Air India: Sold for a song

The government bends over backwards in the Air India sale, handing over an array of assets to the Tata group, but years of mismanagement and a host of internal issues imply an extended period of turbulence ahead for the acquirer.

An Air India aircraft takes off from Ahmedabad on July 7, 2017.

Legend has it that when J.R.D. Tata, the illustrious industrialist, pioneering aviator, and India’s first licensed pilot, heard the news on radio in 1978 that the government had sacked him as chairman of Air India, the airline he had founded in 1932 and dexterously managed without remuneration even after it was nationalised in 1953, he remarked: “I feel as you would feel if your favourite child was taken away.”

In a letter to Prime Minister Morarji Desai, who was heading a Janata Party government, J.R.D. Tata wrote: “I hope you will not consider it presumptuous of me to have expected that when the government decided to terminate my services and my forty-five years’ association with Indian civil aviation, I would be informed of their decision directly, and if possible, in advance of the public....” Some 43 years after what was the “saddest day of his life”, India’s flag carrier is all set to return to the Tata fold. The return comes 68 years after Prime Minister Jawaharlal Nehru nationalised nine airlines through the Air Corporations Act, 1953, including Air India, in which the Tatas held a 25 per cent stake.

On October 8, 2021, the Narendra Modi government announced that Talace Pvt. Ltd, a fully owned special purpose vehicle (SPV) floated by Tata Sons Pvt. Ltd, the principal holding company of the Tata group, had won the bid to acquire a 100 per cent stake in the debt-laden Air India. The move came after 20 years of fits and starts, which saw successive governments dither over whether the government should retain a residual stake/control in the national carrier and what the winning sale price should be.

Details of the deal

With its bid of Rs.18,000 crore ($2.4 billion), which was above the Rs.12,906-crore ($1.72 billion) reserve price set by the government, Talace defeated the only other competitor—Ajay Singh, the promoter of SpiceJet, the heavily indebted low-cost airline. Ajay Singh’s bid was Rs.15,100 crore. Of the Rs.18,000 crore, Rs.15,300 crore ($2.04 billion), or 85 per cent, will go towards servicing Air India’s accumulated debt, which as of August 31 stood at Rs.61,562 crore ($8.21 billion). The government will receive the remaining Rs.2,700 crore ($360 million) in cash for its equity stake. The transaction, subject to the successful bidder and the government satisfying all statutory requirements, and Competition Commission of India and third-party approvals, is expected to be sewed up by end December. Until then the government will continue to bear Air India’s operational losses of around Rs.20 crore ($2.6 million) every day.

The deal also secures for the Tatas a 100 per cent stake in Air India’s AI Express Ltd and 50 per cent in the ground handling entity Air India SATS Airport Services Private Ltd, a 50:50 joint venture company between Air India and Singapore Airport Terminal Services (SATS Ltd). However, it does not give the Tatas control over Alliance Air, a wholly owned subsidiary of Air India that operates air services to 47 domestic destinations with a fleet of 18 ATR 72-600 (70-72-seater) aircraft as part of the government’s Regional Connectivity Scheme.

Air India’s non-core assets such as parcels of prime land, buildings, a famed collection of more than 40,000 pieces of art and collectibles, including an ashtray designed and gifted by the Spanish surrealist artist Salvador Dali, and other holdings are also not part of the deal. The assets, which are valued at Rs.14,718 crore ($1.96 billion), will initially be transferred to a government-owned SPV called Air India Assets Holding Ltd (AIAHL) and hived off later.

Losses for the taxpayer

Announcing the decision to accept the Tatas’ bid, Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management (DIPAM), said that since 2009-10 the taxpayer had funded Air India to the tune of Rs.1,10,276 crore ($14.70 billion)—Rs.54,584 crore ($7.27 billion) by way of cash support and Rs.55,692 crore ($7.42 billion) in sovereign loan guarantees.

