What may seem to be a sweet deal to the Government of India does not necessarily mean it will appeal to all. In its second attempt to disinvest in Air India (AI), the government has offered to sell 100 per cent of the beleaguered national carrier’s stock. Two years ago, the government put up a large chunk of AI for sale, but was left with egg on its face when there was not even a single bid. The government claims the revised and sweetened new disinvestment proposal will attract several companies. Unfortunately, the situation is so bleak that private companies, daunted by the airline’s massive liabilities among several other factors, are restrained in their reaction.
Undoubtedly, AI has to be saved. However, information on the company provided in the Preliminary Information Memorandum (PIM) shows that the airline is not as complete a write-off as it is being made out to be. In fact, it is a significant asset that is worth far more than what bidders will probably pay. If the massive Rs.23,286.50 crore debt liability can be absorbed, whoever wins the bid will gain a company of great value at what might be a throwaway price.
The buzz is that the Tata Group and Singapore Airlines are reportedly making a joint bid for the airline. The Tatas, who are the original owners of Air India, had reportedly shown an interest during the first round itself. There is some conjecture that the Hinduja Group is also in the race. The Hindujas were keen on taking over the now-shut-down Jet Airways, but reportedly held themselves back as they wanted to pursue the potentially more lucrative AI.
Under Indian regulatory laws, foreign direct investment (FDI) in domestic air transport services by international carriers can only be up to 49 per cent, which therefore rules out international airlines from placing bids. Recent news reports show that the government is looking into revising this rule in order to attract foreign investors, another indication that it is hell-bent on getting rid of the airline.
Air India is certainly valuable. According to the PIM, the combined airline (AI and AI Express) is the leader in the international travel market in India, with an overall market share of 18.4 per cent among foreign and Indian carriers and a 50.64 per cent share among Indian international carriers as per data for the second quarter of the financial year 2019-20. Additionally, at 12.7 per cent, the combined airline has the third highest share in the domestic market. Its two constituents would come with an extensive network that connects 45 international destinations and 57 domestic destinations along 450 routes. Air India also offers 75 additional destinations through its second network of code share operations.
The airline’s combined fleet, its most obvious asset, totals 146 aircraft and comprises several wide-bodied and long-haul planes. It owns close to 56 per cent of its total fleet, which is high in comparison with other Indian carriers. A new Boeing 737 costs upwards of $300 million, so AI’s aircraft, even if they are a few years old, would be worth a sizeable amount, says a company source. After AI’s purchase of 111 aircraft in 2005-06, the airline has the youngest fleet among Indian airlines, he says. The fact that AI owns more than 50 per cent of its aircraft and is not dependent on leases is a huge attraction for an interested company.
The AI brand is globally established. It has coveted routes and slots across the world, several in some of the busiest airports such as London and New York, which are almost impossible to get if you are a new carrier.
The airline also has a huge repository of bilateral rights, another coveted requirement for airlines. Although AI is struggling with mounting losses, the smaller AI Express, which provides regional international services, has been a profitable business. It reported a profit of Rs.164 crore in 2019. A civil aviation source says AI’s ground handling and engineering division is highly profitable. AI also has real estate scattered across the globe that is worth millions. The so-called beleaguered airline appears much more valuable than what the government is making it out to be.
The new deal
Air India in its entirety went up for sale on January 27, 2020. The government issued a preliminary bid document for strategic disinvestment of the airline, with the deadline for submitting expression of interest set as March 17, 2020. The bid document, announced by the Civil Aviation Ministry, said AI would also sell 100 per cent stake in AI Express and the 50 per cent shareholding in its joint venture with AISATS (an airport services company). The new deal offers full management control, reduced debt, a leaner organisation and flexibility to form a consortium. The only rider is that the name, Air India, cannot be changed.
The sweet part of the deal is that the government would absorb approximately 30 per cent of the estimated Rs.58,000 crore debt and liabilities. While the new owner would be straddled with a lower debt of Rs.23,286.50 crore, and these would be backed by assets, the government would take care of Rs.22,000 crore of the current liabilities. Disinvestment Secretary Tuhin Pandey told the media that no liabilities in excess of the assets would be passed on to the new owner. He said this was how most mergers and acquisitions were done, and hence the government would follow the right process.
Air India’s biggest resource, which some term a liability, is its workforce. Allegedly, the huge employee strength of the airline has been a deterrent. The sale bid is categorical about the new owner retaining employees, said Ashwini Lohani, former Chairman and Managing Director of Air India. Lohani said AI was not as bloated as media reports make it out to be. AI has 133 employees per aircraft. The profitable Singapore Airlines has 136 employees per aircraft.
A retired pilot told Frontline : “AI has among the most experienced and finest flying crew and ground staff. Our engineers are highly trained and would be the best among all airlines. The problem is not with the number of employees; those are misleading reports being fed to the media. The problem is the company has been mismanaged and been a victim of corruption. If they are willing to write off the debt then why sell it?”
Difference in offers
A substantial part of the deal offered in 2018 has been changed to make it easier to buy the airline. The following are the key features that have been worked on: from selling 76 per cent stake, the entire 100 per cent stake is up for sale now; the net worth of the owner has reduced from Rs.5,000 crore to Rs.3,500 crore; the lock-in period has been reduced to one year from three years; mergers with existing businesses, which were not allowed in the earlier offer, are now permitted; the old offer meant the owner took on debt and liabilities in excess of the total assets while the new one says it will be equivalent to the total assets. The cherry on top is that the new owner can sell AI after one year. With regard to the sensitive issue of workforce, the new offer ensures minimal retrenchment.
