Finding a Suitor for the Maharaja

Special Focus

May 15, 2018

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April - June 2018

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Air India, the country’s struggling and debt-ridden national carrier, will soon pass off to private players. The question is not whether the ride to privatisation will be smooth, but whether it will take off at all, and if so, how soon?

Crony capitalism manifests itself in many ways. Air India, the country’s national carrier has been mired in corruption, sloth, misuse of power, muscle flexing, delays, unresponsiveness and red tape in various forms since its nationalisation in 1953. Same is the case of many state-run airlines across the globe. For instance, Olympic Airlines of Greece was forced to deliver newspapers for a pittance to keep the country’s media barons happy. The fourdecade old airliner stayed alive until the final deadline of 31 December, 2009.

On the other hand, entrepreneurial freedom is rare and is seen thriving among the airlines of Singapore and Ethiopia, and the Gulf carriers, Etihad, Emirates and Qatar Airways. Interestingly, all have benefitted from government money but have been allowed to operate as commercial enterprises with minimal interference!

Air India’s story is one of descent since it was nationalised. While the political masters treated it as part of their personal fiefdom its employees bled it by bestowing free travel coupons on themselves, and add to it the poor management, overstaffing and strong unions. On March 28, the Indian government approved the sale of a majority stake in the state-run Air India.

Air India’s Perilous Descent

Air India’s Perilous Descent

Since India opened and liberalised its economy in 1991, privatisation of state-owned enterprises has been undertaken in bits and pieces. Privatisation is known as disinvestment in India. It follows three distinct routes. The government sells a part of the equity of the PSEs and lists them on the stock exchange. More than 32 PSEs and 20 public-sector banks in categories of Navratna, Maharatna and Miniratna, form the PSE Index stocks. By granting operational autonomy to these profitable public-sector undertakings, such as HPCL, BPCL, BEML, Coal India and SBI, the government has retained majority ownership and gets additional income in form of dividends.

An outright sale or strategic disinvestment of PSUs is another route adopted by the government. So far, 10 PSUs have been sold through this route, including IPCL to Reliance, VSNL to Tata Telecommunications, Hindustan Zinc to Vedanta and Modern Foods to Hindustan Lever. The cabinet decision to sell Air India is a step in this direction.

The last route has been closing down the PSEs where the market value is low. About 17 PSEs have been closed down. The Insolvency and Bankruptcy Code passed by the Parliament in 2016 will further help to shut down unviable businesses.

This is not the first time the Indian government has tried to disinvest in the national carrier. The previous Prime Minister Atal Bihari Vajpayee-led NDA regime during 1998–2004, had seriously attempted companylevel privatisation—strategic disinvestment— including the sale of two airlines—Indian Airlines and Air India. Due to lack of credible offers, the proposal fell through.

Subsequently, to push the carriers towards an eventual divestment or a sale, the government merged Air India and Indian Airlines in 2007. However, the merger was ill-planned and executed in an even worse manner, leading to widespread resentment amongst the workers and long strikes that impacted the carrier just at the time when domestic competition had stiffened up with the entry of many private carriers such as IndiGo, Jet Airways and SpiceJet. The strikes led to the merged entity losing market-share rapidly, plunging deeper into the red.

A bigger blow to Air India, in the international operations, has come through India’s ‘Open Skies’ agreements with numerous nations, notably the Gulf nations, South East Asia and some European countries as well. Most of these agreements seem tailored for the foreign carriers as Air India lacked the necessary fleet to utilise its share of the bilateral agreements, leading the foreign carriers gain a large chunk of the traffic to and from India. For example, today, the GCC carriers are pleading for more routes to be opened up as they have consumed all their rights, while the Indian carriers are far away from having used theirs. These imbalanced and often premature agreements led AI to lose market on several lucrative overseas routes.