Of Air India’s accumulated debt of Rs.61,562 crore, 94 per cent is sovereign, or guaranteed by the government. The portion of this debt that is not covered even after the Tatas’ bid and the sale of Air India’s non-core assets is approximately Rs.32,000 crore. This will be transferred to AIAHL and the government will have to service it.

The Air India sale was a case of third time lucky for the government. Two previous bids, both during the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) regimes (one in 2001 and another in 2017-18), were not fruitful. This time round, the government bent over backwards to sweeten the deal by offering management control and 100 per cent equity share capital and lowering the quantum of debt to be taken over by the bidder. The government will absorb 75 per cent of the airline’s debt.

The government is also viewing the sale as a phenomenal boost to its disinvestment drive and hopes that it will set in motion the process of privatisation of Neelachal Ispat Nigam Ltd and Central Electronics during the current quarter and the strategic sale of Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India (SCI), IDBI Bank and BEML Ltd before the end of the current fiscal, followed by the proposed initial public offer of Life Insurance Corporation of India (LIC).

In order to protect the interests of Air India’s 12,085 employees, of whom 8,084 are permanent and 4,001 are contractual, and Air India Express’ 1,434 employees, the new owners of Air India are prohibited from inflicting any redundancies during the first 12 months of operations, and even after that, employee disengagement can only be through a voluntary retirement scheme. The government has, however, agreed to foot the bill for expenses incurred on medical benefits for retired employees.

Central unions strongly criticised the government’s sale of Air India. Ten Central trade unions wrote to Prime Minister Modi demanding that the sale be stopped and that the government roll back what they said was the “policy of selling national assets”.

In a letter, they said: “By selling Air India by hook or by crook (because it is slowly emerging that it has been sold for a song), the government has tried to cover up its misdeeds.”

According to industry experts, the Tatas would need to pump in $1 billion to get the airline out of the rut it is in. The group already owns a majority holding in two smaller airlines: an 84 per cent stake in the budget carrier AirAsia India (an affiliate of a Malaysian carrier) and a 51 per cent stake in the full-service Vistara (a joint venture with Singapore Airlines Ltd). These two airlines account for only a tiny portion of the overall revenues of the Tata group, a $113 billion business empire that comprises over a hundred companies.

In October 2016, commenting on the AirAsia India joint venture, Cyrus Mistry, who succeeded Ratan Tata as chairman of the Tata group but was unceremoniously ousted, wrote a scathing letter to the directors of Tata Sons Ltd, in which he stated that his “pushback was hard but futile” since Ratan Tata had already “concluded negotiations to partner with AirAsia and wanted the proposal tabled at the forthcoming Tata Sons board meeting”.

The Tata group has always looked to play a large part in the aviation sector, including ‘coveting’ Air India. In 1994, just a few years after India had opened its doors to private airlines, the Tatas toyed with the idea of launching an airline in partnership with Singapore Airlines. But they had to abandon the proposal because the government was not willing to allow the entry of a foreign player.

When the NDA government led by Atal Bihari Vajpayee first talked of disinvestment of Air India, at the turn of the millennium, the Tatas once again indicated their desire to gain control over the airline. Their plan was stymied but the Tatas retained their abiding interest in India’s airline business.

Liabilities galore

Given Air India’s relatively ageing fleet, unionised and difficult-to-manage workforce, a plummeting on-time performance record, and operating costs that far exceed the industry average, the Tatas’ move to acquire the airline hardly looks like a pragmatic decision. Speaking to Frontline , Captain Amit Singh, an aviator with over 30 years of experience in the commercial air transport industry, including in senior management positions at IndiGo and AirAsia India, said that although the Tatas “may have been the progenitor of aviation” in India and of Air India, “the companies stand cultures apart”.

Highlighting the dichotomy in corporate culture between the two entities, a senior pilot said: “The Tatas have to take a call when it comes to absorbing some of the pilots from Air India. Both Vistara and AirAsia have a tough policy regarding pilots who fail the mandatory breath analyser test for alcohol detection, terminating pilots who fail the test for a second time. In Air India, there are some pilots who have failed it twice and, in some cases, thrice. Some have managed to retain their jobs arguing that the DGCA [Directorate General of Civil Aviation] rule pertaining to the test was not in place when they failed the test the first time.”

