08 September 2011

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P – 3 Complete CAG Report - AIR India the Ministry of Civil Aviation (MoCA) and the Bilateral Agreements –

P – 3 Complete CAG Report - AIR India the Ministry of Civil Aviation (MoCA) and the Bilateral Agreements –


Scheduled air services in India began in October 1932 under the Aviation Department of
Tata Sons Ltd, which was succeeded by Tata Airlines. This was subsequently renamed in July 1946 as Air India Ltd., and incorporated as Air India International Ltd. in March 1948.

In 1953, the Air Corporations Act was passed. Air India International Ltd. was nationalized, and two corporations came into existence – Indian Airlines Corporation (as the national domestic carrier) and Air India (as the international carrier). In 1994, the Air Corporations Act was repealed, and Air India Ltd. (AIL) and Indian Airlines Ltd. (IAL) were incorporated under the Companies Act, 1956.


Government-owned airlines dominated the Indian aviation industry till the mid-1990,
When, as part of the open sky policy, the Government of India (Gobi) ended the monopoly of AIL and IAL in air transport services, and allowed private operators to provide air transport services.

In March 2007, National Aviation Company of India Ltd. (NACIL) was incorporated. The scheme of amalgamation of Air India Ltd. and Indian Airlines Ltd. into NACIL was approved in August 2007, with the “appointed” date of the merger being set as 1 April 2007.

Subsequently, in November 2010, NACIL was renamed as Air India Ltd. (AI). The
Administrative Ministry for these Government airline(s) is the Ministry of Civil Aviation
(MoCA).

Audit Objectives and Scope –

The objectives of the performance audit were to ascertain:
Whether the acquisition of aircraft by the erstwhile Air India Ltd. (AIL) and Indian Airlines Ltd. (IAL) was appropriately planned and effectively implemented, with due regard to economy and efficiency and accepted norms of financial propriety;

Whether the merger of AIL and IAL into NACIL was properly planned and effectively
Implemented, and the effectiveness of merged operations of the two entities;

The impact of the liberalized policy of the GoI from 2004-05 onwards on grant of air
traffic rights to other countries through Air Services Agreements (ASAs)/ “bilateral”
agreements and permitting Indian private carriers to fly on international routes;

The main reasons for the poor financial and operational performance of the pre-merger
airlines and the merged entity; and

Whether the MoCA exercised its oversight role adequately and effectively.
Audit Criteria

The audit criteria adopted for the performance audit included:
The reliability of the data used, reasonableness of assumptions adopted, and robustness
and competitiveness of the tendering, evaluation, negotiating and contracting
processes/ procedures for the acquisition of aircraft;

The reliability of data and robustness of assumptions underlying the decision for merger
of the airlines as well as the planning of the merger;

Adequacy of the facts and information put forth to evaluating/ approving agencies for
the acquisition of aircraft, approval of liberalized policy on “bilaterals”, and approval of
merger of AIL and IAL; and

Performance parameters achieved by competing national and international airlines.

Audit Methodology -

Our performance audit (conducted between September 2009 and June 2011) involved
scrutiny of records of MoCA and AI. The first draft of the performance audit report was
issued to the MoCA on 15 November 2010; the replies of MoCA and AI received in February 2011 have been considered and duly incorporated in this report. A revised draft of the performance audit report was issued to MoCA on 11 March 2011, to which no response was received.

A further revised draft of the performance audit report (including findings arising out of
additional scrutiny of records of MoCA and AI) was issued to MoCA on 6 July 2011, reply to which has been received on 3rd August 2011. Further, an exit conference to discuss the main audit findings was also held with MoCA on 3rd August 2011.