No government seems to have taken an interest in addressing these basic challenges facing Air India, but have continued to move, in fits and starts, with their divestment plans. Amidst resistance from Opposition, trade unions and employees, Prime Minister Narendra Modi is keen to disinvest government’s stake in Air India for many reasons. For one, Modi projects the image of a leader, unafraid to take bold decisions – be it the demonetisation of high-value currencies in 2016 or the controversial and ill-executed rollout of the Goods and Services Tax (GST) in 2017.

The government’s premier think tank, the erstwhile planning commission or today’s NITI Aayog, said in its report on Air India that it was “unviable” to provide financial support to it. “Further financial support to an unviable non-priority company in a matured and competitive aviation sector would not be the best use of scarce financial resources of the government,” Minister of State for Civil Aviation Jayant Sinha told the Rajya Sabha in response to a question in January, 2018.

Since the merger of Air India and Indian Airlines, the former has stacked up a massive debt over the last decade. It has been surviving on bailout funded by taxpayers. In 2012, it secured about INR 300 billion in equity infusion spread over 10 years from the government that allows it, on an average, to draw INR 30 billion every year. Though seemingly large, the equity infusion is not quite enough to offset the accumulated debt of the national carrier, standing at INR 519 billion.


High Stakes

Last month the Civil Aviation Ministry issued the Expression of Interest (EOI) for prospective bidders. According to this, the Centre will divest 76 percent of its stake in AI. A 100 percent stake is being offered in its subsidiary, Air India Express, and a 50 percent stake is on offer in its groundhandling operations arm. Other subsidiaries—Alliance Air, Hotel Corporation of India, Air India Air Transport Services and Air India Engineering Services—are not being sold. These will be transferred to a special purpose entity along with approximately a third of AI’s INR 488 billion debt. Effectively, the government is offering a majority stake in AI and AI Express with management control, as well as a cumulative debt burden worth INR 334 billion. Of the 24 percent stake that the government would have post the sale, it would offer some in stock options to the airline’s employees.

However, keeping in mind the possible objections from its own supporters, notably the nationalist groups, the government has made the sale conditional to the management control over AI remaining with Indian entities and keeping intact the brand name Air India.

Global consulting and managing major, Ernst & Young LLP India (EY), has been appointed as government-transaction advisor to advise and manage the proposed strategic disinvestment of the national carrier. The final bids are to be invited on May 14, and the government intends to privatise the operation by December, 2018.

Assets: What Will Buyers Get?

  • Air India has a network coverage of about 93 destinations—around 54 domestic, with approximately 2,330 departures per week and around 39 international, with about 766 departures per week
  • It offers 51 additional destinations through its secondary network of code-share operations covered under 19 code-share agreements with foreign carriers
  • It had an operating fleet of 115 aircraft as on 31 December 2017, comprising Airbus and Boeing—A-319, A-320, A-321, B-747, B-777 and B-787. While 69 of these are owned / on finance lease, 24 are on the sale and lease-back model, while the remaining are on operating lease

Significantly, the potential buyer will have to take over INR 334 billion in debts. This includes contingent or expected liabilities provided in the balance sheet of the airline and INR 17.65 billion statutory dues, such as income tax, customs duty, service tax, and guarantee fee/penal charges due to the government.

Another challenge for the potential buyer is the large employee strength as Air India has about 100 employees per aircraft, one of the highest employee/fleet ratios in the world. Of the 11,214 permanent employees, just under 40 percent will retire in the next five years. In addition, the national carrier also has 8,278 employees either on contract, deputation or are casual workers. Air India Express has only 96 permanent employees.

Also, the government has committed to paying arrears worth INR 13 billion from wage revisions ahead of the proposed divestment. The company is also estimating the cost of employee benefits —pension, gratuity, etc.

A Good Buy?

It is a bold step, given the fact that it is the last full year of the Modi government’s fiveyear term. That is why, it is keen to close the AI sale transaction by early 2019, to bolster its reformist credentials, which is a mammoth task for such an enormous airline. More importantly, do the buyers find it lucrative enough, given the debt situation and the thousands of employees?