Amit Singh said: “Tata’s tie-up with AirAsia Berhad seems to be crumbling primarily due to the marked difference in the ideology of the two groups. While AirAsia is a high-risk, profit-driven and ruthless organisation, the Tata culture is more benevolent and is invested in its employees. Research has shown that 30 per cent of mergers fail due to work culture issues.”

Assets in favour

In its favour, Air India has some attractive assets, including lucrative landing and parking rights at London’s Heathrow airport and in New York, both of which will help Vistara attract business travellers with the promise of non-stop flights to destinations in Europe and the United States. In contrast, foreign hub carriers such as Emirates and Etihad Airways can only compete with one-stop options. Overall, the Tatas, in one stroke, will acquire control of 4,400 domestic and 1,800 international landing and parking slots at Indian airports, as well as 900 slots at airports overseas.

Air India, together with its low-cost entity, Air India Express, which primarily ferries Indian workers to and from the Persian Gulf, currently operates a 141-aircraft fleet: 49 wide-body long-haul jets, with the remaining being narrow-body aircraft for shorter flights. Before the pandemic, the two airlines operated 180-185 domestic flights every day, flying to 85 domestic and 40 international destinations. Air India is also a member of the 26-airline Star Alliance.

Four airlines in the Tata hangar—Air India, Air India Express, Vistara and Air Asia—will also mean significant scale-ups and synergies, including unequalled worldwide reach among Indian carriers and an enviably strong position to bargain with aircraft manufacturers such as Boeing and Airbus, and lessors, engine constructors, oil companies, suppliers, and airport operators. Of course, this hinges on Air India and Air India Express fitting together like a jigsaw with the existing Tata airlines.

Statistics from the DGCA showed that in August this year, Air India and Air India Express had a market share of 11.03 and 2.17 per cent, respectively, of all domestic air traffic. During the same month, Vistara and Air Asia cornered 7.56 and 6.31 per cent, respectively, of the domestic traffic pie.

With its latest acquisition, the Tata group will now enjoy 27.07 per cent domestic market share. It is still far below the market leader, IndiGo, which enjoys a humongous 53.8 per cent share of domestic air traffic.

Oligopoly fears

Interestingly, now the top two players in the domestic aviation air passenger market will together have a market share totalling over 80 per cent, a fact that the Central unions have highlighted. They said: “This sale of Air India to Tatas facilitates an oligopoly. The combined revenues of Air India, Vistara and Air Asia amounted to Rs.40,500 crore in 2020, out of the total revenues of the entire industry amounting to Rs.95,700 crore, i.e. 42.32 per cent, whereas Indigo has a market share of 37.41 per cent. By any account, this would mean that privatisation of Air India has resulted in one of the most concentrated markets in India.”

When it comes to international traffic to and from India, foreign airlines rule the roost, dwarfing Indian carriers. DGCA statistics showed that in the October-December 2019 quarter, the last quarter before the pandemic hit, Indian carriers accounted for only 39.2 per cent of all passengers flying in and out of the country. Air India (11.5 per cent) and Air India Express (7.3 per cent) accounted for 18.8 per cent of passengers, and Indigo 12.8 per cent.

The Tatas could also benefit from tax concessions while servicing the Rs.15,300-crore debt. And naturally, any tax ‘concessions’ will amount to a corresponding loss of revenue to the public exchequer. Although details of the terms of the purchase agreement have still not been spelt out, it would be safe to assume that with the revocation of the sovereign guarantee, the Tatas would be keen to renegotiate the debt with the financial institutions concerned.

Industry watchers said that three decades ago, Air India, with its lavishly decorated aircraft and ‘royal’ service that spelt panache, was one of the world’s premier airlines. But several quixotic decisions by successive governments in the past 25 years, aggravated by the advent of private carriers in the 1990s and the burst of ‘low-cost, no-frills’ airlines in the mid-2000s, coupled with mistrust between the unions and the management and falling standards in the airline, devastated the national carrier.

