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Centre must consider massive financial burden of Air India, should have plan B: CAPA India

Centre must consider massive financial burden of Air India, should have plan B: CAPA India

Leading consultancy CAPA India on Thursday also emphasised that the government should have a 'Plan B' for the national carrier in place now, which can be immediately operationalised, if required, in face of the prevailing situation

The government must consider Air India's massive financial burden, which is likely to be a potential liability of $20 billion before a business turnaround, during the disinvestment process and look at possible changes to the contours of the proposed sale, according to a report.

Leading consultancy CAPA India on Thursday also emphasised that the government should have a 'Plan B' for the national carrier in place now, which can be immediately operationalised, if required, in face of the prevailing situation. The coronavirus pandemic has significantly impacted the aviation industry worldwide, including India.

Domestic carriers are now grappling with lower demand and rising costs, amid the second COVID wave. CAPA India said that shuttering Air India would not only be extremely challenging politically but will have a notable impact on the market, especially in the international segment.

The second COVID wave has increased aviation industry challenges significantly and, as a result, may potentially increase the liabilities of Air India to around an estimated $20 billion by FY2025, it added. As the government remains committed to the privatisation of the flag carrier, showing strategic resolve to conclude the transaction as a priority, the report said the intention to exit Air India is the right strategy and must be pursued aggressively.

Taking into account estimated losses in FY2021 and FY2022, Air India's liabilities will amount to over $16 billion, the report said. Aside from the existing liabilities, the airline is likely to incur closer to $4 billion of losses during FY23-25, it added.

"Hence, the equation from an investor's perspective is a potential liability of around $20 billion before the business turns around. The government must therefore keep this massive financial burden in mind and consideration should be given to making changes to the terms and conditions," the report said.

According to the report, it would be "highly unfortunate" if the government has to continue to support the national carrier when there will be so many high priority health and social infrastructure projects post-COVID, towards which public funds would be better directed.

It also said that short-listed bidders may find it difficult to prepare a bid in the current challenging environment and therefore not certain at this stage whether the privatisation will succeed unless changes are made to the offer, CAPA India said.

"We believe that the Government of India must have a Plan B for Air India in place now, which can be immediately operationalised if required. Ideally, the transaction will go through successfully, but the government should not be left scrambling for answers at the time should that not be the case," it said.

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