Air India Sale Hits Turbulence
Will the government, taken aback by the withdrawal of interest by both domestic and global carriers, change some of the restrictive conditions?
Trust the civil aviation bureaucracy to turn a good idea upside down. Air India's proposed sale is one of the Narendra Modi government's most sensible policy decisions. Burdened with unserviceable debt, a once-proud airline has been brought to its knees over decades of neglect. Its lucrative Gulf routes were given away to carriers from the Middle East. Successive chairmen - all bureaucrats with no domain knowledge of aviation - oversaw falling service standards and flight delays.
The decision to sell the airline was finalised nearly a year ago and IndiGo Airlines immediately showed interest. The Tatas (in partnership with Singapore Airlines) and Jet Airways too were keen to buy Air India (AI). Despite its debt overhang and annual losses, the airline had great underlying assets: profitable subsidiaries, legacy landing right at airports like London Heathrow, a large fleet of aircraft, and prime real estate across the country.
The Minister of State for Civil Aviation Jayant Sinha was initially upbeat. He said the sale would go through. There were buyers in India and abroad. Half of the airline's debt burden could be retained by the government, he said, and investment banks would soon be invited to bid for the mandate.
But within weeks the mood turned dark as the government unveiled its "conditions" for AI's sale. They were so onerous, so filled with 1970s bureaucratese and in many ways so irrational that the bidders quickly lost interest. IndiGo Airlines was the first to say it wasn't interested in Air India anymore. The Tata/Singapore joint venture and Jet Airways followed suit. The civil aviation ministry has put up a brave face but it's clear that unless the conditions of sale are significantly changed, AI's divestment will be a non-starter.
What is wrong with the AI draft sale document circulated by the civil aviation ministry? Examine the conditionalities in the document: "As a part of the disinvestment, 76 per cent equity stake in Air India Ltd along with Air India's 100 per cent equity stake in Air India Express Ltd and Air India's 50 per cent equity stake in AISATS (a ground handling JV with Singapore Airport Terminal Services) is being disinvested by the government of India. Air India has interests in other entities which are in the process of being transferred to a separate SPV (special purpose vehicle) and will not be a part of the proposed transaction."
The SPV is the key conditionality. It will not be offered for sale. The SPV will hold some of AI's most attractive assets: Air India Engineering Services, Air India Air Transport Services (the airline's local ground handling company), Airline Allied Services (the operator of feeder airline Alliance Air) and the Hotel Corporation of India. To make the deal even less attractive, AI's real estate assets will be spun off into a new company called Air India Assets Holding Ltd (AIAHL).
Potential buyers have been put off by what they see as the ministry's small-minded approach. One government official said dismissively of the 24 per cent residual stake in Air India that it will hold after the sale: "The government can exit at any time after the transaction, if it wishes." Reacting to the sale document, Jet Airways issued this statement: "We welcome the government move to privatise Air India. It is a bold step. However, considering the terms of offer in the information memorandum and based on our review, we are not participating in the process".
The deadline for submitting bids is May 14, 2018. Will the government, taken aback by the withdrawal of interest by both domestic and global carriers, change some of the restrictive conditions? It may not have an option. As it stands today, the AI sale proposal is in a state of induced coma. EY is the transaction advisor for AI. Any changes in the information memorandum of the bid document will be made by it under the supervision of a group of ministers chaired by Finance Minister Arun Jaitley.
What's on offer to buyers is a 76 per cent equity stake in Air India, a 100 per cent stake in Air India Express Ltd and AI's 50 per cent stake in AISATS. Air India has excellent assets but is grossly overstaffed. According to the information memorandum, buyers will have to take on debt of Rs. 33,389 crore. Another Rs. 15,389 crore will remain with the airline's new SPV, AIAHL, which will control assets not part of the sale offer.
Air India's market share has been gradually falling. It enjoys just 16.93 per cent domestic market share and an even lower 12.27 per cent international market share. Air India's loss of lucrative routes in the Gulf and elsewhere during Praful Patel's tenure as civil aviation minister in the UPA government was particularly damaging.
As I wrote on these pages on July 26, 2017: "Civil aviation minister Praful Patel disastrously merged Air India with Indian Airlines and gave away the merged entity's most profitable domestic and international routes to Emirates, Etihad, Jet and other airlines. From being India's national carrier, accounting for a third of the total passenger traffic, Air India today has under 14 per cent overall market share. If ever there was wilful destruction of India's two airlines - Air India and Indian Airlines - the Congress-led UPA government and its alliance partner, the Nationalist Congress Party (NCP), did an efficient hatchet job."
In 2016-17, AI made an annual loss of Rs. 5,765 crore on revenues of Rs. 22,177 crore - a negative margin of 25 per cent on sales. Much of the loss can be attributed to bloated overheads. But with powerful trade unions, a new buyer will find it difficult to cut staff levels. The government's approach to PSU disinvestment has often smacked of half-heartedness. Air India is a typical example. Instead of simplifying the sale process, the government has complicated it. By stripping the Air India group's ground handling, feeder airline and real estate assets, the price the government will eventually get will be far lower than it would have had it sold the whole AI group. Asset stripping is a bad ploy and will play poorly with global investors.