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

With the third attempt to disinvest in Air India going well so far, and the government really serious about the exercise, the national carrier may actually change hands

Why Air India failed to sell twice before and what's working now
Air India may finally be poised for privatisation. Image courtesy: Wikimedia Commons

Will the government be third time lucky in its effort to sell the cash-strapped national carrier Air India? It will certainly hope so, given that there were reportedly multiple expressions of interest on December 14.

Apart from India's biggest conglomerate Tata group, for which taking over Air India would mean a reunion with as asset that went out of its hands a few years after independence, budget carrier SpiceJet and the US-based Interups Inc may be involved. Plane Vanilla had reported that a consortium of over 200 employees of Air India has also submitted its EoI with the support of a Seychelles-based fund.  

The government's determination to sell the airline could be seen in the words of civil aviation minister Hardeep Singh Puri, who said earlier this year that the option before the government was to either privatise Air India or shut it down. The government's push for privatising Air India is also in keeping with its policy of disinvestment in order to reduce its financial burden by stepping out of inefficient public sector undertakings (PSUs). 

Mountain of troubles

Air India and Air India Express' total debt burden was Rs 60,074 crore as on March 31, 2019. The total liabilities of the two companies combined was Rs 56,084.3 crore in 2018-19. This meant that the total debt plus liability burden of Air India and its low-cost subsidiary Air India Express ran past Rs 1,00,000 crore in 2018-19. According to various media reports, the national carrier made a loss of Rs 8,556.35 crore in 2018-19.

An Air India Airbus A320-251Neo. Image courtesy: Wikimedia Commons/Anna Zvereva

Puri had stated in September this year that the national carrier incurred a net loss of about Rs 2,570 crore in the first quarter of 2020-21, PTI reported. According to Air India's Chairman and Managing Director Rajiv Bansal, the airline could record a loss of Rs 8,000 crore this fiscal itself. 

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

According to a recent RTI response by Air India, there were outstanding dues of over Rs 822 crore towards VVIP charter flights as on November 30, 2019. Rs 9.67 crore towards evacuation operations and Rs 12.65 crore towards transporting foreign dignitaries were also pending. Alarmingly, Rs 526.16 crore was due to the airline on account of tickets taken on credit by government officials as on March 31, 2019. These factors, apart from high interest rates, fluctuating exchange rates due to a weakening rupee and competition from low-cost carriers have put a burden on the airline's finances.

Late last year, the airline announced that it would stop issuing tickets on credit to officials from government agencies like the Central Bureau of Investigation, Enforcement Directorate, Information Bureau, Central Labour Institute, Border Security Force and Indian Audit Board, each of whom owes the airline more than Rs 10 lakh, IANS reported. 

Apart from these, in 2005-06, there was a case of a controversial purchase of 111 aircraft that cost the carrier Rs 70,000 crore. There have been employee unrest and strikes, causing a lot of damage to the airline and inconveniencing the passengers. There have been allegations that safety protocols were not properly followed by the Air India staff. 

The airline has received equity infusion from the government to the tune of Rs 30,520.21 crore since FY 2011-12 till December 5, 2019, Live Mint reported. However, according to an Economic Times report in July, the government has declined to provide equity support to the airline any further. 

First attempt 

Air India, therefore, has been sort of a problem child for the government. The first attempt to disinvest in the airline came in 2000. It was a time when the Atal Bihari Vajpayee government had started to go all out with its disinvestment plan, despite opposition from even its partner parties and the Rashtriya Swayamsevak Sangh (RSS). 

