Tata inches closer to acquiring long lost offspring Air India: Report

Tata and the government reportedly have narrowed their differences to three key points

Tata inches closer to acquiring long lost offspring Air India: Report
An Air India Dreamliner at the London-Heathrow airport. Image courtesy: Wikimedia Commons/Mike Burdett

India's largest conglomerate Tata group seems to have pulled ahead of its competitors in the bid to acquire Air India and is close to sealing the terms of the deal with the government.

Tata, which gave birth to Air India nearly 100 years ago, have zeroed in on three sticking points in its negotiations with the government, and a financial bid may be submitted as early as this month itself, according to Live Mint sources. The three points of concern are pension liabilities, real estate assets and debt. 

A large number of Air India employees are due for retirement in the coming years and they may want pension-related matters to be looked after by the government. The deeply-entrenched unionised culture of the company could also be a cause for friction after privatisation. 

It would also be interesting to see how a private owner handles the cost-cutting measures necessitated due to the Covid downturn. Air India unions have been relentless in their protests over inequitable salary cuts for the pilots and the top management, delay in payment irrespective of Covid and leave without pay. Recently, the company extended the leave without pay scheme for its employees to June 30, 2021, which would make it more than a year that the scheme would be in place. The labour issue, therefore, is an extremely sensitive one that the new owner would have to tackle.   

Also read: Is Tata integrating airline businesses with Air India ownership in mind?

The ownership of Air India's vast real estates, including staff quarters and residential colonies, is also an issue that could create some controversy. Even after the airline changes hands, many employees may protest residential complexes and other real estate assets moving into private hands. As part of the disinvestment process, the government had transferred most of Air India's real estate assets to a special purpose vehicle (SPV) called Air India Assets Holding Limited (AIAHL) in 2019.    

Vistara and Air India could soon be parts of the same stable. Image courtesy: Instagram/atc.spotter   

Also in question is the national carrier mountain of debts. It had a net debt of nearly Rs 58,255 crore as of March 31, 2019, Live Mint reported. Later in 2019, around Rs 29,464 crore of this debt was transferred to the SPV to make the deal more attractive to the potential buyer. The airline's debt would have gone up substantially during the Covid period, one fears. 

The national carrier is estimated to have incurred losses of Rs 9,500-10,000 crore in the financial year 2020-21 -- its highest since the merger with Indian Airlines in 2007, beating the record Rs 8,500 crore loss in 2018-19, The Economic Times reported. The airline has not made profits since that merger and continues to subsist on government bailouts.   

The government has offered to give up management control and offload its entire stake in Air India and its low-cost arm Air India Express along with its 50% stake in the ground-handling unit AISATS.

Also read: Air India and Tata cultures apart; will they be happy together?

The shortlisted entities would have to bid on the enterprise value (EV) of the airline, which means that instead of having to take on a pre-fixed amount of debt, they would now have to quote an EV based on their estimate of the airline's combined debt and equity. Essentially, under the changed rules, the bidders would have to state the amount of debt they would be willing to absorb. 

The winning bidder would be the one quoting the highest EV. At least 15% of this value would have to be paid in cash, while the rest can be taken on as debt.     

Initially, the buyer had to absorb Rs 23,286.5 crore, or around one-third of the airline's total debt, while the rest would have been transferred to the AIAHL. This condition was diluted later. 

Air India aircraft parked at the Delhi airport. Image courtesy: Wikimedia Commons/Ramesh NG

According to the sources quoted by Live Mint, the Tata group has debt worth around $27 billion and is not willing to absorb a lot of debt. So as part of the final deal, the government may end up absorbing $5 billion of debt while the rest would be transferred to Tata so that the debt burden is shared equally. 

Air India essentially had emerged out of Tata Airlines. Tata Airlines started as Tata Air Services with an investment of Rs 2 lakh from Tata Sons and two second-hand de Havilland Puss Moth aircraft. It was in 1932 that JRD Tata piloted a de Havilland Puss Moth carrying airmail from Karachi to Bombay (present-day Mumbai). That was the first flight of Tata Airlines, and indeed of the country. 

Since then, the airline went on expanding. In 1946, Tata Airlines became a public limited company and was renamed Air India. After independence, the Government of India took up 49% of the airline. That happened in 1948. Then in 1953, the government bought a majority stake in Air India from Tata Airlines, though JRD Tata continued as its chairman till 1977. After nationalisation, the carrier was renamed Air India International Limited, with a focus on foreign operations.

However, Tata's interest in aviation never sagged. In the early 1990s, India started to allow private players in the aviation sector. This gave Tata the opportunity to come up with a plan a start an airline again, and as pointed out in a Bloomberg Quint article, in 1994, Tata moved to set up an airline with the help of Singapore Airlines and with 100 planes. The idea had to be scrapped as the government was not willing to allow a foreign player.  

In 2000, efforts were made to re-privatise Air India, and Tata again tried to regain control of the airline that went out of its hands a few years after independence. At that time, the government had decided to shed a 51% stake in Indian Airlines and 60% in Air India. However, the "future strategic partner" was actually offered only 26% in Indian Airlines and 40% in Air India. The remaining disinvested stakes (25% in Indian Airlines and 20% in Air India) was to be in favour of employees, public and financial institutions. The strategic partner was, however, assured freedom in day-to-day functioning unless policy matters were involved. Foreign investments were restricted to 10.4% in Indian Airlines and 26% in Air India. 

Also read: Why Air India failed to sell twice before and what's working now

Tata partnered with Singapore Airlines again, but the plan had to be dropped following opposition from the then civil aviation minister Sharad Yadav.

In 2018, the government offered to part with 76% of its stake in Air India and also management control of the airline. However, the offer fell flat, with no bidders coming forward.

An Air India Airbus A320. Image courtesy: Wikimedia Commons/Anna Zvereva

Tata already owns leading transport brands like Tata Motors, Jaguar Land Rover, Vistara (a full-service carrier that it owns in partnership with Singapore Airlines) and AirAsia India. Tata's push for Air India, despite the national carrier's debilitating financial woes, industrial disputes and inefficiencies, shows the $113-billion conglomerate's avid interest and commitment towards the transport business, particularly the aviation business. Moreover, Air India has immense nostalgic value for Tata. An article in Plane Vanilla in December 2020 discussed how Tata may be integrating its airline businesses with an eye on the imminent ownership of Air India.

A consortium of SpiceJet Chairman and Managing Director Ajay Singh, Ras Al Khaimah Investment Authority and Ankur Bhatia, promoter of Delhi-based Bird group, is the other entity currently in the race for Air India, according to the Live Mint report. 

Civil Aviation Minister Hardeep Singh Puri has said that the new owners of the national carrier would be decided not later than May 2021. He reiterated that the choice was between privatising and closing down the loss-making airline. Despite its many woes, Air India carries with it a rich history, lucrative slots in the major airports of the world, top-end aircraft and codeshare agreements with some of the leading global airlines. It also flies on lucrative long-haul international routes, many more than the other Indian carriers at the moment. To top it all, it is India's flag carrier. 

According to an ANI report on April 1, Air India has asked its officers to come to work even on Saturdays in order to expedite the disinvestment process.

(Cover image courtesy Wikimedia Commons/Mike Burdett)