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 today, 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.