An Air India Airbus A320 at the Trivandrum airport. Image courtesy: Wikimedia Commons/Binai Sankar

A separate department of disinvestment under Arun Shourie was set up and companies such as Bharat Aluminium Company Limited (BALCO), Hindustan Zinc Limited, CMC Limited, HTL Limited, Indian Petrochemicals Corporation Limited, Modern Food Industries Limited, Paradeep Phosphates Limited, Videsh Sanchar Nigam Limited (VSNL), Maruti Udyog Limited, two hotel units of Hotel Corporation of India Limited and 17 hotel units of Indian Tourism Development Corporation Limited (ITDC) went into private hands. The Indian Oil Corporation Limited took over IBP Company Limited. PSU oil marketing giants Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL) would also have been privatised, but the Supreme Court intervened, saying that the privatisation of these two companies required a nod from the Parliament.  

Also read: Air India employees bid for ailing carrier with Seychelles-based fund as partner

The government had decided to shed 51% stake in Indian Airlines and 60% in Air India. However, there were strings attached. 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 call for the privatisation of Air India and Indian Airlines drew suitors like the Tata-Singapore Airlines, Hindujas, LN Mittal, Videocon and even the Indian Pilots Guild (IPG) -- an Air India pilots' union. Four airlines of the SkyTeam alliance and the Dubai-based Emirates were said to provide the foreign flavour, as it were.   

At the close of the filing of expressions of interest (EoIs), or preliminary bids, on November 10, 2000, there were six major contenders, including three who had bid for both Indian Airlines and Air India, according to an India Today report. 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. 

Another criterion for the bidding was that the interested group or consortium should be worth at least Rs 1,000 crore, but the investors were not required to specify their partners. Even those who specified had the freedom to change their partners at a subsequent stage.  

The plan, however, had to be scrapped because of opposition from the then civil aviation minister Sharad Yadav. 

Strident calls for privatisation

In the meantime, Air India continued to bleed. Indian Airlines and Air India were controversially merged in 2007, but the merged entity has not seen the face of profits ever since. Incredibly, Air India's losses went up by over 800% from March 31, 2007, to March 31, 2009, during which its merger with Indian Airlines happened. 

Air India enjoys lucrative slots at domestic and foreign airports. Image courtesy: Wikimedia Commons/Kurush Pawar

In 2012, a study commissioned by the corporate affairs ministry recommended that the airline should be partly privatised. Then in 2013, the then civil aviation minister Ajit Singh stated that privatisation was necessary for the airline's survival. But this faced political opposition. 

Then in 2017, the NITI Aayog recommended an outright sale of Air India. It also said that the privatisation of the airline should be done after it is unbundled from its real estate assets. According to a Live Mint report in 2017, apart from the largest domestic and long haul aircraft fleet in the country, and operations to 41 international and 72 domestic destinations, it had vast land holdings, including nearly 32 acres in central Mumbai and its headquarters at Mumbai's iconic Marine Drive valued at over Rs 1,600 crore. It also owned properties in New Delhi, Hong Kong, London, Nairobi, Mauritius and Japan. 

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

The Times of India had reported that the NITI Aayog had called for Air India's real estate assets to be hived off into a separate company before up to 100% equity is offered to a strategic partner. 

The Economic Survey of 2017 had also recommended the privatisation of Air India. 

The NITI Aayog's proposal was sent for the consideration of a core group of secretaries on disinvestment, chaired by the cabinet secretary, according to a report in The Hindu. The recommendations of this panel were sent to the Cabinet Committee of Economic Affairs (CCEA), chaired by Prime Minister Narendra Modi. On June 28, 2017, the Union Cabinet gave an in-principle nod for the strategic sale of Air India.   

According to the then civil aviation secretary RN Choubey, the NITI Aayog's recommendations served as the immediate trigger for the government to go ahead with the plan for the disinvestment of Air India.  

The government also cleared strategic disinvestment in five of Air India’s subsidiaries — its MRO unit Air India Engineering Services (AIESL), ground-handling arm Air India Transport Services, Air India Charters, which operated Air India Express and Airline Allied Services Limited (AASL) that operates Alliance Air and Hotel Corporation of India (owner of Centaur Hotels), along with the joint venture AISATS.