After initial media excitement, uncertainty looms large over the privatisation. Several reasons can be attributed to it. One is that some of the main contenders, notably IndiGo and the Tata group are believed to have dropped out of the race citing the conditions imposed by the government on the divestment.

To begin with, IndiGo—the only airline that qualifies to bid for Air India—alone had publicly expressed interest to acquire Air India’s international operating arm in July, after a ministerial panel approved divestment of the airline on 28 June, 2017. However, it has resisted the temptation. “From day one, IndiGo has expressed its interest primarily in the acquisition of Air India’s international operations and Air India Express. However, that option is not available under the government’s current divestiture plans for Air India,” IndiGo said in a statement.

“We do not believe that we have the capability to take on the task of acquiring and successfully turning around all of Air India’s airline operations,” said Aditya Ghosh, the airline’s president, in the statement.

Similarly, Jet Airways (India) Ltd and the Tata Group, too, opted out of the race. Major Gulf carriers Emirates and Qatar Airways PJSC, too, are reported to have decided to stay out. They are all concerned about the terms and conditions Expression of Interest (EoI).

With the privatisation move facing turbulence, several experts called for liberalising the EoI in order to align it with investor interests if it is keen to sell a stake in the airline.

Amber Dubey, partner and India head, aerospace and defence, KPMG observed, “Simplifying the deal structure, to attract at least three to four serious bidders is in the government’s own interest.”

Echoing similar views, the Centre for Aviation (CAPA) stressed the need to tweak terms in EoI for significant investors’ interest. CAPA says the government needs to be more flexible on issues like branding and labour and also reduce government-owned, non-aircraft related debt. “More importantly, a written commitment of no interference as the government will hold 24 percent equity (post divestment),” CAPA said in a report.

With the decision to retain 24 percent in the airline business, the government has reduced the bid value. As the government may not have a seat in the Air India board, can it assure bidders of non-interference? The national carrier has been treated as a personal fiefdom by political masters and bureaucrats for their vested interests.

According to Jayant Sinha, the minister of state for civil aviation, the new owners will be free of any government interference. “The winning bidder will have total control and freedom to operate the company in a way that will maximise revenues, profitability and value creation,” Sinha asserted in an interview to a private TV channel.

However, till the bid closes on May 14, uncertainty will continue. Even Tata is still in the race, in addition to Lufthansa and Singapore Airlines, for the debt-laden national carrier.

The task of strategic disinvestment of Air India is complex. The balance sheet of Air India is not only debt ridden but contains unusual assets. Over the years, it has collected artwork —sculptures, murals and paintings— in addition to premium commercial space in major cities in India as well as London, Tokyo and Hong Kong. Air India owns prime slots of the takeoff and landing at major international airports in several countries on four continents. Air India’s association with Star Alliance that provides global connectivity to the airline too has commercial value. Valuing these assets will be a challenge.

Once privatised, the airline will no longer drain taxpayer funds. But what if no serious buyers turn up? What options will the government be left with? Shutting down and liquidating assets?

Citing job losses in the aftermath of the previous NDA government’s decision to sell two Centaur Hotel properties in Mumbai, a joint forum of 10 Air India unions have opposed the privatisation move.

The INR 300 billion bail-out package to Air India for over a 10-year period is dubbed as a waste of taxpayers’ money and the government has sought its privatisation. Air India employees wonder why the government is worried over the bailout package to the national carrier when it has conveniently forgotten the default of over INR 8,000 billion of government-owned banks by many large companies and industrial groups.

Founded in 2006 IndiGo has a market share of around 40 percent. This shows that it is far cheaper to start a new airline and grow it successfully than to infuse entrepreneurial spirit into an ailing dinosaur, such as Air India and nurse it back to health. Will the Maharaja get a prospective suitor? Only time will tell.

