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Debt burden of nearly $3 billion that a potential bidder for Air India will have to shoulder has emerged as a key hurdle in the divestment of the loss-making national carrier, two people aware of the matter said.

They said the requirement that a potential buyer absorb 23,286.5 crore of the carrier’s total debt of 60,074 crore, has made it difficult to sell the airline in its second attempt, after the initial failure in 2018.

“At that time too, the airline’s debt pile emerged as the primary worry for bidders following which the government decided to transfer around 40,000 crore of the debt to Air India Assets Holding Ltd, a special purpose vehicle created for this," said the first person cited above.

Kapil Kaul, South Asia CEO of CAPA-Centre for Aviation said he expects the deadline for submitting bids to be extended further at least to December.

“While the government is committed to Air India’s privatization and expects a successful outcome this time in spite of very challenging circumstances, it may have to sweeten the deal and make changes based on investor feedback," Kaul said.

The deadline for submitting bids for the national carrier has already been extended several times due to the coronavirus pandemic ever since a fresh divestment process was initiated on 27 January.

The government had in January sought bids for selling its entire 100% equity in the airline, including Air India’s 100% stake in no-frill subsidiary Air India Express Ltd and 50% stake in Air India SATS Airport Services Pvt. Ltd.

Tata Sons, which controls the Tata group conglomerate, and had initially shown interest in bidding for Air India, is however unlikely to place a bid, said the second person.

“At present, it’s a very tough call for Tata group to bid for Air India. In fact, under the current scenario, it will be very difficult for any airline to bid for Air India considering how the sector has been adversely affected by the pandemic," the person, who is close to the Tata group, said on condition of anonymity.

A spokesperson for the Tata group declined to comment.

Handing over control of Air India may help the carrier, which hasn’t made a profit since the merger with Indian Airlines in 2007, to post a financial turnaround. The path may, however, not be easy considering the global aviation market has been one of the worst-affected by the pandemic and could potentially be one of the last few sectors to stage a recovery.

In India, both domestic and international flights were suspended in March following the pandemic, causing massive losses for airlines. While domestic operations have resumed after a two-month suspension from 25 May in a calibrated manner, scheduled international flights remain suspended.

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