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Long flight path? Air India disinvestment hits air pocket due to lack of bidders

Surajeet Das Gupta / New Delhi 25 Sep 17 | 08:45 AM

The Air India logo is seen on the facade of its office building in Mumbai (Photo: Reuters)

Last week Union Finance Minister Arun Jaitley, who heads the ministerial group on the disinvestment of Air India, said the process was moving “quite well" and the government would soon appoint a transaction advisor. 

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In a meeting held last week, the government also discussed whether Air India’s disinvestment could be completed this financial year.  

But the privatisation of the airline faces serious stumbling blocks. With just IndiGo showing interest in buying the international business of the airline, government officials say that it cannot go in for an auction because that would require at least two to three competing players to discover the true value.

The problem has been accentuated by the fact that the policy does not allow foreign carriers to bid for Air India. Unless that changes, airlines such as Emirates or Singapore Airlines, which could have been interested, are out of the game.

This decision is owing to the fear of adverse political opposition the government might face from unions if the country’s crown jewel is sold to a foreign carrier. This is significant because the Lok Sabha elections are due in another 18 months or so. 

Wooing more players would depend on how the government deals with the company’s large debt of more than Rs 52,000 crore. Aviation experts say that it would depend on how much the government is ready to write off. 

They say that a substantial portion of the Rs 30,000 crore of working capital debt needs to be written off for potential buyers to take a serious look. Even IndiGo has made it clear that while it would be ready to take the long-term debt on its books, the government has to write off or take over some part of the overall debt. 

But government officials say that such a reduction could lead to serious questions and opposition from unions. After all the Air India unions have represented to the government that if the government writes off the Rs 30,000 crore debt, which is the key to the financial problem, there is no justification to privatise the airline. Surely they will not take it lying down. 

Aviation experts say that the sale of Air India will surely not bring substantial amounts of cash to the government to help it meet its disinvestment target. However, it will help the government in not rustling up any more of the taxpayer’s money (it has invested more than Rs 29,000 crore in its equity) every year for an unforeseeable future to keep the airline alive without any sign of a turnaround. “Look at how the government in Malaysia sold the debt-ridden Air Asia to Tony Fernandes at just one ringgit, and he took over the debt. That has to be the approach because you are not going to make money for your disinvestment target through the Air India sale," says a top executive of an aviation consultancy. 

He points out that while Rs 20,000 crore of loan is secured against assets (the aircraft), the valuation of the company, which includes, apart from the planes, its international slots and routes, should be around Rs 30,000 crore. 

So the government needs to write off at least Rs 20,000 crore of loans to make it attractive. “The buyer will take over about Rs 30,000 crore of debt and there might be just some token premium for the acquisition, which is not going to be high at all," says the executive. 

Can Air India follow a different model of sale? Some aviation valuers say that it is possible to replicate the airport privatisation model (Delhi and Mumbai) by leasing assets (aircraft, routes, slots, etc) to the entity that provides the highest revenue share. The government, which would transfer the debt on its books, can pay it though increased earnings from revenue share (assuming the turnover increases every year under a new operator). However, a top airline says that this model is not workable for a simple reason — the airports in Delhi and Mumbai have a monopoly on all the businesses and can afford to pay a high revenue share. Also they are assured of a fixed return on their investments though regulation. But a company that buys Air India has to face cut-throat competition from other airlines on each route, and does not have an assured return, and, therefore, cannot get into a fixed revenue-share model. 

Experts say that the other stumbling block is the more than 22,000 employees of Air India, which, based on the employee-to-plane ratio, is too high. Globally the privatisation of airlines has been accompanied by a substantial reduction in their workforce. British Airways, for instance, went through a substantial reduction of its labour force, which was reduced by more than 20,000 before the airline became private. Even Lufthansa reduced its labour force by more than 7,500 while it was going through the same process. Airlines which have looked at Air India say that the problem is more acute in the domestic business, and anyone looking at buying it would have to go in for a substantial reduction of the personnel. 

Clearly, with the government recently floating a request for proposal (RFP) to appoint a valuer, aviation consultancy firms say that the process would take at least 12 months. The government in its RFP expects the winner to prepare its report in 120 days. It is clear from this timetable that the disinvestment process is unlikely to be completed in this financial year.

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