Air India share sale: The Maharajah’s last sigh
The sale of Air India was supposed to help the Modi administration burnish its reform credentials, but colossal debt, a bloated workforce and fears of continued govt interference made buyers wary when it was put on the block
New Delhi: In the two months since the government formally put up Air India Ltd for sale, it received more than 160 queries. A fairly large number, considering that the national carrier has completed a decade of losses and has been a drain on government finances.
In the end, all those queries and initial interest turned out to be just curiosity. The last minute flurry of bids that the Narendra Modi government was hoping for remained as elusive as Air India’s profits.
“We were looking forward for better participation,” civil aviation secretary R.N. Choubey said after the deadline for submission of bids ended at 5pm on 31 May, with not a single buyer in sight.
That nobody offered to buy the national carrier with a legacy of over eight decades dating back to the pre-independence era, pointed to the risks associated with buying a money-losing firm that needed thousands of crores of rupees in capital investment to turn around, with the added risk of the government retaining a large stake even after the control of the company has changed hands.
Outside the government, few, if any, expected companies to show much enthusiasm after studying the bid documents, detailing the onerous requirements, including a clause that the government will retain a 24% stake in the airline.
The poor response that the majority stake sale invitation got last month has an immediate and significant impact on the company and the exchequer. Failure to privatize the debt-ridden behemoth means further taxpayer funds going into the airline. The Modi administration cannot be seen funneling scarce resources into a venture with Rs.48,781 crore debt that could be better utilized on welfare schemes in its last year in office before the country goes to polls towards the middle of next year. Industry observers say it is vital for the airline to be privatized to avoid further burden on the exchequer.
“Obviously, privatization is the only way to turn around Air India,” said Dhiraj Mathur, leader of defence and aerospace practice at PwC India.
Aviation consulting firm Capa India said in an analysis on 4 June that Air India is expected to lose a total of $1.5-2 billion over the next two financial years, FY19 and FY20. “These losses will need to be funded by Indian taxpayers. And this is in addition to the $4 billion of public funds that have been used to subsidize the airline since 2012,” Capa India said.
Disinvestment is a key part of the government’s overall approach to public sector enterprises, which involves leveraging the healthy ones to achieve strategic economic goals like job creation and infrastructure building and letting those needing capital for expansion to tap the capital market. Privatization, the last resort for the unviable ones, is a sensitive issue that could trigger labour unrest and become a politically thorny issue. Policymakers are clear that globally, airlines have done better once the state handed them over to private owners.
The government faces a serious dilemma in privatizing the national carrier. It is aware that the majority stake sale in the firm may not fetch much, considering the huge debt burden and the need for the successful bidder to invest heavily to turn around the company.
It also cannot be seen as giving away the iconic firm for a song, considering the political implications. Diverse considerations led to the offer failing to measure up to investor interest at a time fuel price has soared.
While the consideration that the government may get from a 76% stake sale in Air India may be small, the total investments needed by the investor to turn around the firm and settle liabilities will be huge.
The proposal was to let Air India and Air India Express Ltd, its low-cost international arm, retain debt and net current liabilities of Rs.33,392 crore at the time of sale.
Minister of state for civil aviation Jayant Sinha said in an interview in April that out of this, interest-bearing debt will only be of Rs.24,576 crore. In order to benefit from the future growth of the firm under a new private owner, the government chose to hold a 24% equity after divesting 76% to the private investor. This, apparently, has not gone down well with investors, who would prefer a free hand in operations after the transaction without political interference.
Former finance minister P. Chidambaram on Monday, 11 June, said it was not clear to him what the government intends to do with Air India. “It is neither privatization, nor an arrangement to run it as a joint venture… You must have a clear policy objective,” he told reporters in the capital.
To be sure, the government is re-examining the privatization process, including the clause to retain a minority stake in Air India.
Prospects of a sale
Secretary Choubey has said the government now has a better understanding of the market, and that the ministry will take all options before a ministerial panel for taking a call on the future course of action. That includes inviting new bids under revised terms. The failed first attempt gives a credible political reason to relax the terms. While industry watchers are skeptical about whether the government will go ahead with the sale in the final months of its fifth year in office, government officials are in no doubt about that prospect. “The government has no reason to abandon the commitment to privatize loss-making firms,” said a finance ministry official, who asked not to be named. Even if the government goes ahead, it remains to be seen whether potential investors would take the plunge or wait till the next government assumes office.
Mathur of PwC India said an investor who takes the burden of a firm laden with Rs.33,000 crore debt and having about 27,000 employees and pays the government for the equity, should have a free hand in deciding how to turn around the firm. That becomes difficult when the government retains a 24% stake and has a nominee on the board of directors under new ownership.
