Air India disinvestment: govt’s conditions won’t fly

Shorn of the fluff that surrounds it, the Air India disinvestment narrative is all about salvaging the remnants of national pride in a floundering public sector enterprise. As an aside, it is also an admission of India’s inability to manage a public sector asset efficiently. The end of Air India’s ‘private’ status in 1953 was the beginning of its downfall although, to the outsider, the Maharaja lore continued for a long time to retain a lustre that concealed the steady decomposition within.

The relentless upsurge of internal inefficiency was slow but inexorable and was paid for by the largely ignorant and unsuspecting taxpayer. Some flawed aircraft purchase decisions (2005) compounded by an inopportune merger of Indian Airlines and Air India (2007) and abandonment of substantial lucrative international routes along the way added to the mounting negative valuation of the enterprise until eventually, the losses became hard to conceal --- much like an unwanted pregnancy. Euphemistically terming the present exercise ‘disinvestment’ is a smart move -- of turning a management necessity into a reformist virtue.

Perhaps some of the Maharaja’s ignominy could be redeemed if its reins were to pass on to another Indian entity; in all certainty, any private Indian entity would definitely be more efficient and productive than the public sector. As a result, Air India could, with the passage of time, become profitable and claw at lost pride to reclaim it; it may even carry the Indian flag with dignity. However, as of now, that looks unlikely. Tata Group, Air India’s progenitor, has shown some interest in acquiring Air India but the enthusiasm has been half-hearted, possibly as a result of its previous (distasteful) experience with the Indian establishment.

The eligibility criteria for the interested bidders is a minimum net worth of Rs 5,000 crore and net profit for three preceding years. However, the rules have been relaxed for Indian companies that can bid either solo or as part of a consortium. Despite that relief, Indian airlines (Indigo, Jet Airways, SpiceJet), which were the anticipated candidates for making bids, have all distanced themselves -- for various reasons but largely because they find the terms of the Preliminary Information Memorandum (PIM) (for Strategic Disinvestment of Air India Limited, including AI’s shareholding interest in the AIXL and AISATS) issued by the Ministry of Civil Aviation (MoCA) unappetising.

Noises from prospective foreign buyers have also been muted and baffling; as an illustration, a prominent Indian newspaper reported that a senior MoCA official had said that Swiss Aviation Consulting (SAC) had shown interest in Air India (adding it might be representing clients) but SAC has since denied the report vehemently. A similar denial followed reports of interest evinced by Qatar Airways.

The reasons are not far to seek. Business dealing with Indian bureaucracy has always been a bane for most foreign entities and that could be one reason for the tepid response. However, the contents of the PIM itself hold further pointers. Air India’s paid-up share capital is Rs 28,690.2 crore and, at the end of the last financial year, its accumulated losses were Rs 48,781.3 crore (exclusive of government guarantees of aircraft lease rentals for 21 Boeing 787s).

The former civil aviation minister Ashok Gajapati Raju had publicly admitted that Air India’s debt may turn out to be far more when subjected to close scrutiny and had hinted at Rs 70,000 crore. In 2012, the central government had approved a turnaround plan amounting to Rs 30,231 crore over a 10-year period. The picture is complete when one notes that the annual debt burden is a whopping Rs 4,000 crore. These numbers certainly do not add up to a desirable picture, especially as a substantial proportion of the debt (Rs 33,400 crore) is intended to be passed on to the buyer.

On the asset side, Air India has a fleet of 119 aircraft, Air India Express has 23 and Alliance Air has 15 planes (according to their official websites), out of which 69 are owned/on finance lease, 24 are on sale and lease-back model and the balance are on operating lease. 

However, its market share has shrunk abysmally from the monopolistic position of advantage it had enjoyed in the past; according to the DGCA website, Air India had 13.2% share of the domestic market (in February 2018), at third place behind IndiGo (39.9%) and Jet Airways (14.6%) and barely ahead of SpiceJet (12.7%).

In the area of international flights also, its share is a bare 17% of all flights being flown by Indian carriers. Again, not a mouth-watering morsel for potential bidders! As far as the Air India brand is concerned, much has been said about it but, after all the knocking it has taken over the past few years, its worth may be trifling.

The fact that 24% is being retained by the government is a hard-to-swallow proposition; although a 24% holding technically does not allow major management say, the prospective buyers would view even 24% as a threat to autonomous decisions independent of government interference. The condition that a buyer cannot exit from his stake for three years is another confounding caveat.

Air India’s large manpower-holding and its well-entrenched unions may be yet another impediment to the disinvestment initiative. Tata Group has found the terms put forth by the government (about safeguarding interests of existing employees et al) too onerous. Other prospective bidders can also be expected to baulk at pre-conditions on tapering the manpower — an essential step towards improving efficiency. With no firm bidder yet to surface even as the May 14 deadline for submission of Expression of Interest (EoI) draws nearer, the chances of finding a buyer look grim.

The prospect of the government having to mellow down some of its terms looms large. However, given the enormous embarrassment that Air India has already caused the nation, a little more will not matter much. In any case, the government is in a rather weak bargaining position.

(The writer is a retired Group Captain of the Indian Air Force)

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