No Takers For The Maharaja

Among the national carriers, market leader Indigo was the first one to pull out of the race, followed by Spicejet and Jet Airways. Most other Indian carriers might not be eligible, given the stringent conditions laid down by the Indian government to qualify for the bids. As of now, some international carriers, including Singapore Airlines, British Airways, Lufthansa and Etihad, may be interested, though some others like the Swiss Aviation Consortium has pulled out.

Experts feel the lack of interest from national and international carriers is due to the terms and conditions laid down by the government for the airline’s takeover, which make many Indian car-riers ineligible to make bids, and the acquisition extremely unattractive or unprofitable.

The government has offered 76 per cent management control and equity ownership in Air India (AI). However, there is a catch. Foreign airlines can acquire only up to 49 per cent of the airline, which means they would have to tie up with an Indian company. Also, AI has to be sold as a single unit, which means the acquirer will also have to buy Air India Express, AI’s low cost carrier, as well as AI SATS, a company for AI’s ground handling. The government has offered 100 per cent stake in Air India Express, but only 50 per cent in AI SATS. This makes AI a bad proposition as many carriers would want to take over only AI and not the other companies along with it.

Indigo, for instance, has publicly said it was interested only in AI’s international operations. Jet Airways also stated they had decided to pull back from the process after considering the terms of offer in the information memorandum. “No government agency has been known to be marketing experts,” says former AI executive director Jitender Bhargava. “They go in a bureaucratic manner and do what they think is right. The interest people have diminishes as a result.”

There are other factors too that will go against AI’s disinvestment. First is the huge Rs 33,000 crore debt that AI is saddled with, including a debt of about Rs 25,000 crore and current liabilities of a little under Rs 9,000 crore. Though the terms of sale issued this March states the bidders have to take on the entire debt, the government will have to clear the smoke on what happens to the debt before the disinvestment process starts.

Moreover, AI has been in constant losses. In FY2017, the losses amounted to around Rs 5,765 crore. However, its subsidiary Air India Express made a profit of around Rs 300 crore. AI SATS is also profitable. Importantly, AI currently has over 16,000 employees on its rolls. According to reports, the Indian government wants them to stay on the rolls of the acquirer for at least one year. Worse, these employees are divided into six unions, all of which are strongly opp-osed to the company’s disinvestment. Managing the unions and the huge emp-loyee base would be a gargantuan task for anyone who acquires AI. This could be a factor pushing the carriers away.

Apart from this, AI has been providing several facilities and privileges to its employees, especially pilots, which other carriers might not be willing to retain. This includes huge perks, high gratuity, leave encashment and medical benefits for life. Having to provide these would entail huge costs for the company acquiring AI. There are other privileges like subsidised hotel stay and sick leave, which employees are not provided in other companies.

The price for acquisition could be forbidding too. “The government will not be willing to sell AI for anything less than Rs 30,000-40,000 crore,” says aviation consultant and expert Mark Martin. “The buyer will then have to spend another Rs 10,000 crore to transform the airline into a profitable carrier. On top of that, it will need to invest at least Rs 6,000- 6,500 crore a year. In all, it will need at least $16-18 billion over the next 10 years to run the airline. No airline has so much money in the bank to make the purchase.”

A buyer also has to look at AI’s prospects in the years ahead, with competition heating up in the private sector and AI losing hold over the domestic and international markets. “AI at present has 12.7 per cent domestic market share and 17 per cent international market share,” says Bhargava. “But with the private sector airlines having on order 900 aircraft and seriously getting into international routes, what kind of market share will AI have in future? Today, only one in eight passengers travel by AI domestic and only one in seven by AI international. The distinct possibility of further marginalisation should be a matter of concern.”

Bhargava also feels that although AI has made operational profit in recent times, other carriers have made 10-fold profits, while AI’s market share and load factor have both been on the decline. According to the Directorate General of Civil Aviation data, AI has been among the bottom two airlines in India.

AI’s disinvestment, however, has some advantages in terms of what a buyer will get. First, AI is an asset-heavy company that owns all its aircraft and assets, whereas private carriers like Indigo have leased in most of its aircraft. AI has 160-180 aircraft, making its fleet larger than that of any other Indian carrier and on par with some of the largest international ones. Besides, it owns offices in top international destinations such as New York, London, Tokyo and Paris, and has landing and parking rights in most top destinations. It is sitting on real estate globally worth billions of dollars.

And that’s not all. AI has bilateral rights with most of the top destinations and routes to every destination in the world. Any company starting a new airline will take at least 10 years to reach anywhere close, while anyone taking over AI will have a huge head start over competitors.

And yet if there are no suitors, there is something seriously wrong with the way the government is approaching the company’s disinvestment. Most overseas investors feel the government may have to ease the norms of takeover and come clear on AI’s liability, especially its lab-our and debt, in order to draw more suitors in the AI disinvestment.

Bhargava feels the government is not communicating the positives and advantages of the company properly, and that is not only driving away buyers, but can also have an impact on the sale price. He also feels the company’s present performance is under an unprofessional management, and can improve dramatically under a professional management. Moreover, the market conditions now might not be the best for an airline’s disinvestment. With oil prices hovering over $71 a barrel, investors will think twice before taking a big plunge and risk exposure in aviation.

One thing is clear, however. The government seriously needs to relook at the terms and conditions it has laid down for AI’s disinvestment if it wants to attract serious suitors and command a good price. It needs to look at the contentious issues of labour, pensions and benefits before it can get any buyer for the airline. But the government had stood its ground with the current conditions, which might have an impact on what kind of sale finally happens. The picture will be clear by the end of this month when the actual bids come in.