The Flight So Far

■ 1932: Tata Airlines begins offering air services in India

■ 1946: Tata Airlines renamed Air India

■ 1953: Air India along with seven private airlines nationalised after the Air Corporation Act

■ 1981: Vayudoot, a new carrier is launched as regional feeder airline

■ 1986: Private air taxis allowed to boost tourism

■ 1993: Vayudoot merged with Air India after INR 200 crore loss

■ 1994: Air Corporation Act repealed; private carriers allowed

■ 2003: Naresh Chandra Committee calls for privatisation of both Air India & Indian Airlines. Stiff opposition from unions.

■ 2005: Air India signs purchase agreement for 50 aircrafts from Boeing

■ 2007: AI & IA merged into National Aviation Company of India

■ 2010: The company is renamed as Air India

■ 2011: Comptroller & Auditor General of India pulls up Civil Aviation Ministry for reckless purchase of aircraft which led to huge losses.

■ 2012: Government sanctions INR 42,182 crore for turnaround plan

■ 2014: AI becomes a member of Star Alliance boosting international connectivity

■ 2016: CAG faults Civil Aviation Ministry for poor implementation of turn around plan

■ 2017: Air India losses mount INR 52,000 crore

■ June 2017: Premier policy advisory body NITI Aayog backs strategic sale of loss-making Air India

■ March 28, 2018: To privatise Air India, Centre invites expressions of interest in acquiring a controlling stake in the debtridden national carrier.

■ May 14: The last date for submission of Expression of Interest

■ May 18: Intimation to the qualified interest bidders

Maharaja for Sale! What’s at Stake?

■ 100 percent sale of government’s stake in Air India Express

■ 76 percent sale of stakes in Air India Limited

■ 50 percent of Air India SATS Airport Services

■ Bidders should have a minimum net worth of INR 5,000 crore

■ Carriers with zero or negative worth can also bid by forming consortium with other players

■ Buyer will have to take over USD 5.1 billion of Air India’s total debt of USD 7.8 billion

■ Buyer will have to list the company subsequently

What’s on Offer?

■ 115 number of aircraft; 46 wide-bodied aircraft/69 narrow bodied aircraft

■ 12 Grounded aircraft

■ Number of Indian cities served: 54

■ Domestic departures per week: 2,330

■ International destinations served: 39

■ International departures per week: 393

Slot: Domestic Slots: 3,739

International Slots: 2,543

Number of Bilateral Rights: 970,388

Privatisation Pill: A Global Tour

India is not alone in privatising its national carriers. How has privatisation taken many national carriers out of the blues.

British Airways (BA): The United Kingdom’s national airline, was formed in 1974 with the merger of the two largest UK airlines—British Overseas Airways Corporation (BOAC) and British European Airways (BEA), and including also two smaller regional airlines, Cambrian Airways and Northeast Airlines. British Airways’ turnaround started when Prime Minister Margaret Thatcher hired CEO Colin Marshall, British Airways, who privatised it in February 1987.

Air Malawi: Three attempts were made to privatise Air Malawi, the national airline of Malawi in South Eastern African country. The Malawian government’s attempt to privatise the airline on two occasions failed in 2003 and 2007. However, in 2013, Ethiopian Airlines made a success. Air Malawi was shut down, and instead Malawi Airlines was created.

Air France: After the French government agreed to relinquish majority ownership in Air France, a privatisation programme was launched in 2002. In 2004, Air France acquired the Dutch airline KLM to create Air France–KLM Group, one of the largest air carriers in the world.

Japan Airlines: In 1987 Japan Airlines was completely privatised. In 2002, Japan Air System and Japan Airlines merged into a new holding company called Japan Airlines System. In 2009, Japan Airlines suffered steep financial losses, despite remaining Asia’s largest airline by revenue. As a result, the airline embarked on staff cuts and route cutbacks in an effort to reduce costs. The carrier also received a ¥100 billion through capital injection and credit from the Japanese government as part of the proposed bankruptcy.

Qantas Airways of Australia: The country’s largest airline by fleet size, international flights and destinations, was privatised between 1993 and 1997. Qantas’ privatisation was a combination of two approaches—stake sale to a strategic investor and an IPO.

The highest number of airline privatisations has been in Europe with governments holding some stake in respective national carriers.



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