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Long Live The Maharajah

...all angles are examined. transfer of ownership, whether between two private entities or between a government-owned entity and a private party takes time

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The hammer has finally come down on the sale of India’s national carrier Air India, the national carrier that is euphemistically also known as the Maharajah. Talace, a fully-owned affiliate of Tata Sons emerged as the “successful bidder” for the sale of equity shareholding of Air India and its subsidiaries. On October 8, Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management (DIPAM) merely confirmed the sale when he made the announcement, since everyone seemed to know everything about the sale for weeks. That Tata Sons was going to win the bid for Air India was a no-brainer given the emotional connect of Tatas with the airline, and the fact that there were just two bidders in the fray.

Of the two bidders, Talace quoted Rs 18,000 crore while a consortium led by Ajay Singh (promoter of SpiceJet) quoted Rs 15,100 crore. Talace would now be required to pay Rs 2,700 crore (cash component) while the balance 85 per cent amounting to Rs 15,300 crore would be debt to be retained by Talace. 

The takeover gives Tatas control of a massive fleet of 128 aircraft (of these 70 are directly owned by Air India, and the rest are held on lease), in addition to more than 18 per cent of the international passenger market, 2,738 international as well as 4,486 domestic slots (counted on a weekly basis), and a massive 25 per cent share of the domestic market (the combined market share of Air India, Vistara and Air Asia; the latter two are also controlled by Tata group companies).

For rivals like IndiGo and SpiceJet and new airlines that may come up in 2022 though, the takeover may pose some unique challenges of its own. As for the central government, the sale of Air India marks a historic milestone in its drive to privatise state-controlled enterprises and corporations. 

With the sale to Tatas having been made official, it is a case of ‘third-time lucky’ for this diversified conglomerate, which had unsuccessfully tried to take over Air India in 2001 and again in 2018. The salt-to-software Tata group, with businesses spanning across sectors as diverse as automotive, infrastructure, defence, and much else, is perhaps best suited to operate this carrier. After all, it was Jehangir Ratanji Dadabhoy (JRD) Tata who founded the airline in 1932 when it was known as Tata Airlines. In 1946, it was renamed Air India and in 1948, Air India International was launched flying to European destinations. Back then, the government owned 49 per cent of the airline, Tatas held 25 per cent while the balance lay with the public. In 1953 Air India was nationalised. 

Much Drama

The weeks and days preceding the October 8 announcement witnessed much drama and anticipation over the deal. 

The financial bids for Air India were submitted on September 15 in which Tata Sons and Ajay Singh (promoter of SpiceJet) in his individual capacity were reportedly the key bidders. Subsequently, the bids were evaluated by the core group of Secretaries on Divestment (CGD) headed by the Cabinet Secretary. Thereafter, news of Tatas having emerged as the lead bidder made headlines for several hours before DIPAM Secretary Pandey in a tweet dismissed the reports as “incorrect”. 

“Media reports indicating approval of financial bids by Government of India in the AI disinvestment case are incorrect. Media will be informed of the government’s decision as and when it is taken,” he tweeted in the wake of the headlines. 

But that hardly seemed to make any impression on the people who continued to believe that the final decision would be in favour of Tata Sons based on the news of its bid being reportedly Rs 3,000 crore more than the next bid. Everyone thought a formal announcement was just around the corner, as only the Air India Specific Alternative Mechanism (AISAM) panel headed by Home Minister Amit Shah was left to examine the highest bids and the corresponding documentation etc. and give its approval. The AISAM panel also includes Finance Minister Nirmala Sitharaman, Commerce Minister Piyush Goyal and Civil Aviation Minister Jyotiraditya Scindia.

“Due process of evaluation and scrutiny of documentation takes time. All angles are examined. Transfer of ownership, whether between two private entities or between a government-owned entity and a private party takes time,” said an aviation expert explaining the nitty-gritties of such approvals. 

“The takeover team is ready. As soon as it’s official, it will swing into action. Operationally, it should be seamless and smooth from the passengers point of view,” said a company insider. Officially though, everyone was tight-lipped ahead of the formal announcement. 