Acquisition of aircraft by erstwhile Air India (AIL) –

On 30 December 2005, the erstwhile Air India Ltd. (AIL) signed purchase agreements with Boeing and General Electric (GE) for supply of 50 Boeing aircraft (with GE engines) at an estimated project cost of Rs. 33,197 crore:

8 B777-200LR ultra long range aircraft (ULR) with a seating capacity of 266;

15 B777-300 ER medium capacity long range aircraft (MCLR-A) with a seating capacity of 380; and

27 B787-8 (popularly known as “dreamliner”) medium capacity long range (MCLR-B)
aircraft with a seating capacity of 258.

In addition, Air India Charters Ltd. (AICL) 1 also signed purchase agreements with Boeing and CFM for supply of 18 short range B737 aircraft with CFM engines at an estimated project cost of Rs. 4,952 crore

The last fleet acquisition by the erstwhile AIL involved induction of two B747-400 aircraft in 1996.

A brief chronology of events related to the current acquisition of aircraft by the erstwhile AIL is indicated below:

December 1996
AIL’s proposal for acquisition of 3 A310-300 aircraft was not cleared by MoCA due to reasons like availability of excess A-320 type of aircraft with the erstwhile IAL.

January 2002
Expert committee was constituted by AIL to identify aircraft requirement and prepare fleet plan for 5 year timeframe.

November 2002

Techno Economic and Negotiation Committee (TENC) was constituted
by MD, AIL for finalization of requirement of aircraft.

April/ July 2003

TENC submitted separate reports for acquisition of: 17 (10 on firm basis + 7 on option basis) medium capacity long range aircraft (A340-300 / B777-200 ER);

and 18 short range aircraft (A320-200 / B737-800).

November 2003
After review, TENC submitted a revised report for 18 short range and
10 or 17 long range aircraft on the basis of revised pattern of operations, making NPV positive. AIL Board approved proposal for acquisition of 10 medium capacity
long range aircraft (A340-300) and 18 small capacity short range aircraft (B737-800).
January 2004 AIL submitted project report for acquisition of 28 aircraft to MoCA. 02 August 2004 In a meeting chaired by the then Minister, Civil Aviation it was
decided that Air India should revisit the proposal for purchase of aircraft and submit a fresh project proposal to the Government at the earliest which could include the revised requirement.

13 September 2004
Based on the decision taken in the meeting of 2nd August, 2004, as communicated in the Ministry’s letter dated 5th August, 2004, the Board of Directors of Air India in its 101st
meeting decided that the fleet plan could be revisited in its entirety.

24 November 2004
AIL Board approved a revised plan for acquisition of 50 aircraft for AIL,
apart from 18 aircraft for its subsidiary AICL.

03 December 2004
Bids were invited from Boeing and Airbus.

24 December 2004 Technical bids were opened.

26 April 2005
TENC evaluated bids and submitted its report.

On the same day, AIL Board approved the acquisition of 50 aircraft (35
firm + 15 on option) from Boeing with GE engines.

14 May 2005
Project Report for GoI approval for acquisition of aircraft was
submitted to MoCA.

16 June 2005
Price Negotiation Committee was constituted by AIL, with ‘in
principle’ approval of MoCA.

30 June 2005
Presentation was made by AIL to MoCA on aircraft acquisition.

18 August 2005
‘Overseeing Committee’ was constituted by MoCA to oversee the process of price negotiations with Boeing and GE for acquisition of aircraft; negotiations were held by Overseeing Committee between August 2005 and November 2005

31 August 2005
Pre- PIB (Public Investment Board) meeting was held.

13 October 2005
PIB cleared the aircraft acquisition at a cost not exceeding Rs. 33, 1974 crore, indicating:

that MoCA may evaluate AIL’s cost structure and productivity and fix benchmarks for achieving reduction in cost and enhancing productivity;

purchase of 35 on firm basis, and 15 on optional basis, with the decision for exercising the option to be taken by AIL Board, depending on the market situation.

15 December 2005
CCEA (Cabinet Committee on Economic Affairs) approved constitution of EGoM (Empowered Group of Ministers) for final round of negotiation with lowest bidder.
20 December 2005
Cabinet Secretariat communicated constitution of EGoM.

