Tata, SpiceJet promoter shortlisted as Air India's potential buyers: Report

The government may float a request for proposal (RFP) for Air India in the next seven to ten days

Tata, SpiceJet promoter shortlisted as Air India's potential buyers: Report
An Air India Airbus A320 at the Trivandrum airport. Image courtesy: Wikimedia Commons/Binai Sankar

India's biggest conglomerate Tata Group and budget carrier SpiceJet's promoter Ajay Singh have been shortlisted as prospective buyers of national carrier Air India, according to a media report. 

While Tata is preparing to bid through its low-cost arm AirAsia India, SpiceJet's Singh has finalised plans to partner with a sovereign fund based in the Middle East, according to Times of India sources. Earlier this month, a consortium of Air India employees under the leadership of the airline's commercial director Meenakshi Mallik had fallen out of the race after it was disqualified by the transaction advisor to the government -- EY. 

The shortlisting of Tata and Ajay Singh is a big development in the Air India privatisation process, which had been looking like slackening a bit after several deadlines were missed. However, Air India Chairman and Managing Director Rajiv Bansal had said on March 19 that the disinvestment exercise "has gathered pace", according to a Times of India report.  

The shortlisted entities would now have to submit financial bids. They 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. 

Also read: Why is Tata so keen to buy national carrier Air India?

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 Air India Assets Holding Ltd (AIAHL) -- a special purpose vehicle. This condition was diluted later. 

An Air India and a Vistara plane at the Delhi airport. Image courtesy: Twitter/@DelhiAirport 

What's more, the government may float a request for proposal (RFP) for the airline in the next seven to ten days, according to a report in the Business Standard. The RFP is in the process of approval and would soon be issued by the Department of Investment and Public Asset Management (DIPAM), a government official told the daily. The RFP is nothing but financial bids, Civil Aviation Secretary Pradeep Singh Kharola had explained in a press conference in Delhi on December 29, 2020. 

The RFP would give the interested bidders clarity on the contingent liabilities of the national carrier, and provide details of the current share of Air India and Air India Express in total bilateral rights, apart from the contingent liabilities due to retired employees. 

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

Tata's relation with Air India goes back nearly a century. 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 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. 

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.

This time around, Tata is being billed as the frontrunner in the bid to acquire Air India, but there could still be a surprise. According to The Economic Times, SpiceJet Chairman and Managing Director Singh had shown keen interest in the national carrier too.

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.

An Air India Dreamliner aircraft. Image courtesy: Facebook/Air India   

In fact, Tata had been trying to woo its Vistara partner Singapore Airlines to come on board for the Air India bid, but the latter has chosen to stay away following its losses due to the Covid-19 pandemic. 

As of March 2019, Air India had a total debt of Rs 60,074 crore. This 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. 

Also read: Air India going the Tata way after nearly 70 years?

Union Finance Minister Nirmala Sitharaman, in her Budget speech in February, had said that the privatisation of Air India would be completed during 2021-22. The government hopes to raise Rs 1.75 lakh crore from the disinvestment of Air India and other public sector undertakings in 2021-22.

Air India CMD Rajiv Bansal had said that the airline's losses could be around Rs 8,000 crore in FY21. Its cash losses are expected to rise 80% on year to Rs 6,000 crore in FY21.

It is expected that the government would guide the new owner of Air India during the initial period when there may be trouble from unions and other stakeholders of the national carrier, the TOI report said. 

(Cover image courtesy: Wikimedia Commons/Binai Sankar)