According to industry sources, once the deal is done and over, there would have to be some sort of consolidation of the airline operations for the winner. Why? Because, with Singapore Airlines having given its nod for the acquisition of Air India, the airline under the Tata management would have to be part of one aviation entity that also includes Vistara and Air Asia. As of August 2021, the three airlines together had a market share of 26.8 per cent in the domestic segment. Individually, Air India was at the second spot with a 13.3 per cent market share behind IndiGo’s 57 per cent market share. 

Overall, for the eight months ended August 2021, Air India along with Air Asia and Vistara accounted for over 25 per cent market share whereas IndiGo’s share for the same period was 55 per cent. Some rejig in market share is a certainty going forward. 

“A combined market share of 25 per cent or more can give significant leverage on pricing of tickets, expense rationalisation on fuel cost and issues related to repairs, etc. Post-pandemic, we can see price wars, especially after Jet Airways also takes to the air,” says a senior executive of a rival airline. 

Terms Of The Deal

The stake sale process, in which the government is selling 100 per cent stake in Air India including Air India’s 100 per cent shareholding in AI Express and 50 per cent in Air India SATS Airport Services, began in January 2020. But the process was marred by delays due to the spread of the Covid-19 pandemic. In April this year, the government resumed the process by asking potential bidders to put in financial bids.

As mentioned earlier, Air India’s disinvestment plan requires the successful bidder to take on Rs 23,286 crore of the total Rs 60,074 crore debt on the books of the airline. And since the winning bid has been placed on the basis of enterprise value (both equity and debt) of Air India, the bidder has to pay least 15 per cent of the quoted enterprise value to the government in cash, and the rest can be taken on as debt. As per the plan, the balance debt of Air India would be transferred to government-owned Air India Assets Holdings (AIAHL), a new company that will house Air India’s assets including Air India building in Mumbai, Airlines House in Delhi, land in Delhi’s Connaught Place and various other housing societies spread across cities. 

On its part, the central government has already asked Air India to ensure that its employees vacate company accommodations within six months from the divestment of the airline or the monetisation of properties. If they do not vacate, they may face strict penal action or heavy monitory penalty with disciplinary action. The decision was taken by AISAM at its meeting held on August 9, 2021, said an Air India employee. 

Scope For Profits

Sector watchers believe way too much focus has been put on the massive debt on the books of Air India (including its subsidiaries and group entities). Based on the financial data available for the past few years, Air India has been clocking weekly departures ranging from 380 (in FY15) to around 450 (in FY19). On a monthly basis, these translate to more than 1,600 departures generating over Rs 2,260 crore in passenger revenue (pre-pandemic figures when aviation sector was booming).

On the expense side, fuel accounts for less than 44 per cent of the passenger revenue or around Rs 910-920 crore. The monthly salary bill is around Rs 260-265 crore. The lease outgo is another Rs 210-220 crore. Post-takeover, cost rationalisation coupled with increase in passenger traffic, the scope for generating profits from Air India operations will be immense, say experts. 

“Decisions would be faster, cost negotiations would be more effective, deals with aircraft lessors can be negotiated more effectively. There are more gains for the buyer. Access to slots around the world, trained and experienced pilots, crew and technical staff are just some of the many advantages,” says a former Air India veteran.

As per the information memorandum on Air India that was put up for the potential bidders in January 2020, the government referred to it as “India’s flag air carrier” with a significant marke t s h a r e in international and domestic operations. Air India along with Air India Express had a 50.64 per cent share of the international traffic to and from India among Indian carriers and around 18.4 per cent share overall (ex-India) as of Q2 FY20. The two airlines combined control around 12.7 per cent of the Indian domestic market as of Q2 FY20 (touching 13 per cent in August 2021). Undoubtedly, Air India is one of the most extensive flight service providers in India with network coverage of 98 destinations (56 domestic destinations. with around 2,712 departures per week and 42 international destinations with around 450 departures per week) as on November 1, 2019. 

Air India also offers 75 additional destinations through its secondary network of code share operations covered under 25 code share agreements with foreign carriers. 

