How To Privatise Air India

Privatising Air India could turn out to be one of the smartest decisions of the Narendra Modi government. Laden with a huge debt, shrunken routes, reduced landing rights and deteriorating service, selling Air India is clearly the wisest option.

Air India was effectively ruined by the UPA government from 2007 onwards. Civil aviation minister Praful Patel disastrously merged it 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 just under 14 per cent market share.

If ever there was a 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.

Handled well, privatisation could make the airline the Tatas founded in 1932 rise like a Phoenix from the ashes. The key question: are private sector buyers interested in Air India? Apart from Indigo Airlines, which has already officially expressed interest in a letter to the civil aviation ministry, there are several Indian and global airlines and private equity players who would be keen to own Air India.

The Modi government wants a quick sale, perhaps as early as next year. A crucial issue is whether to divest the whole of Air India or sell its subsidiaries (including Air India Express) and other assets in parts. Divesting the airline as a whole would likely fetch a better valuation.

With oil prices low, the economic fundamentals of the aviation industry have improved greatly since 2015. Air India too has cut its annual losses and is operationally profitable. With staff rationalisation and better route utilisation its balance sheet could improve further.

Many buyers are put off by Air India’s humungous debt burden of Rs 52,000 crore. But that isn’t as big a worry as it seems. As Niti Aayog CEO Amitabh Kant said recently in an interview to a financial daily, “If the government continues to run Air India, a vast amount of resources will be required immediately. The airline can’t go on like this. We calculated that Air India would need an investment of about Rs 30,000 crore. After very detailed examination, it was felt that, given a choice between the government’s investment on infrastructure vis-à-vis social sectors and given that Air India has just 14 per cent market share, it’s best that the private sector runs and manages Air India in a far more efficient and cost-effective manner. I think the damage was done when Air India and Indian Airlines were merged in 2007. The systems were not properly laid out; there were a number of staff issues; and when all this continued for years, it led to the airline’s declining performance. Air India is sitting on a number of very good routes. It does not have excessive staff. It has very good planes. It has good landing rights, and many other assets. So from any investor’s viewpoint, Air India is a very good asset.”

So how do you arrive at a valuation for Air India? For starters, look at the valuation of its global peers. At the top of the totem pole is Atlanta-based Delta Airlines, the world’s most valuable airline with a market capitalisation of $41 billion (Rs 2.70 lakh crore). In the middle lies Singapore Airlines with a market cap of $12 billion (Rs 80,000 crore).

Given its fleet size and legacy landing rights at airports like London Heathrow and New York JFK (which cost over $75 million — Rs 500 crore — each), Air India could justifiably be valued at between Rs 90,000 crore and Rs 1,00,000 crore. Its real estate, which should be part of the deal, is worth around Rs 10,000 crore at today’s market rates. The 23-storey Air India building in Mumbai’s Nariman Point has an area of 2,20,000 square feet and is alone valued at over Rs 3,000 crore. Besides, Air India remains the country’s largest international airline with 16.9 per cent market share on overseas routes, ahead of Jet Airways (14.5 per cent).

One of its three profit making subsidiaries, Air India Express (the low-cost, short-range international carrier), recorded a net profit of Rs 297 crore in 2016-17.

Anyone buying Air India — be it an airline, a private equity player or a combination of the two — would need to consider three issues:

* One, who will take on the Rs 52,000 crore debt — the government through a haircut or the buyer with the final purchase price discounted by factoring in the debt?
* Two, will the buyer be satisfied with a 49 per cent stake or will it insist on a Maruti model and a majority stake?
* Three, will the Air India unions stop the sale as they have threatened to do, fearing staff layoffs by a new private sector owner?

Taking all these factors into account, a 100 per cent sale of Air India, along with its subsidiaries and real estate to an Indian buyer with a foreign partner (the Tatas and Singapore Airlines are said to be particularly interested) could fetch the government up to Rs 50,000 crore after deducting Air India’s debt. That’s equal to its entire divestment budget for fiscal 2017-18. Moreover, the Centre won’t have to make good anymore the annual losses of Air India or invest in new aircraft and ground handling facilities.

In a desperate move to cut costs, Air India recently announced it would no longer serve non-vegetarian meals in economy class. Resorting to such small cost-cutting measures reveals the decline of a once-proud airline, run into the ground by the UPA government’s appalling decision to merge it with Indian Airlines and gift its best routes to a few favoured carriers.

Around the world, countries have privatised their airlines. Only the Gulf sheikhdoms keep a tight rein on their national flag carriers. It’s time India reversed the post-Independence decision to nationalise Tata Airlines and rename it Air India.

Air India could, sooner than we think, return to its original name and owner.