How Air India was destroyed

Instead of stemming the rot, successive governments worsened the situation, especially when running a full-service airline in the face of cut-throat competition from low-cost no-frills airlines in a price-sensitive market had become impossible. Several decisions by the Ministry of Civil Aviation lacked planning and foresight and flew in the face of common sense: for instance, acquiring and utilising long-haul aircraft on routes that had traditionally been making losses.

Further, the Ministry refused to undertake fleet acquisition when it was badly needed, enabling private players to capture marketshare from Air India and Indian Airlines in a rapidly expanding sector. And ironically, when aircraft were finally ordered, it was done allegedly more for extraneous reasons and less to meet the operational requirements of the two stressed airlines.

Between 2005 and 2006, in a series of inexplicable decisions that unarguably caused the greatest damage to the two state carriers, the Ministry under Praful Patel placed orders to acquire 111 aircraft at a cost of Rs.46,549 crore (68 Boeings and 43 Airbus planes), financed almost entirely through debt. The next step, which was even more baffling, came in 2007 when it decided to merge both the carriers. The move was a disaster, proving yet again that cultural and operational synergies are crucial to a merger’s success.

In 2013, amid mounting losses, Ajit Singh, the then Minister for Civil Aviation, averred that privatisation was imperative for Air India’s survival. In 2017, the government approved the sale of the airline and a committee was set up to begin the process. But the government’s dilly-dallying caused Air India to slide deeper into the red.

The two national carriers were also badly hurt by the ‘open skies’ policy aggressively pursued by successive governments and the liberalised bilateral agreements that followed, which allowed foreign carriers to go beyond the major airports and operate from the interior as well. Foreign airlines were also able to utilise the ‘Sixth Freedom of The Air’, which allows a carrier operating between two foreign locations to halt within its own country, which is usually their aviation hub, to garner passengers, especially on lucrative routes such as West Asia.

Commenting on the challenges before the Tatas, senior pilots with Air India told Frontline that it was a fallacy that one of the core strengths of the airline was its workforce, particularly the pilots.

A senior captain said: “The number of accidents, and incidents which may not have been classified as serious incidents but still warranted investigations by the regulatory authority, indicate the indiscipline and unprofessionalism that has crept in. Many pilots in Air India Express originally belong to Air India and are on deputation to Air India Express. The top management positions in Air India Express have been occupied by executives of Air India most of the time. So, while Air India Express took all the blame, Air India got away with it.”

In addition to bureaucratic interference and bungling, Air India’s management took some seemingly strange decisions.

A prime example was Air India’s inability to transfer crew to bases from where they are required to operate flights. A captain said: “The Boeing 787 flights originate from Delhi or Mumbai. But pilots on the Boeing 787 fleet who are ‘based’ at stations like Chennai, Calicut (Kozhikode), Bengaluru, Hyderabad, and Kolkata are flown to Delhi or Mumbai as ‘staff on duty’ on business class seats and provided accommodation at hotels before and after their flights, and then flown back to their respective bases. This is a sheer waste of money. Similarly, Airbus fleet pilots who are based at Trivandrum and Calicut are flown and accommodated at stations from where they are required to operate flights.”

He added: “Air India undertakes a similar exercise with cabin crew: in a bid to equalise their international flights that makes them eligible to earn U.S. dollars as outstation allowance, several of them are flown from one base to another. It will make more sense for the airline just to pay them the dollars rather than transport them from place to place and accommodate them in hotels.”

Senior pilots also mentioned the decision taken by the executive director (operations) to depute a disproportionately large number of pilots from the Airbus fleet as commanders to the Boeing 787 fleet, resulting in several 787 flights flying with a complement of two captains instead of the usual complement of one captain and a co-pilot, resulting in an unnecessary financial outflow as captains get substantially higher flying allowances than co-pilots.