The then Union finance minister Arun Jaitley said in an interview to Doordarshan in 2017 that there was a historic second chance to disinvest in Air India. He recalled that he had first proposed the disinvestment of Air India when he was the disinvestment minister in the Vajpayee government in 1999-2000. The Hindu quoted Jaitley as saying that nearly Rs 50,000 crore could be invested in social welfare sectors instead of financing Air India’s debt.

Second chance

The second chance looked promising as within hours of the government announcing its plan, the country's largest low-cost airline IndiGo expressed its intention to the ministry of civil aviation (MoCA) to take over Air India's international operations. 

The govt had earlier tried to disinvest in Air India in 2000 and 2018. Image courtesy: Wikimedia Commons/John Taggart

In 2018, the government offered to part with 76% of its stake in Air India and also management control. However, the offer fell flat, with no bidders coming forward. The unwillingness of the government to offer its entire stake in the carrier and lack of clarity over the amount of debt being packaged with the airline were considered to be the major weaknesses of the 2018 offer. 

Undeterred govt attempts again

Then, less than two years later, on January 27, 2020, the government again offered to sell the airline, but this time with a sweetened deal. In its third attempt to sell the national carrier, the government offered to offload 100% stake in Air India and low-cost carrier Air India Express, along with 50% in the ground-handling arm AISATS, which is an equal joint venture between Air India and SATS Limited.  

Also read: Air India employees must appear in person and sign deal documents to bid for carrier

The preliminary information memorandum (PIM) issued on January 27, 2020, however, stated that the Air India subsidiaries Air India Air Transport Services Limited (AIATSL), Air India Engineering Services Limited (AIESL), Hotel Corporation of India (HCI) and Airline Allied Services Limited (AASL), or regional carrier Alliance Air would not be a part of the proposed transaction and would be hived off through appropriate mechanisms as determined by the government before the disinvestment process is over.  

Sweetened deal

According to the EoI floated by Department of Investment and Public Asset Management (DIPAM) in January, the buyer would have to absorb Rs 23,286.5 crore, or more than one-third of the airline's total debt, while the rest would be transferred to the Air India Assets Holding Ltd (AIAHL) -- a special purpose vehicle.

The minimum net worth criterion for potential bidders was also relaxed to Rs 3,500 crore from Rs 5,000 crore in 2018. 

However, DIPAM secretary Tuhin Kanta Pandey said that the potential investors of Air India had requested that the debt should not be fixed at the EoI stage, considering the uncertainty created in the aviation sector in the wake of the Covid-19 pandemic, The Hindu Businessline reported.    

More sweetening of deal

The Covid-induced crisis was also a reason for repeated postponements of the deadline for submitting preliminary bids. Accordingly, the initial deadline of March 17 was pushed first to June 30, then August 31, then October 30 and finally to December 14. 

Diluting the deal terms even further, the government allowed bidding on the enterprise value of the carrier instead of the equity value. While the enterprise value of a company includes its equity value, debt and cash with the company, its equity value is the value of the company’s shares.

Alliance Air has been kept out of the current disinvestment deal. Image courtesy: Wikimedia Commons/Vijay8808

The bidders would now have the option to decide on how much debt they want to absorb and the cost they would pay for the carrier. The government, which had cut Air India's debt to Rs 23,286.5 crore from a little over Rs 33,000 crore (according to the 2018 offer) to make the deal attractive to the investors, has now left it on the investors to decide on it. 

Out of whatever the enterprise amount that the bidder quotes, 15% would have to be given to the government as the price of Air India and 85% would be debt that the winning bidder would absorb, civil aviation secretary Pradeep Singh Kharola was quoted as saying by PTI. The willing bidder would have to pay 15% of the quote as upfront cash payment, Pandey said, according to a Business Standard report. 

According to the DIPAM's replies to clarifications sought by interested bidders on the PIM, on the date of closing of the transaction, the debt, which is lower among 1) the outstanding debt of Air India and Air India Express combined, and 2) 85% (or lower) of the enterprise value quoted by the financial bidder would be debt retained. The remaining debt would be allocated to the AIAHL. 

