New Delhi: The CAG has come down hard on the Civil Aviation Ministry over the decision to acquire 111 planes for Air India through debt, calling it "a recipe for disaster" and also on the merger of the two erstwhile state-run carriers.

The merger of Air India and Indian Airlines was described as "ill-timed" by Comptroller and Auditor General(CAG) which said this exercise was undertaken "strangely from the top (rather than by the perceived needs of both these airlines), with inadequate validation of the financial benefits".

Terming the move for acquiring a "large number" of planes as "risky", the CAG said the aircraft acquisition had "contributed predominantly" to the airline's massive debt liability of Rs 38,423 crore as on March 31 last year.

In its latest report tabled in Parliament on Thursday, the Government Auditor said, "The entire acquisition (for both Air India and Indian Airlines) was to be funded through debt (to be repaid through revenue generation), except for a relatively small equity infusion of Rs 325 crore for Indian Airlines.

"This was a recipe for disaster ab initio and should have raised alarm signals in Ministry of Civil Aviation, Public Investment Board and the Planning Commission", the report said.

The CAG felt there is a need for some "harsh decisions" to improve the health of the airline.

"The airline is in a crisis situation. Salary payments and ATF obligations are becoming difficult. If the airline has to survive, the management and employees will have to set personal interests aside and undertake some harsh decisions, till the health of the airline improves", it said.

Significantly, the CAG recommended, among other measures, "a total hands-off approach (by the government) with regard to the management of the airline".

The CAG also took the Civil Aviation Ministry to task for liberalising the bilateral air traffic entitlements with other countries in a manner which "did not provide a level playing field to AI (and to a lesser extent other Indian private airlines)". The report dealt with several aspects of the ailing national carrier's losses, fleet acquisition, merger, huge debt burden, delay in joining the global airline grouping Star Alliance and its financial and operational performance.

On merger, the CAG said this was also carried out "without adequate consideration of the difficulties involved in integration (notably in terms of HR and IT, among other areas)".

Though Air India had "inherent strengths", it said "there was no evidence of Civil Aviation Ministry having provided it with positive support in the last few years".

 Noting that the fleet acquisition process took an "unduly long time", the CAG said the initial proposal was made in December 1996 and its examination continued "in fits and starts" till January 2004 when a plan was made to buy 28 planes, which was revisited and later a decision taken to acquire 68 aircraft.

It said the revised plan saw "a dramatic increase" in the number of planes to be purchased and maintained that the sequence of events up to November 2004 clearly demonstrated that the pre-merger AI "hastily reworked" its earlier plan.

 Observing that many assumptions for the revised plan were "flawed", the CAG said the negotiation process was "irregular and adversely affected the transparency of the process".

Maintaining that "no benchmarks" relating to comparable prices and commercial intelligence were set, it said, "Consequently, in the absence of such benchmarks, the effectiveness and efficacy of negotiations and the
reasonableness of the price arrived at is difficult to ascertain".

Other factors responsible for the "critical" state of affairs in AI were "chronic operational deficiencies, a weak financial position, grossly inadequate equity capital and undue dependence on debt funding providing little or no cushion for the financial shock when it came". Besides, high
fuel prices and global recession also hit the airline hard.

AI hit by huge hikes in air traffic rights to Gulf: CAG

The Civil Aviation Ministry had granted "massive increases" in bilateral air traffic rights to Gulf nations in 2004-05 despite Air India's "strong reservations" as this was its most profitable international sector, a government audit body has said.

It has also said that as a result of liberalisation of the bilateral rights, Indian carriers did not get any increase in the number of destinations in the Gulf countries while airlines from that region got the right to operate to 14 destinations in India, four more than before.

In its report tabled in Parliament today, the Comptroller and Auditor General (CAG) said the Dubai sector saw a massive increase in the number of seats per week between May 2007 to March 2010 -- from 18,400 seats to 54,200.

The CAG took the Civil Aviation Ministry to task for liberalising bilateral rights with these countries in a manner which "did not provide a level-playing field to Air India (and to a lesser extent to other Indian private airlines)".

"These agreements, besides not affording adequate time to Air India/Indian Airlines to set their houses in order and gear up for a highly competitive environment, very evidently worked to the detriment of the national and Indian private carriers", the public audit body said.

It said, "Clearly, the Gulf sector was AI/IA's most profitable international segment before the liberalised policy on bilateral entitlements.

"AI repeatedly expressed strong reservations to the Ministry against the proposals/requests from Gulf countries for increase in seat entitlements as well as additional points of call at interior locations in India", the report said, adding that the grant of bilaterals demonstrated "the one- sided nature of benefits to Emirates/Dubai". The report said that whatever changes Air India had of increasing market share through increased capacity (or putting more planes on a sector) were "severely hampered by the Ministry's decision to liberalise bilateral entitlements from 2005 onwards", benefitting foreign airlines and countries.

The CAG also pointed out that most of Air India's routes-- like those to North America, UK and Southeast Asia, were incurring losses, it was "only the Gulf/Middleast and Far East Asia routes" which made profits till 2005-06.

After the 'open sky' policy to liberalise bilaterals came into being, it said, "By 2009-10, all routes were loss-making".

In a major recommendation, the CAG asked the government to "strictly freeze" granting of bilateral rights to the Gulf and Southeast Asian nations and their airlines.

"Till India has its own effective and efficient hubs and AI and other Indian carriers are able to exploit them effectively, entitlements for airlines/countries, notably Dubai, Bahrain and other Gulf countries, should be strictly frozen by the Ministry", the CAG said.

"At this stage, Indian carriers (including Air India) will have to tackle renewed and serious challenges to compete effectively with established international 'mega carriers'".

It also said that a considerable amount of route rationalisation has already taken place, especially in terms of reducing loss-making routes since 2008-09.

The CAG said that the Civil Aviation Ministry had "very obligingly bowed to ostensible pressures" from its External Affairs, Commerce and Tourism counterparts, "ignoring the interests of the Indian carriers including AI".