An aviation analyst says the challenges with the new offer are several. The government may believe that this is the way ahead, but there is a harsh and real debt issue to contend with. The substantial debt will need significant equity infusion and working capital. Whether bidders can lock up capital before the airline can turn into profitability is not clear.
Severe competition from low-cost carriers (LCCs), which dominate the domestic market, along with price wars on several international routes will be a hurdle. Moreover, LCCs have made significant inroads into some routes and there are code shares/alliances between carriers. So this would tend to be a sticky preference for frequent flyers with loyalty benefits. A high domestic cost structure, particularly on fuel, leasing costs and maintenance and MRO (maintenance, repair and overhaul) that is subject to foreign exchange risk, is another negative. The uncertainty on the applicability of route dispersal guidelines and regional connectivity and major employee obligations and related liabilities are some of the problems a new owner will take on.
A debt manager with a private bank in Mumbai says while the huge debt is certainly daunting for bidders, there are other issues at play. He says unless problems such as employee strength or the perks and benefits given to retired employees are streamlined, it is going to be hard for a new owner to work towards operational profitability. He says: “Moreover, we also need to understand whether the new owner will get complete autonomy. Given how governments have used the carrier, will they give up this control? The government may say it is a complete sale, but knowing them, it could turn the screws on the company that buys AI in other ways if it does not comply with the government’s demands. These are major concerns. Yet AI is still a huge brand with coveted routes and parking slots. There will be interested companies. If only they can get past the other mess. Furthermore, is there another solution? The government has clearly shown it is incapable of operating a national carrier.”
When the airline came up for sale in 2017, investment bankers were of the view that the company should be carved up and sold as there were a few profitable sections such AI Express and the engineering division. To take over the company in its entirety is obviously more daunting.
Flying high
According to sector reports compiled from data provided by the Directorate General of Civil Aviation (DGCA) and the Airports Authority of India, India is currently considered the third largest domestic civil aviation market in the world. The country’s domestic passenger traffic stands at 160.16 million and international passenger at 39.43 million. The airline industry is expected to cater to 520 million passengers by 2037.
Additionally, under the Ude Desh ka Aam Naagrik (UDAN) Round 5, the Regional Connectivity Scheme is being promoted heavily. The UDAN project is an attempt at making air travel affordable to the common man. The plan includes connecting smaller cities to each other and revamping unused airports or building new ones. The Kannur airport, opened in 2018, in Kerala comes under this scheme. It became the fourth international airport in the State. Obviously, the government is working towards raising air traffic, but it needs operators, says the aviation analyst. Airlines such as Spicejet and Indigo are aware of the future scenario and will therefore look at AI as a way forward.
He says Indigo commands 47.5 per cent of the current domestic market. If it is interested in AI and ends up buying it, it will become the leader of the airline industry. Spicejet, on the other hand, has a market share of just 13.6 per cent and may purchase it if it is looking at expanding. GoAir will probably not be a contender. FDI regulations prevent international operators, but once they are amended, then it will be a free-for-all. “India, provides massive numbers and that’s what all operators want—to fill up their planes.”
The industry projects that the expenditure of Indian travellers is expected to grow to Rs.9.5 lakh crore (US$ 136 billion) by 2021. Because of the rising demand for air travel, India will need 2,380 new commercial airplanes by 2038. “All the better if it is coming cheap. This demand is what is making international companies look at the AI sale,” says the analyst.
Air India’s nosedive coincided with the opening up of India’s domestic air space, which was a part of the economic reforms of the 1990s. The story is well documented, but needs to be repeated from time to time in order to understand how severe mismanagement and corruption led to the decline of a pioneer in the industry.
In 2017, when the first rumbles of the sale began, Frontline did an in-depth story on the issue. The story said that the first attempt at privatisation was initiated by the Atal Bihari Vajpayee-led National Democratic Alliance in the late 1990s.
The proposal to privatise set back several key expansion decisions as it would not make sense for the government to invest in the expansions when it had decided to sell the company. The plan failed and AI, which was ahead of the curve, began a steady decline because of the lack of interest in expansion.
The government repeatedly stalled the national airline’s attempts to expand its fleet from the 1990s and this suddenly pushed the airline into buying 111 aircraft at a cost of Rs.46,549 crore in late 2005 and 2006. Air India by this time had already lost a significant market share to private domestic players. This unusually large purchase of aircraft was financially crippling to the company and eventually became the reason for its downfall. Soon after the bulk purchase was made, the government decided to merge the domestic carrier, Indian Airlines, with Air India. A fatal call that hastened the deterioration.
As the country’s national carrier, AI has played a heroic role in evacuating Indians from countries on the brink of war, for example airlifting thousands of Indians stranded in Kuwait during the Iraq war in 1990, or bringing back Indians from places affected by epidemic outbreaks such as SARS in 2003 and the more recent coronavirus (in Wuhan, China). It would be interesting to see if a private carrier will have the sense of responsibility to carry out such operations.