'First-rate' brand

Still, as pointed out by Puri, Air India is a "first-rate" brand. The PIM points out, "AI (Air India) is India’s flag air carrier with a significant market position in international and domestic operations. AI along with AIXL (Air India Express) has ~ 50.64% share of the international traffic to/ from India among Indian carriers and ~ 18.4% share including global airlines (ex India) as of Q2 FY20."

The two airlines together controlled around 12.7% of the Indian domestic market in Q2 of FY20. As on August 25, 2020, the two airlines together had over 150 planes in their fleets. While Air India Express flew entirely on the Boeing B737-800, Air India had a mix of wide-body Boeing aircraft and narrow-body Airbus aircraft. 

Air India covered 56 domestic and 42 foreign destinations as on November 1, 2019. It is member of the Star Alliance and offered 75 additional destinations through a secondary network of codeshare operations under 25 codeshare agreements (including those with 14 foreign Star Alliance carriers, 10 non-Star Alliance foreign carriers, and with Air India Express), the PIM noted. It carried 22.1 million passengers and had operational revenues of Rs 25,508.8 crore in FY 2019. 

Air India Express has been a very well-functioning entity. Image courtesy: Wikimedia Commons/Muhammed Suhail

Air India Express flew to 13 domestic destinations and 20 foreign destinations, predominantly in the Middle East. Unlike its struggling parent, Air India Express has been performing far better, even in this time of the pandemic. The budget carrier reported its highest-ever net profit of Rs 412.77 crore in FY20, according to a Hindu Businessline report. This is its fifth consecutive year of profit.

The two airlines also enjoy attractive slots at top domestic airports that are growth-constrained due to airport infrastructure issues, the PIM pointed out. This is a significant advantage compared to a new player, or an existing player looking to expand into the Indian aviation market, the PIM added. The two airlines also enjoy important slots at major foreign airports.   

The PIM stated that the slots and bilateral flying rights being utilised by Air India and Air India Express, as on the date of the PIM, would continue with the two airlines for at least six months after disinvestment. The slots and bilateral flying rights allotted to the two airlines, but which are not being used by them, as on the date which is one month prior to the date of submission of the financial bid, would also continue with the two airlines for at least six months after disinvestment. 

Bloated staff numbers a weakness

The total permanent employees with Air India as on November 1, 2019, was 9,426. There were 4,201 contractual employees, 2,867 employees on deputation from other companies, 662 casual workers engaged on daily basis. The bloated staff numbers of Air India is an issue that a new owner would have to contend with. It was flagged by potential investors during the last disinvestment attempt, according to The Indian Express.

The total permanent employees at Air India Express as on November 1, 2019, was 191. There were 1,156 contractual employees, 15 on-deputation employees and 38 other employees. The employee-to-aircraft situation at Air India Express is much better. 

Earlier this year, the government had set a disinvestment target of Rs 2.1 lakh crore for 2020-21, according to a Bloomberg report. Out of this, Rs 90,000 crore was to come through stake sale in public sector banks and financial institutions, while the remaining Rs 1.2 lakh crore was to be mopped up by stake sale in central public sector enterprises (CPSEs).

This is nearly double the Rs 65,000 crore it had expected to raise in the past financial year. Initially, the government had hoped to garner Rs 1.05 lakh crore through disinvestments in 2019-20, but the target was subsequently lowered to Rs 65,000 crore.

According to Union finance minister Nirmala Sitharaman, activities related to disinvestment had picked up over the past two months and the pace of disinvestment would now gain momentum, Live Mint reported.  

The government has so far collected Rs 6,734 crore through minority stake sales and the initial public offering of Mazagon Dock Shipbuilders Ltd. Strategic disinvestments are yet to take place this fiscal.

With the third attempt to disinvest in Air India going well so far, and the government really serious about the exercise, the national carrier may actually change hands this time around. Now all eyes would be on January 5, when the qualified interested bidders would be intimated.