The concern arises from the fact that government-owned firms historically served many of the economic, strategic and political objectives of the government of the day. Investors have already told the government that the level of debt to be retained with Air India and Air India Express is not in line with the airlines’ potential future earnings.
“For privatization to succeed, government has to rework the sale terms,” said Kinjal Shah, vice-president of corporate ratings at ratings company Icra Ltd. A private owner will need a free hand in cutting cost, have deep pockets to absorb losses till the company turns around and would do well to avoid labour-related issues. Also, a successful bidder, if already owns an airline, would like to explore synergies by merging the two businesses. The original proposal for sale expected the winning bidder to retain the Air India brand at least for three years before any amalgamation.
For any fresh offer of sale to attract interest, investors would also like the government to outline finer details of the sale terms upfront, including employee protection, rather than leaving them to be disclosed at a later stage in the request for proposal (RFP).
Where Air India faltered
The iconic airline, founded in 1932 by industrialist and aviator J.R.D. Tata, has gone through the vagaries of several economic cycles. Economic liberalization of the 1990s and the subsequent open sky policy ushered in a new breed of agile rivals to Air India and to Indian Airlines, another state-owned carrier that operated mostly in the domestic market which was merged with Air India in 2007.
Allowing private Indian carriers to fly on global routes from 2004-05 onwards, too, put pressure on international operations of both the state carriers before their merger. After Indian Airlines and Air India undertook massive fleet acquisitions of Airbus and Boeing aircraft, respectively, in 2005, the two airlines were merged in 2007 to form the National Aviation Co. of India Ltd (NACIL), renamed as Air India in 2010.
The Comptroller and Auditor General of India (CAG) said in a 2011 performance audit report that almost immediately after the merger, the merged entity faced significant financial problems, mainly owing to debt arising from a massive fleet expansion, which continued to multiply manifold, resulting in acute cash flow and working capital problems. This forced Air India to seek state bailout. Since 2012, the company is on a taxpayer bailout package and has received over Rs.26,500 crore till 2017 out of a planned equity infusion of over Rs.30,000 crore up to 2021. Under state support, the national carrier is struggling to compete in a market that is now projected to be the third largest in the world by 2025 after the US and China, overtaking the UK.
The rigid bureaucratic frame which undermines the timely decision-making needed in a highly competitive industry, too, contributed to the airline’s decline. “A total hands-off approach with regard to the management of the airline is required,” the CAG report had told the government. The auditor also had warned that piecemeal infusion of small amounts is merely going to at best delay the certain closure of the airline.
Where AI stands today
Air India now has an around 12.3% share of the Indian domestic market, down from about 30% in 2002. Air India and its low-cost international carrier, Air India Express, have around 42.8% share of the international traffic to and from India among Indian carriers and about 16.9% share when global airlines are also taken into account. The carrier is set to face serious erosion in market share, with private players going for a massive expansion in capacity. With private carriers scheduled to take deliveries of about 120 aircraft in the current fiscal, Air India’s market share could further deplete.
Interglobe Aviation Ltd, which runs IndiGo, the country’s largest carrier with about 40% market share, for example, is planning a 25% increase in capacity in FY19, Willy Boulter, chief strategy officer-commercial, said in an interview. Other airlines are also planning capacity expansion as the government is pursuing airport capacity expansion and improved regional connectivity to scale up air traffic to one billion passengers a year in 15-20 years, nearly four times the 265 million recorded in 2016-17. According to industry estimates, GoAir will add 17 aircraft in FY19, SpiceJet 16, Jet Airways 7-to-8 and Air Asia 6-to-7 in FY19.
Has bailout helped?
Air India’s losses before one-time items have been steadily declining in the four years to 2016-17. Company documents show that losses before extraordinary items declined from Rs.6,939.4 crore in 2013-14 to Rs.3,619.7 crore in FY17. Net loss in FY17 was, however, higher at Rs.5,765 crore on account of writing off over Rs.847 crore of ‘served from India scheme’ scrips as invalid and Rs.1,298 crore provision to implement the basic pay revision recommended by the Justice Dharamadhikari Committee.
Air India chairman and managing director Pradeep Singh Kharola said in the annual report for FY17 that the airline’s passenger revenue increased marginally from Rs.15,656.2 crore in FY16 to Rs.15,997.8 crore in 2016-17. Messages and calls to Kharola remained unanswered at the time of publishing.
Civil aviation ministry officials said the setback to the privatization effort will not affect the Maharaja’s future growth plans till a new worthy home is found
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