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Maharaja on Sale: Why would anyone buy debt-ridden Air India?

Selling a loss-making, debt-ridden carrier like Air India is no easy task, but the government hopes to be third time lucky.
twitter-logo Manu Kaushik   New Delhi     Print Edition: July 2, 2017
Maharaja on Sale: Why would anyone buy debt-ridden Air India?
Illustration by Ajay Thakuri

Will the beleaguered state-run Air India soon get a new lifeline? In a recent interview, Finance Minister Arun Jaitley said that the disinvestment of the loss-making national carrier is on the cards. According to him, private carriers, which already have 86-87 per cent market share, could also handle 100 per cent flying. On the other hand, while Air India's market share is just around 14 per cent, its debt burden has piled up to reach Rs 50,000 crore. Of the total debt, Rs 20,000-25,000 crore is related to aircraft valuation. As for settling the remaining amount, Air India has some lucrative assets, the Minister noted.

Following Jaitley's comments, the National Institution for Transforming India (NITI) Aayog, the government think tank, also rooted for its disinvestment. But a few days later, Civil Aviation Minister P. Ashok Gajapathi Raju admitted that finding a scapegoat - in the form of a strategic investor - might not be easy. Even as the government machinery is pulling out all the stops to find a suitor, the sell-off could be tricky.

Who May Buy Air India and Why

As the airline is wholly owned by the Indian government, any investor - corporate or institutional - could only be interested in buying at least 51 per cent stake to thwart the chances of the government's interference in the future. Given that the carrier works like a private air charter service for ministers and several bureaucrats, to say nothing of the management apathy, no investor would ever want the old order to interfere with the airline's future course.

 

The likely buyer could be a foreign airline interested in the Indian aviation market or an Indian carrier looking for inorganic growth. The third possibility, a distant one, is some deep-pocketed corporate planning to venture into aviation. The biggest pull factor for any investor is going to be the prized assets that the carrier owns, including the marquee assets such as the Air India Building at Nariman Point in Mumbai, another building at the old airport in Kalina, also in Mumbai, and a plot in Delhi's Connaught Place. For the financial year ending March 31, 2015, its fixed assets stood at Rs 37,375 crore.

The last time a foreign airline showed interest in Indian aviation was in March this year when Qatar Airways said it had plans to start a fully owned airline in the country. However, Qatar is now passing through an economic and diplomatic crisis as several Arab countries have severed ties with it for its alleged involvement in terror funding. So, ruling out Qatar Airways from this list is a no-brainer.

That an Indian carrier would take over Air India does not seem plausible either, and the reasons are many. First, the carrier's legacy issues and operational baggage make it unattractive. For instance, look at the employee cost. At the end of 2015/16, Air India had 12,880 employees with an expenditure of Rs2,345.5 crore, which means a cost of Rs 18 lakh per employee, per annum. Compare that with Jet Airways' Rs13.8 lakh and IndiGo's Rs14.4 lakh, and it is clear that Air India is paying way too much.

Then there is a whole bunch of labour unions, including the Air India Employees Union, Air Corporation Employees Union, Indian Pilots' Guild and Indian Commercial Pilots' Association who put employees' interests above the airline's performance. Any new owner will find it daunting to deal with unions or meddle with the existing employee cost structure. In fact, the merger of Air India with Indian Airlines in 2007 and the subsequent brawl between the employee unions and the management had paved the path for the current mess.

It is also ironic that in spite of engaging the best industry talent, the airline is consistently losing market share at a time when passenger traffic is growing at around 20 per cent. The company's market share has slipped from 20.4 per cent in March 2014 to 12.9 per cent in April 2017.

In India, the most profitable airlines are low-cost carriers such as IndiGo, SpiceJet and GoAir. These airlines have learnt the LCC model well and stuck to it despite strong temptations to get into the full-service space. In contrast, Air India has a mix of everything - full-service, low-cost and regional operations as well as maintenance, repair and overhaul (MRO). The complexity of running such a huge organisation could be well beyond the Indian carriers.

Despite all odds, the government is hoping to find a buyer. Meanwhile, the airline sits on a debt pile of Rs46,570 crore (as on September 30, 2016) and has accumulated losses of Rs47,440 crore between 2007/08 and 2015/16. Understandably, that is going to be the biggest deterrent for anyone. Without reducing its debt - either through banks taking a haircut or the government taking a hit - prospective buyers are unlikely to show up.

However, the government has already spent a fortune to revive Air India. In 2011, it had approved a Rs30,231 crore turnaround plan (TAP) to pull the airline out of mounting losses and debt burden. So far, a total of Rs24,745.21 crore has been spent out of that kitty.

Is Disinvestment the Best Way Forward?

It is the third serious attempt by the Indian government to sell off Air India. In 1999, when Jaitley was the Disinvestment Minister in the Atal Bihari Vajpayee government, he came up with a similar proposal, but it did not materialise. In fact, the repeated efforts by several governments to revive the airline had never yielded favourable results. That the airline could post operational profits of Rs 105 crore in 2015/16 was considered its biggest achievement during the past decade. But the euphoria did not last long. The luxury of letting the government run the show at Air India - and burn taxpayers' money - is, indeed, over. It is now time to choose short-term pain for long-term gains.

@manukaushik

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