Modi government must launch enquiry into the aircraft deal that ruined Air India

By: Jitender Bhargava

The sordid story of the humongous aircraft purchase for Air India that led to its financial ruin has again taken centre stage after Vinod Rai, former CAG, looks deep into the deal in his just released book Not Just An Accountant.

Praful Patel, who was aviation minister then and widely believed to be the man behind the deal, continues to deny his role — you only had to watch Times Now the other day to see his “spirited” defence. His defence, however, falls flat before those conversant with the actual events surrounding the deal.

In 2005, the year in which the aircraft order was placed, Air India, had an annual revenue of Rs 8,000 crore. The cost of the 68 aircraft (18 short haul and 50 long haul) ordered was Rs 39,000 crore. Even the best airlines operate on wafer-thin profit margins.

Read Praful Patel's defence


Simple arithmetic will show that Air India, which had to finance the aircraft by availing loans because it had no reserves (the government was pitching in only with less than 2% of the cost), would have to bear an interest burden of up to Rs 2,000 crore annually as the delivery of planes began in July 2007.

Remember, in the years prior to the order, Air India was making only a modest profit. It did not require a genius to see a financial tragedy was waiting to unfold.

Compliant Board

Nonetheless, the Air India board “recommended” the acquisition. This happened after Patel asked the Air India brass in a meeting on August 2, 2004 to revisit its earlier acquisition plan of 28 aircraft (18 short haul and 10 long haul). The board had earlier recommended purchase of only 10 long-haul aircraft because the Air India management had said the Net Present Value would be positive for an order of this size.

In other words, the 10 planes were all that Air India could afford. It is bewildering why the board did not question how then could the NPV be positive for 50 long-haul aircraft.

Only Sunil Arora, a board member by dint of being chairman of Indian Airlines, questioned the flaw. The silence of the management and representatives of the ministry on the board can be explained due to fear of reprisal — additional secretary V Subramanian was shunted out within two hours of asking basic questions on the business plan, financing etc.

The internal dynamics of how board meetings were conducted in Patel’s era could provide some answers. In a letter to the cabinet secretary on June 2, 2005, Arora shared instances of blatant ministerial interference. He also described how a key meeting was held. He said board members received a notice on December 21, 2004 that a meeting will be held the next day in Delhi as an aircraft maker had raised the possible impact of changes in specifications on the deal. No agenda papers were made available to members. A decision was still taken. Clearly, this calls Patel’s bluff when he says that neither he nor the ministry was connected with the nuts and bolts of the aircraft acquisition. The story doesn’t end here.

Patel, as he said in his recent TV interview, requested the prime minister to constitute an Overseeing Committee and an Empowered Group of Ministers (EGoM) to examine the deal.

However, the minutes of the meetings reveal that the two committees looked only at the concessions/discounts from the vendor and technical details. There is no mention of the Overseeing Committee discussing the number of aircraft recommended for purchase — which is the crux of the problem.

Besides seeking concessions from the vendor, the EGoM took two key decisions. To quote the minutes: “In pursuance of the above discussions, the proposal contained in para 10 of the note for EGoM is approved”.

This ‘note’ came from the aviation ministry. The other decision — “Air India will place the entire order for 68 aircraft with Boeing on firm basis” — was devastating for the airline as its own eventual proposal and the one by the aviation ministry (endorsed by the Public Investment Board) were for buying 18 short haul aircraft and 35 long-haul aircraft and retaining 15 as options.

Who is the Mastermind?

Patel has said it was former finance minister P Chidambaram’s decision (Chidambaram headed the EGoM) to order all aircraft on firm basis. If we were to believe that, it displays the casualness with which such a critical decision — the cost of 15 more long-haul aircraft was nearly $2 billion — was taken.

Could Chidambaram have taken a decision without going through the financial implications? Wasn’t it Patel’s responsibility to brief the EGoM members of the deal’s implications? The minutes make no mention of the decision being thrust on an unwilling Patel.

Rather, he happily announced the deal after the meeting. There are too many mysteries surrounding the aircraft deal. But who was instrumental in forcing Air India to buy the aircraft? If Praful Patel really wishes to dispel the widespread belief of his dubious role in ruining Air India financially, he should be the one seeking a probe. Let us hope the new damning revelations in Rai’s book will force the Narendra Modi government to launch a full probe.


(The writer is a former executive director of Air India)