Air India sale: Deal terms look 'sweet' but is govt misleading buyers?

The Ministry of Civil Aviation has released the much-awaited expression of interest (EoI) document asking for potential buyers to bid for 100 per cent stake in Air India. The document, which asks for potential buyers to submit EOIs by March 17, has relaxed a whole lot of terms as compared to the EoIs floated in 2018. A major relief is the government doesn't want to retain a stake in the national carrier after sale, unlike the previous time when it wanted to keep 24 per cent for itself for potential upside in future.

But most importantly, the latest sale offer has brought down the amount of debt to be taken over by the new buyer from Rs 33,392 crore in 2018 to Rs 23,286.5 crore, a reduction of over 30 per cent.

"At the time of closing of the proposed transaction, debt worth Rs 23,286.5 crore will remain with Air India and Air India Express, and the remaining debt of Air India and Air India Express will be allocated to AIAHL (Air India Assets Holding Limited)," says the document. AIAHL is a special purpose vehicle (SPV) created to offload some of the debt of the carrier (as well as some assets) to make it more attractive for buyers. At last count, some Rs 29,464 crore of debt has been shifted to this SPV.

Also Read: Govt to sell 100% stake in Air India; issues bid document

In the initial part of the document, the government has detailed the nature of Air India's debt, which is Rs 58,282.9 crore as on March 2019. Nearly 7.5 per cent (or Rs 4,393.3 crore) of this debt is for a finance lease, which is partly secured by the government and partly by aircraft.

In the aviation industry, there are broadly two types of leases: finance lease and operating lease. In addition, airlines also buy aircraft. Under the finance lease, which is akin to taking a car on EMI, the airline pays the aircraft debt over a period of time, and when the loan gets over the aircraft is owned by the airline. Operating lease, on the other hand, is akin to living in a rented house where you pay for the property as long as you use it. The property - or aircraft in this case - belongs to the landlord (or lessor in the case of Air India).

Also Read: Air India sale: Here are the main conditions set by Modi govt

As per the EoI document, Air India has a total of 33 aircraft -- 15 wide-bodies and 18 narrow-bodies -- on finance lease as on November 2019. But here's a catch. The document says that these 33 aircraft are no longer under finance lease as the loan against them has been fully paid, and the process to transfer the title of aircraft to AI is under process. That means that the loans highlighted against these finance leases are not valid.

The document also mentions the transfer of Rs 23,286.5 crore worth of debt to the new owner would include finance lease obligations, long-term borrowings, short-term borrowings and others. The question is that if those 33 aircraft are no longer under finance lease, what kinds of debt transfer would that be?

The sale document has already received flak from some quarters. For instance, BJP leader Subramanian Swamy has called the sale "anti-national" and threatened to drag the government to court.

With the relaxation of qualification criteria and a better deal structuring, analysts are expecting good response this time. In the last attempt, airlines like IndiGo had expressed interest in Air India's international operations but backed out later. Though the reduction of debt component and relatively easy terms could elicit likely interest from Tata Group, Adani Enterprises, Hinduja Group, and foreign carriers, the government needs to clarify on some of these aspects.

Also read: Air India sale: Debt burden on buyer to be Rs 23,286 crore