearly 30000 Air India employees going on strike. Immediately following this, the disastrous incident of the crash of Air India Express Flight 812 leading to the death of 158 people, happened.

The change phase, unlike in the more traditional sectors, change happens not at the top as turnaround starts happening. There is often a change of problematic management, mostly purporting the point of view that a CEO’s knowledge and relationships are crucial to a successful recovery. The same happened in the case of Air India. The entire top management of Air India was recast in a period of 30 days by the then aviation minister Mr. Praful Patel. As part of the shakeup, several old time directors were asked to leave and a Professional Chief Operating Officer was appointed under the CMD, Mr. Arvind Jadhav.

In the third phase, a lot of actions happen simultaneously; these include cost rationalization, asset rationalization, revenue creation and product and market reorganization. In turnarounds that are successful, organizations should be careful not to lose resources that may be useful to recovery. This happens when they concentrate on surviving rather than on competitive leadership. Reflex cutbacks should not result in loss of key resources in firms successful in turning around their organizations. Instead, the focus should be on reducing costs. Also Air India disinvested some of the less efficient parts of its operations, while retaining the more important and useful ones.

After an early emphasis on cost reduction, the focus of Air India then shifted to Structural alterations, joint-venture participation, investment, and the introduction of new products. There is a significant deviation in the experience of firms operations in more stable industries, which suggests that it is the high-competitive environment that demand that the changes occur simultaneously rather than sequentially.

But as the transformation takes place, the turnaround of the firm goes through an inflection point that causes a shift in focus from cost and asset reduction to growth of the firm. In the case of Air India this has been characterized by the commitment of the top management to the growth of top line and sales and a conscious effort on the part of the airline to drive up volumes and occupancies of the airlines. The airline plans to reduce its price up to 23% by the end of this year. Industry experts see this as a clear sign of conscious effort on the part of the airline to drive up its volumes and occupancy rates.

The last phase of the turnaround is punctuated by the assumption that for survival the focus has to be on growth and acquisition. In high competitive industries, this phase does not usually require that the CEO change or that the management change. Our group expects the same to happen by the end of the nest fiscal year when the economy would have recovered and new opportunities would arrive at the horizon for the troubled airline.

Influencing Factors

Literature study says that significant differences exist between successful and not so successful cases when they are compared in terms of their contextual and situational factors of turnaround attempts. Factors related to macroeconomic improvement and market growth appear to be assisting turnaround attempts. Though, it also has been seen that these environmental changes are not deterministic. With each organization being a unique collection of resources, external events do not seem to be having a uniform impact. Thus, a rising tide seems to lift only the seaworthy boats.

External influencing factors include:

Macroeconomic Improvement & Market Growth

Stakeholders’ attitude. Interaction of an organization with stakeholders such buyers, employees, suppliers, unions, bankers, the government and the community play a major role in determining the success of the turnaround efforts. When important stakeholders hold an active interest in the business viability of the firm, the chances of success appear to be greater.

Internal Influencing factors include:

Mission institutionalization

Availability of financial resources

Power concentration, and

Perception of the permanence and controllability of decline.

Mission institutionalization, primarily driven by the internal and external expectations of the businesses the firm should be in, can be a major abettor or inhibitor of positive change demanded by an intended turnaround. In cases where the changes required put the firm in a new strategic domain (say that of the low cost carriers), mission institutionalization can often hinder efforts of a swift shift in strategy if a firm’s constituents instinctively negate or refute out courses of action that are seen to be inconsistent with the vision and mission of the firm or its founders. This in Air India’s case can be explained by the reluctance of the airline’s part to move into low cost carriers’ strategic domain. While this remains a possible strategic domain for the future, the airline showed remarkable reluctance in adopting this as a possible strategy. Maybe the Maharaja can’t fly cheap after all.

Available financial resources are one of the important requirements for a turnaround attempt, especially if the firm has considerable cash demands. Even then, availability of funds has still not been found to be one of the deciding factors in the outcome of a full-fledged turnaround effort. This is a significant finding as it often is suggested that firms in stress require only a steady input of cash until their products or services regain market acceptance. Also in the case of Air India with the airline being heavily government funded, the opportunity to save money and possible publicize it makes a great political success story and a PR opportunity.

Of greater impact on the success of a turnaround attempt is the concentration of power within the organization. Firms with higher levels of power concentration are a lot freer to strategize, develop and also implement successful turnaround plans, while the cases that fail are often constrained or reined in by parent companies, powerful stakeholders like political parties, or internal politics. In non-turnaround cases, the management appears to have far less power relative to that owned by the stakeholders. In the case of Air India, with the creation of a new position of power of CEO, can potentially dilute the power vested in the top management. Yet considerations of operational efficiencies far outweigh the concern for power dilution.

Similarly, with the entire airline industry showing signs of recovery with the economy firmly on the path of recovery, the perception of the permanence and controllability of decline is that of impermanent and one that can be managed by suitable strategy implementation.

Strategy Implementation

Successful firms reduce their resource base in those areas which are no longer core activities. Failed firms are more far likely to dispose or sell off on otherwise lose valuable resources than those that might support a recovery attempt. In the successful cases, the remaining resources are often realigned and augmented with the resources which are “borrowed” through joint ventures, development agreements, or outright acquisitions. This is depicted in the diagram as shown below.

Resource Leveraging diagram

As a rule, the successful turnaround cases concentrate a majority of their critical resources on a single and consistent turnaround plan, emphasize on a few improvement areas at a time, and focus on a few critical performance levers. They have a strong feedback mechanism to instill new learning deep into the organization. In the case of Air India it would be taking the voice of customers very seriously and trying to create a culture which cares for the people the firm serves.

Firms which go through very successful turnarounds are also in a position to blend and balance resources to bring in products and services into the market, while unsuccessful firms often have seem to have an imbalance of skills, which neutralizes capabilities that exist elsewhere in the organization. Finally, parsimonious and frugal resource use and the useful ability to implement turnaround plans quickly also form one of the chief characteristics of successful recoveries.

Thus, this is the comprehensive resource based turnaround strategy that we propose for Air India.