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Wednesday, June 03, 2020

Air India disinvestment: Will the new terms attract investors?

The government has tweaked the terms of Air India’s sale, and is now putting 100% of its equity in the airline on the block. Will there finally be a buyer? How will flyers and employees be impacted?

Written by Pranav Mukul | New Delhi | Updated: January 28, 2020 8:07:47 am
Air India disinvestment: Will the new terms attract investors? Air India flights at the Hangar in Mumbai. Recently, Union Minister for Civil Aviation Hardeep Singh Puri had made it clear that the government would shut down AI if it did not find a buyer. AI currently has a debt of more than Rs 30,000 crore after the government moved an equal sum to Air India Assets Holding Ltd., an entity that owns the airline’s assets. Express Photo by Amit Chakravarty. 31.12.2019. Mumbai.

The first formal attempt at privatising Air India and, at the time, Indian Airlines, in 2000 had elicited interest from the who’s who of India Inc., including the Tata Group, Hinduja Group, L N Mittal, and Videocon Group. But the airlines were not privatised after political opposition from within the then-NDA government.

Cut to 2018. The NDA government under Prime Minister Narendra Modi, despite all the political will to disinvest its stake in the airline, could not attract a single bidder. The reasons: the Centre’s unwillingness to part with 100% of its holding in the flag carrier, and lack of clarity over the debt being packaged with the airline, among others.

Less than two years later, the government has tweaked the terms of sale — with room for more changes — and is now putting 100% of its equity in the airline on the block. Like the last time, low-cost arm Air India Express and a 50% stake in ground handling joint-venture Air India-SATS are also up for sale. The government has also laid down a principle for calculating debt, which will be bundled with airline, and relaxed the minimum net worth criteria for potential bidders to Rs 3,500 crore from the Rs 5,000 crore in 2018.

Will the new terms attract investors?

After having conducted eight roadshows across the world seeking inputs on how the disinvestment package should be structured, the government is hopeful of attracting investors with the new sale criteria, coupled with the main benefits of the airline, which are prime slots in capacity-constrained airports across the world, wide-bodied aircraft, and a 50.64% market share in international traffic among Indian carriers.

The first time around, the manner in which debt and liabilities were bundled with the airline were called into question. This time, the airline will come with a frozen long-term liability of Rs 23,286.50 crore, and current liabilities that will be calculated on the date the transaction closes.

However, any potential investor is also expected to look at the size of the airline’s operations with reference to what those operations generate. For example, both Air India and Singapore Airlines operate with a fleet of 121 aircraft, but in 2018-19 (April-March), Air India posted a net loss of Rs 8,556 crore, whereas Singapore Airlines (as a standalone airline) reported a net profit of Singapore $ 779.1 million (approximately Rs 4,100 crore).

Further, even though the debt calculation has been changed to instill a level of certainty in what will be packaged with the airline, the combined amount of debt and liabilities are at least Rs 32,058 crore. Therefore, in addition to valuing the airline and placing a bid for its equity, the new investor will need to invest in turning the airline around.

What will the new investor get?

The most attractive proposition in acquiring Air India is the slots and landing rights that it holds at airports such at Delhi, Mumbai, London, New York, Chicago, Paris, etc. These could be helpful both to airlines looking to expand into long-haul international operations, and to entities looking to set up global operations from scratch.

Air India currently operates to 56 Indian cities and 42 international destinations. Several of Air India’s international and domestic routes are profit-generating, while a number of them are loss-making or witness low load factors. This is a legacy problem that the airline comes with for the new promoter.

Additionally, while the airline comes with 121 aircraft primed as domestic and international workhorses, 18 of them are grounded for lack of funds to make them airworthy.

The new investor also gets hold of the ground-handling firm AI-SATS, which offers end-to-end ground handling services such as passenger and baggage handling, ramp handling, aircraft interior cleaning, load control and flight operations, and cargo handling services for general, perishable, trans-shipment, express courier and special cargo at Bengaluru, Delhi, Hyderabad, Mangaluru and Thiruvananthapuram airports. This would provide the investor with an ancillary services firm with captive use.

How will consumers and employees be impacted?

CONSUMERS: If and when Air India is taken over by a private entity or consortium, experts believe the first move could be pruning of operations to ensure the airline inches closer to profitability. This could cause Air India to cease operations on certain loss-making domestic and international routes — leading to a rise in fares. It is believed that Air India’s continuous loss-making operations have skewed the market, wherein private companies have to play ball even when fares are artificially low. Cutting certain routes could also impact consumers in terms of the unique offerings by Air India, such as higher baggage allowance, etc.

EMPLOYEES: Air India’s bloated staff strength was flagged by potential investors in the last disinvestment attempt. The airline has 17,984 employees, of which 9,617 are permanent staff. According to the preliminary information memorandum, 36% of the permanent staff will retire in the next five years. However, Air India’s Chairman and Managing Director Ashwani Lohani insisted on Monday that the airline did not have any “excess staff”. Whether the employees will be retained by the new investor is unclear. The government is expected to provide more clarity on conditions for retaining staff in the request-for-proposal stage, which will come after expressions of interest are received.

So will the airline be finally sold?

Despite the strong political will to privatise the airline, the government has received opposition even from within. BJP leader Subramanian Swamy tweeted on Monday: “This deal is wholly anti-national and I will (be) forced to go to court. We cannot sell our family silver.”

Employee unions have always opposed stake sale. However, the government has held extensive meetings with the unions, and tried to identify specific issues raised by them.

A lot also depends on the global politico-economic scenario that enables bidders, from India or abroad, to show interest in acquiring the loss-making airline. Given that there are specific parts of the airline that are considered attractive for different entities, experts are of the view that if this second attempt too fails, the government will have no choice but to take a piecemeal approach at divesting the national carrier.

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