The government may scare off potential buyers of Air India

The Air India sale process is not going too well, by all indications. Yesterday (May 1, 2018), the government extended the deadline for submitting the expression of interest (EOI) for Air India, while easing a few conditions, and also clarifying a number of questions raised. However, the basic terms of the sale offer has not changed - the government wants the bidder (a single company or consortium) to pick up 76 per cent of the stake in Air India, including 100 per cent of Air India Express, and 50 per cent of AISATS, the ground handling subsidiary of AI. The buyer will still need to take on about Rs 33,392 crore of debt, and retain the staff of the airline for a year, after which it can design a suitable VRS for excess staff.

At least two prominent Indian carriers - Indigo and Jet Airways - have already backed off and said they will not be interested in taking over Air India, at least under the current terms and conditions.

Meanwhile, the government is facing resistance to the sale both from within and as well as from the opposition parties. There aren't too many issues in which the RSS, the TMC and some prominent INC leaders find themselves arguing on the same side, but this seems to be one. As Business Today magazine has reported, Swadeshi Jagran Manch, an affiliate of the RSS, has already expressed its displeasure with the AI sale, and said the airline should remain in Indian hands, and no foreign party should be allowed to take control. TMC lawmakers have opposed the sale in any form, and have demonstrated against it in front of the Parliament. The CPI-M and several Congress leaders have also made disapproving noises about the government selling of the national airline.

It is obvious the government will have to bite the political bullet if it wants to sell Air India. But the bigger hurdle in the sale process is not political - it stems from a lack of clarity in setting the objectives it wishes to achieve through the sale.

If the main reason for selling Air India is to stop the amount of tax payer money that is spent on the loss making and stupendously overleveraged and inefficient carrier, it requires one set of thinking. The objective, on the other hand, is to just hand over management control, while staying a minority shareholder which will reap the benefits when Air India is turned around and listed, it will require a different approach. But in neither of those approaches does the current method and terms and conditions of sale make any sense.

If the government simply wants to stop financing a loss making Air India year after year, it should take on the accumulated debt, break up the different operations (international, main domestic, Air India Express, the maintenance subsidiary) and try for bidders for each one of them. It can use the money it gets from the sale proceeds to repay some of the accumulated debt.

If its main purpose is to change management control, while still enjoying the residual benefits of minority ownership and capital gain when it is finally listed by the new management, it will still need to make Air India attractive for the buyer by allowing buyers to bid for only the portions they would want.

Even then, it might need to break up Air India into three separate offerings - the airlines (domestic and international), the maintenance operations, and Air India Express and sell them to different bidders with a clear condition on how quickly it expects them to list each portion. Either way, it should not put in terms and conditions like guaranteeing a job for all employees for at least a year while offering it for sale.

The airline business is cut throat, and it requires lean staff which is motivated. Air India suffers from an excess of staff who are also overpaid, union troubles and a big pension bill. For any buyers, these would be problems to deal with, even without other hurdles. But by trying to meet multiple goals simultaneously, the government runs the risk of scaring off potential buyers.