24 December 2005
EGoM held discussions with the representatives of Boeing and GE.

30 December 2005
PMO (Prime Minister’s Office) forwarded a copy of the note of the Chairman, EGoM to the PM on the action taken by the EGoM; where it approved acquisition of 50 aircraft by AIL on firm basis, in addition to acquisition of 18 aircraft by AICL;

30 December 2005
PMO returned the note indicating that the “Prime Minister has seen the note and directed that the Ministry of Civil Aviation may inform CCEA about the finalized transaction”.
30 December 2005 MoCA conveyed GoI’s approval to AIL.

30 December 2005
On the same day, AIL also signed purchase agreements.

12 January 2006
CCEA noted the contents of the MoCA note apprising them of the EGoM decision on acquisition.

July 2010
20 aircraft (8 B777-200LR + 12 B777-300ER) received; receipt of 3 B777-300ER aircraft deferred at AIL’s instance.

Our main audit findings in respect of this aircraft acquisition are summarized below.

Undue time taken for acquisition

There is no doubt that the erstwhile AIL desperately needed to acquire new aircraft. Due to lack of timely acquisition, AIL had to induct 13 additional aircraft on dry lease by January 2004. AIL’s proposal of December 1996 for aircraft acquisition was not cleared, and a fresh process for acquisition was initiated only in January 2002. Thus, it took nearly eight years (December 1996 to January 2004) when AIL finally came before Government with a firm acquisition proposal. Such an unduly delayed acquisition process is deleterious for the financial health of a commercial airline.

Interestingly, although the original proposal for acquisition of 18 + 10 aircraft took its own time for processing, the revised proposal for acquisition of 18 + 50 aircraft was processed considerably faster, with many activities (e.g. price negotiations) taking place concurrently with (or in anticipation/ advance of) approvals.

The Ministry explained (August 2011) that the delay referred to above, was due to the then prevailing circumstances, viz. shrunk market because of global events (9/11, SARS) and proposed disinvestment of the airline and later on the acquisition was done on priority to arrest the rapid decline of the airlines and the fact that other carriers were increasing capacity. The Ministry further stated that at no point was any activity required in the procurement process constituted in haste or in anticipation of any approval.
We do not agree with the Ministry’s reply. While the acquisition took nearly eight years
from the first proposal, the revised proposal for acquisition of 18 + 50 aircraft was
processed faster. Further, the Ministry’s contention regarding lack of haste in the procurement proposal for 50 + 18 aircraft is not borne out by facts since, as brought out in the chronology of events above. From the approval for the constitution of EGoM by the CCEA, for final round of negotiation with lowest bidder, to the signing of purchase agreement, it took just 16 days.

Increase in requirements from 10 + 18 aircraft to 50 + 18 aircraft in 2004

Change in number of aircraft to purchase –

The erstwhile AIL’s project report of January 2004 proposed acquisition of 10 medium
capacity long range aircraft (A340-300) and 18 small capacity short range aircraft (B737-800). This, itself, had taken two years to mature.

However, by November 2004, the AIL Board changed their fleet acquisition plan and
submitted a revised proposal for acquisition of 50 medium capacity long range/ ultra long
range aircraft, in addition to 18 small capacity short range aircraft for its subsidiary, Air India Charters Ltd. (AICL). This analysis to enhance AIL’s requirements took just four months (from August to November 2004), after MoCA advised them to “revisit” their proposal.

Suggested Reading –
P -2 Complete CAG Report - AIR India the Ministry of Civil Aviation (MoCA) and the Bilateral Agreements –
http://realityviews.blogspot.com/2011/09/p-2-complete-cag-report-air-india.html

Complete CAG Report - AIR India the Ministry of Civil Aviation (MoCA) and the Bilateral Agreements – Part One
http://realityviews.blogspot.com/2011/09/complete-cag-report-air-india-ministry.html

Reality views by sm –
Thursday, September 08, 2011

Tags- News FULL CAG REPORT AIR INDIA

1 comments:

Noah Webster January 04, 2013  

this blog is very informative for me....its a great work from ur side....thanks and congrats...
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