Not long ago, talk of privatizing Air India Ltd seemed like a pipe dream. After all, with a debt burden of around Rs50,000 crore, bidding interest for the company was expected to be next to nothing. Jet Airways (India) Ltd, a somewhat comparable airline, has an enterprise value of only around Rs17,000 crore.

But the government seems to be making all the right moves, or at least the right sounds, to ensure the sale happens. News reports suggest it will split the airline into four parts and then sell at least 51% in each of them. The four divisions are Air India and Air India Express, regional airline operations, ground handling operations and engineering operations.

“This makes sense as it will maximize the valuation for each business segment. Selling them as one entity would tend to result in a conglomerate discount as the buyer may not attribute as much value to certain business segments," says Corrine Png, chief executive of Crucial Perspective Pte. Ltd, an Asian transport equity research firm.

InterGlobe Aviation Ltd (that runs IndiGo), a potential bidder, has already stated it is only interested in Air India’s international operations.

“The ground handling and engineering operations are less cyclical in nature compared to the airline business and could draw investment interest from companies that operate in those segments and are not interested in acquiring the airline business" says Png, a former analyst at JPMorgan.

The government has also relaxed ownership rules and allowed foreign ownership of up to 49% in Air India.

As Kapil Kaul, CEO (South Asia) at Capa Centre for Aviation, says, “No major Indian corporation from outside of aviation will invest in such a complex project without an experienced strategic partner." As such, the new ownership norms will increase demand considerably.

While all of this is good, the elephant in the room is the company’s mammoth debt. While news reports have suggested the government is looking at hiving off a large part of the debt, it’s still a secret how much debt will remain on Air India’s books when it’s sold.

How much of the company’s debt should be ideally hived off before the asset is put for sale?

“The Asian airline sector’s net debt-equity level is 100% on average. Cleaning up Air India’s legacy debt and deleveraging to a gearing level below 100% in terms of net debt-equity would make Air India more attractive to investors," says Png.

Capa Centre for Aviation’s Kaul says the working capital debt has to be taken off Air India’s balance sheet. As on 31 March 2017, working capital loans were about Rs30,000 crore, or around two-thirds of its total debt.

Considering that the government has come thus far and has been flexible with ownership rules, it can be expected to keep out a majority of the company’s debt in a special purpose vehicle.

A moot point is if the government will retain a minority stake to retain some of the upside that comes from privatisation. Else, there may well be charges of privatising profits and socializing losses, especially if the majority of the debt is rolled over to the government or written off by banks controlled by it.

But at the same time, retaining a stake may put off some investors. “Any level of equity retention will deter investors due to concerns about the prospect of continued government interference post-privatization," says Kaul.

Walking this thin line is one among many challenges the government will face while going ahead with the arduous task of selling the troubled airline.