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Business News/ Opinion / Air India: a case for privatization
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Air India: a case for privatization

The government must exit the airline business and use public money wisely

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Air India has perhaps six months before it is engulfed in the next round of competition, as global airlines such as Etihad Airways, Singapore Airlines and AirAsia are preparing to raise their game in India once the requisite regulatory clearances are in the bag.

It is against this backdrop that certain developments are worth noting. The public sector airline has closed two significant deals this week. It has signed off on an agreement to sell five Boeing 777-200 long range aircraft to Etihad for an estimated $300 million. It will also be negotiating with banks for a loan of around Rs2,000 crore because the government is currently in no position to put in more money as equity, so the fresh borrowing will lead to further leverage of a weak balance sheet even while providing cash for settling some of the dues to public sector oil companies.

It is no secret that Air India has been in deep trouble. However, in an interview with Bloomberg TV that was published in this newspaper on Tuesday, civil aviation minister Ajit Singh said that the airline will likely report an operating profit of around Rs1,000 crore in the current fiscal, as compared with a very modest operating profit of Rs18 crore in fiscal 2013 and a massive operating loss of Rs2,300 crore in fiscal 2012. He believes that these are the first signs that Air India is on the way to recovery.

That would be undoubtedly welcome, but the more important question is: what next? The improvement in financial performance should not be used as a further cue by the government to keep underwriting the tired behemoth. It should instead be used to privatize Air India.

There are two reasons for privatization. The first is a practical one. The government has promised to provide $6.5 billion to Air India till 2021, but this was agreed much before the government was delivered a sharp rebuke by the financial markets and credit rating agencies about the state of its own finances. Finance minister P. Chidambaram has committed himself to maintaining the fiscal deficit at its budgeted level, and so it is no surprise that Air India has got no funds from its owner this year. The only extra spending that this government will likely sanction in an election year is the sort that wins a few extra votes. It is hard to see how financial support for an airline fits into this category.

The second reason why Air India should be privatized is more ideological. A government that cannot run a decent public health system should not be running an airline. There is enough private capital eager to do the job. Take the Rs30,000 crore that the government says it will spend in the coming years to support Air India. There are far better ways to use public money.

Ajit Singh put the case for privatization succinctly in his Bloomberg TV interview, though he also suggested that it was a decision best left to the next government. “This government has six months only. When I say it (Air India) should be privatized then that is something the next government will have to face... In my view the government should not be in the service sector; especially not something like airlines where the competition is fierce, margins are very thin and the decisions have to be taken very quickly," he argued.

There is little to disagree with his analysis. The reason an incipient turnaround in Air India should be welcomed is that it will help the Indian government—either this one or the next—privatize the company. There have been too many false dawns to take the current turnaround claims at face value, but a combination of further corporate actions such as selling real estate or hiving off the engineering division as well as better operating performance after the induction of Dreamliners into the fleet could help Air India become a more attractive purchase for potential acquirers.

Air India has a small window of opportunity before the likes of Etihad Airways, Singapore Airlines and AirAsia go all out to attract Indian flyers. The airline should get its act together quickly so that it can be sold by the next government.

It is good that an aviation minister is finally speaking the hard truth: the government has no business to be in the airline business.

Should Air India be privatized? Tell us at views@livemint.com

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Published: 16 Oct 2013, 06:12 PM IST
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