Dur - ing FY 2019, Air India carried around 22.1 million passengers and recorded operational revenues of Rs 255,088 million. At the time, Air India reported an aircraft fleet of 121 aircraft (excluding 4 B747-400 aircraft), mainly comprising Airbus and Boeing aircraft such as A-319, A320, A-321, B-777 and B-787. Out of these 65 were either owned or on finance lease/ bridge loans, 21 on sale and lease back model and balance 35 were on operating lease. 

There couldn’t have been a worse time for the aviation sector globally than 2020! It suffered an estimated net loss in 2020 of $118.5 billion, a fourfold jump from the $30 billion loss during the fnancial crisis in 2008 and 2009. The pandemic also brought an abrupt end to the 10-year profit run for major airlines. As per IATA, the full-year passenger traffic results for 2020 showed that demand fell by 66 per cent (international 76 per cent, domestic 49 per cent) compared to 2019, by far the sharpest traffic decline in aviation history. While the situation is turning for the better with the passage of every month, experts say it may take three full years for the overall scenario to return to pre-pandemic levels. 

Sector In Turmoil

Indian aviation saw its biggest turmoil with the closure of Jet Airways in early 2019. This resulted in a big capacity vacuum. In 2020 March came the Covid-19 lockdown. This led to the suspension of all scheduled air operations from 25 March 2020. Air India did step up its operations post the closure of Jet Airways right up to the suspension of all air services due to the pandemic, says Rajiv Bansal, Secretary, Ministry of Civil Aviation and former Chairman, Air India. “Air India is the only airline service in India with long-haul operations and we have been able to step in to effectively bridge the gap between demand and supply post-April 2019,” Bansal had told the shareholders in the annual report. During that period, Air India added some capacity and launched the nonstop Delhi-Toronto, MumbaiKuwait, Delhi-Doha, Delhi-Seoul and Mumbai-Nairobi flights. In the India/ UK market, Air India added capacity to Heathrow and Stansted and included Amritsar as one more point to UK. For Dubai, the growth opportunity came with Jet’s closure and Air India added more direct flights from interior points in India to connect Dubai. 

However, the post-pandemic restriction on air travel did take its toll on all carriers. In a written reply to a Rajya Sabha question in July 2021, the Civil Aviation Ministry said that airlines in India suffered a cumulative loss of Rs 15,086.3 crore in FY 2020-21. IndiGo led the table followed by Air India, as they operated a larger fleet and more number of flights amidst restrictions on passenger capacity. Air India reported a loss of Rs 4,700 crore while IndiGo reported a loss of Rs 5,829.7 crore. 

In comparison, airlines that had a smaller fleet size and operated fewer flights posted smaller losses. As a result Vistara (Rs 1,609.7 crore), AirAsia (Rs 1,396.0 crore), and Go Air (Rs 1,333.5 crore) fared slightly better. The ministry pointed that the data for SpiceJet was not available.

In the pre-pandemic period, the combined losses of Indian carriers was relatively smaller — loss of Rs 5,497.24 crore in FY 2019-20 and Rs 6,709.43 crore in FY 2018-19. 

Air India hardly saw any change in the losses in the last three years. In FY 2019- 20, it raked up a loss of Rs 4,660.3 crore and Rs 4,685.26 crore in FY 2018-19. 

Challenges Galore

The takeover of Air India is expected to have wide-ranging implications for Tatas and their aviation business, and raises several questions as well. Following the takeover, it may take at least three years for the new owners to effect complete integration. Also, what happens to Vistara (a joint venture between Tata Sons and Singapore Airlines), also a full-service carrier like Air India? Or to Air Asia India, a joint venture with Tata Sons Holding and AirAsia Investment of Malaysia? Will these two get merged into an umbrella corporation that also would hold Air India? Or will one or both be shut down or merged? Media reports peg the combined financial losses in the two JVs in excess of one billion dollars or even more.  

Once back home, the ‘Maharaja’ would also need fresh investments. How will the dynamics play out amidst the proposed re-launch of rival Jet Airways (expected to start operations in the first quarter of 2022) and the launch of ultra-low-cost carrier Akasa Air backed by well-known market investor Rakesh Jhunjhunwala? It will be interesting times for the aviation sector where the passengers may be spoilt for choice and the aviation companies will be crunching numbers.


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