Maharaja for Sale

Government approves Air India divestment

Ending speculations around the fate of the sinking national carrier, the centre finally granted in-principle approval for the divestment of Air India in June 2017. The move follows NITI Aayog’s detailed examination of the requirements to ensure that the carrier stays afloat. Given the fact that it is nearly impossible for the Maharaja to function efficiently without further investments from the government and that it has a mere 14 per cent market share, the policy think tank recommended that the private sector be brought in to run and manage Air India, ensuring efficient and cost-effective operations.

The big move – Centre’s decision to divest

At a time when the Indian civil aviation industry is growing by leaps and bounds, the national carrier is reeling from the aftermath of years of poor performance. Air India has undoubtedly been in a difficult position for a number of years, surviving on the government’s bailout packages, which started in 2012. So far, around Rs 240 billion has been infused in the airline to ensure its survival.

To add to its woes, the national carrier has long been considered a burden on the exchequer, recording a total debt of around Rs 520 billion, of which Rs 220 billion is in the form of loans for aircraft purchase and the remaining comprises working capital loans and other liabilities. Although in 2015-16, the airline reported an operating profit of Rs 1.05 billion for the first time (after the merger with Indian Airlines), the situation was far from improving, with appeals from key stakeholders to privatise the loss-making national carrier growing stronger. Further, NITI Aayog’s recommendation of up to 100 per cent privatisation of the airline provided an impetus to the long-pending decision. It has suggested three possible stake sale options — 24 per cent, 49 per cent and 74 per cent, based on studies of revival plans of global carriers in which governments exited fully, such as British Airways, Japan Airlines and Austrian Airlines.

Thus, in a landmark move, in June 2017, the centre gave its nod for the divestment of Air India and formed a group of ministers (under the finance minister) to work out the modalities of the strategic sale of the airline and its five subsidiaries. The group, apart from deciding the quantum of divestment, will also take a final decision on the treatment of the unsustainable debt, shedding certain assets to a shell company, and the strategic divestment of its profit-making subsidiaries.

An attractive buy?

Despite the perception that cash-strapped Air India might only add to the buyer’s burden, the overall picture does not seem so dismal.

According to rough estimates made internally by the Ministry of Civil Aviation, the value of Air India’s physical assets stands at Rs 250 billion-Rs 300 billion. These include its robust fleet of around 118 aircraft (77 aircraft owned, 22 on sale and leaseback and 19 on dry lease), land parcels, buildings, and its valuable flying/landing rights and parking slots at airports globally. Some of its prime real estate properties include nearly 32 acres in central Mumbai, and its iconic headquarters on Marine Drive (Mumbai) valued at over Rs 16 billion. Further, the national carrier also has properties in New Delhi, London, Hong Kong, Nairobi, Japan and Mauritius.

Reportedly, all of Air India’s subsidiaries, except Air India Engineering Services, are expected to make net profits in 2017-18.

Thus, from an investor’s point of view, Air India could actually be a lucrative buy.

Mixed reactions

While the news of the divestment might be a reason to celebrate for many private players, it has left others in a tizzy. In particular, the Air India Employees Union has expressed its concerns over the job security of the airline’s employees and is thus opposing the privatisation move. Besides, the union has also voiced their concerns about certain policies of the airline which might have resulted in the mounting losses. These include the reappointment of permanent employees after retirement, the joint venture with Singapore Airport Transport Service for ground handling, surrendering of profitmaking routes to private airlines, etc. Further, the union has demanded that the government waive off the airline’s debt instead of privatising it.

Meanwhile, IndiGo’s announcement of investing in the debt-laden carrier has not gone down well either. As a consequence of the announcement, the airline witnessed a 5.6 per cent fall in its share value the next day. Thus, IndiGo has now clarified that it is only keen to buy the national carrier’s international arm and low-cost division, Air India Express, to expand its network.

Further, the divestment decision has also come under attack from several political parties, questioning the ability of the government to run the national carrier effectively.

Turbulence before a smooth flight

The government is yet to take a final decision on whether to go for a partial divestment or a complete stake sale of the beleaguered carrier. Further, while the Tata Group and IndiGo have expressed their willingness to acquire a stake, the government is hoping to see a few global investors join the fray to ensure competitive bidding. For the timely resolution to the situation, it is imperative that the government spells out the conditions of the deal clearly and removes any uncertainties. For instance, according to reports, the Tata Group is only keen on acquiring a stake in the loss-making Air India if the government significantly reduces the carrier’s debt of over Rs 500 billion. The demand does not seem unreasonable, given the amount of effort that will be required to push the airline back into the black; however, it might not be in sync with the government’s intention and plans. Further, the route of the sale is also an important factor. For instance, taking the lead from other global examples, when Air Lanka was sold to Emirates about two decades ago, the entire management, control, authority and responsibility for the business and affairs of the airline vested with Emirates for a period of 10 years. It was believed that the deal would have been more economically beneficial to the government had the landing slots been sold separately. Thus, deciding between a component-wise sale and a bundled sale is also crucial.

Notably, with greater clarity now on the government’s intent, reaching a consensus within the ministerial group members and getting regulatory clearances will not be an uphill task.

Conclusion

In an ideal situation, national carriers are meant to be at the heart of sectoral and thus economic growth. However, in the Indian context, the future of the national carrier, which at one point in time was an inspiration to international carriers like Singapore Airlines and Cathay Pacific, is in the doldrums. In this situation, the divestment decision, though late, seems to be apt. The successful sale will also go a long way in reiterating the government’s ideology of minimum government, maximum governance. Besides, it will also enable the government to channel its resources to other sectors in a bid to improve the economic situation. Notably, countries such as the US, Benin, Cyprus, Hungary, etc. do not have national carriers, and are letting private airlines fulfil commercial aviation needs and achieve trade objectives based on market forces.

Going forward, the government will need to ensure that a disciplined approach is followed for the divestment, to avoid any expensive mistakes. A compelling logic will need to be provided to both the buyer(s) and the existing employees to gain their interest and confidence in the process. Further, the unbundling of each subsidiary might be useful in extracting the full market value through a transparent process. Besides, the divestment committee also needs to ensure that the bilateral rights that Air India still holds as a national carrier are valued properly.

GET ACCESS TO OUR ARTICLES

Enter your email address