Air India: On a wing and a prayer as it prepares for a Tata take-off
Unlike Lufthansa, it wasn’t restructured pre-privatisation and Tata will rely heavily on TCS cash flows to turn it around
t’s finally done! And it’s a privatization—not a back-door divestment of the kind seen in the last many years. The Narendra Modi government, despite its many policy failures, must be complimented for untying many historical Gordian knots in India’s economy: Power, coal, telecommunications, and now Air India.
A closer analysis is necessary, though, before we celebrate a ‘successful’ divestment. The ultimate success of any major policy rests primarily on gauging its policy intent. In my view, the government’s decision was driven not by its right-wing ideology, nor by classical economic theories of principal-agency costs, but by the hard reality of fiscal imbalances and the innately uncompetitive business model of Air India in a highly competitive global airline industry. I argued in Business World recently that the drivers for it were broadly similar to Germany’s highly contentious, decade-long privatization of Lufthansa in 1995, which was precipitated by a budgetary crisis after West Germany’s 1990 unification with East Germany—but that is where the similarity ends.
Why was there no major bidder in the fray apart from the Tata Group ? Could the government have got a better valuation for the national carrier? Was it part of a carefully thought-out privatization plan ? Or did it merely want to get it off its books somehow? Is this a one-off privatization or an enduring policy statement on public sector accountability and India’s turn to redefine the boundaries of state intervention in the economy ? What did the taxpayer gain by successive governments delaying the divestment for two decades ? Will Air India regain its pride of place as our national carrier ?
Several questions linger for which there is only one answer: The fundamental approach taken by India’s government is radically different from what was followed by Germany and which proved to be hugely value accretive for Lufthansa and the German government’s residual holding post- divestment. Lufthansa’s privatization took 10 years because, like us, Germany too had a fiercely nationalistic sense of public-sector asset ownership. But once it was clear to its then chancellor Helmut Kohl that the 1978 deregulation of the US airline industry, and the advent of Thatcherism in dismantling the UK’s public sector in the early 80s, had started a chain of irreversible events that necessitated a complete re-engineering of Lufthansa’s business model, he took a decision to ensure the national carrier regained its international competitiveness before its privatization, so as to garner higher valuations during the divestment process—but, more importantly, for its very survival amid global competition after privatization. In other words, handing over a basket case to its potential investors was not the objective.
This policy directive ensured that Lufthansa’s management executed a thoughtfully prepared three-tier plan of rationalization, privatization and reorganization, in that order. The most difficult decisions of rationalization—workforce reduction, wage cuts, route consolidation, revenue maximization, international alliances—were taken pre-privatization to enhance global investor interest and obtain a high sale price. This necessitated a reorganization of the business to allow for Lufthansa’s sustained viability without any dependence on state subsidies. Today, therefore, the airline remains an enduring symbol of German pride.
The Tatas do not have the benefit of any such judicious pre-sale intervention, but then this is arguably reflected in a commensurately lower transaction price. The challenge accepted by the Group, therefore, is onerous. The very fact that it was the sole serious bidder (the other bid being in the personal capacity of an entrepreneur) is a telling comment indeed.
One encouraging fact is that the Tata Group is perhaps the best possible home for Air India in these circumstances. It has management depth, political clout and financial stature to garner the resources necessary for a wide-ranging restructuring exercise. It can marshal government help to renegotiate profitable international routes, bilateral arrangements for entry, fares, traffic, capacity, etc. It can work with unions to significantly scale down the carrier’s work force and revise compensation structures and productivity norms. And it can leverage its global reach to stitch up international alliances to build on Air India’s enviable aero-political network and valuable airport landing rights. Thanks to TCS, it will have access to steady cash flows of ₹40,000 crore annually (and counting) to leverage for many years, though it still has multiple cash-guzzling businesses in the Group, including its two airline joint ventures. On the crucial issue of work force reduction, pay cuts, etc, it is perhaps the only group in India which can innovatively structure compensatory mechanisms based on the principles of Volkskapitalismus (people’s capitalism), wherein shares could be offered at discounted values from its large, diverse and valuable stock pool.
We must not forget that Tata is a debt-laden group with huge capital requirements to cater to emerging dislocations in its automobile and power businesses, both of which have massive debts and negligible profitability. It is the same for many of its other group companies, though there has been a marginal improvement in the last five years. Also, given the challenging environment, the international airline industry has hardly ever made money sustainably, and even marquee names like Singapore Airlines have had a profitability ratio of under 5% pre-covid. In any well- governed group, this is ultimately bound to create conflicts over capital- allocation.
I hope and pray that Air India has not moved from one poor capital-allocator to another—as then nothing much will fundamentally change for its long-term sustainability. Regaining its pride of place as an internationally-competitive commercial airline would be the true success marker of this airline’s privatization—just like it was for Lufthansa three decades ago.
Prabal Basu Roy is a Sloan Fellow of the London Business School, non executive director, and an advisor to chairmen, of corporate boards
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First Published:12 Oct 2021, 05:40 AM IST
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