The government is going around in circles on selling Air India and the stakeholders involved in the process have been giving out confusing signals after the first attempt at sale bombed.
Perhaps it is time to evaluate whether there is any market at all for the Maharaja now, when it seems to be preparing for a second attempt at selling the airline.
The question is, even if the government were to bow to potential bidders on several counts, what is the guarantee that even one bidder will place a bid in the second attempt at AI disinvestment? Instead of offering the same package in a different wrapping paper, perhaps the government should consider changing the contents of this package.
Why not try and sell some of the profitable arms of the Air India business first instead of the main airline business?
In the first attempt, what the government was offering was a 76% stake each in Air India and Air India Express, besides a 50% stake in AISATS, all bundled into one. Air India houses the main airline business, a low-cost international arm named AI Express and a ground handling joint venture called AISATS.
The sale offer had some stringent conditions such as the government retaining 24% stake, the new owner having to retain employees for one year and then having to offer VRS as per existing norms of the Department of Investment and Public Asset Management .
The airline was to retain much of the debt on its books, over Rs 33,000 crore. There were also stipulations like the acquirer having to maintain arms’ length between this acquisition and his existing businesses and some stiff criteria on net worth, among others. Does it surprise that the sale bombed?
While these stipulations may be eased in the next attempt, any potential buyer must also consider the aftermath of the purchase. Global aviation consultancy CAPA has estimated that turning around Air India would take at least three years for any new buyer and that the airline is expected to log $1.5-2 billion in losses in the next two years.
The new owner will not only have to invest heavily for letting the airline function, he would also have to bear the usual burden of a large employee base in a market where it is expected to rapidly lose its grip.
CAPA estimates that Air India’s share of the domestic market will drop to below 10% over the next five years as other airlines have lined up a robust fleet induction.
Its international supremacy is also expected be severely challenged because competitors such as Vistara and IndiGo will show aggression on premium long-haul routes. AI together with AIE has almost 43% share of the international traffic to and from India among Indian carriers as of now.
Stacked against this backdrop, it is likely that potential bidders would want to remain on the sidelines even after the government accedes to their earlier demands. There could well be a situation where no one comes forward, again, for picking up the Maharaja.
So why not begin the sale from the other end?
Take for example AI subsidiary Air India Engineering Services Ltd (AIESL), which offers engineering services. The engineering business houses industry-leading talent and has one of the most robust facilities for aircraft maintenance and repair in India.
This unit has the best shot at attracting the right buyers with good valuation. As for the ground handling part of the airline, it is split into the wholly-owned unit AIATSL and a 50:50 JV AISATS.
SATS of Singapore has the first right of refusal in this venture. The Singaporean company will potentially buy out the government’s stake. It made such an offer to the government earlier too. The JV AISATS has been profitable for the last five years, reporting Rs 66 crore net profit in FY17.
As for Alliance Air, there is a persistent view that this subsidiary offers unmatched regional connectivity and should not be sold off since the government is anyway emphasising on promoting connectivity of the hinterland through special schemes like UDAN. Even for AIE, there have been similar views – why offload these profitable ventures if the intention is to only let go of the loss making parts? AIE posted Rs 296 crore net profit in FY17.
As on March 31, Air India has accumulated losses of almost Rs 40,000 crore and debt totalling around Rs 49,000 crore – of which working capital debt is around Rs 30,000 crore.
That the government has no choice but to restart the sale process, given AI’s bleeding books, is apparent. But this time, the people tasked with conducting the biggest strategic disinvestment in Independent India must look at drastic solutions like offering other arms for sale first before the core airline business is divested.
And in the time it takes for the disinvestment process to be completed, perhaps the government would do well to also heed another piece of advice: it should devise a special mechanism with professionals to oversee the operations at Air India.
The airline has been directionless as the disinvestment process progressed over the last several months and has been hurt further as crucial decisions have been kept in abeyance.
Earlier this week, AI had to seek an emergency loan of close to Rs 300 crore just to clear delayed salary payments for May, according to sources. It has already advertised for an urgent working capital loan of Rs 1,000 crore and has alongside renewed demands of equity infusion from the government, which it is entitled to under an earlier approved turnaround plan.
Given all these difficulties, the government should expedite the disinvestment process with perhaps a fresh look at which parts to sell first.
Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy.
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