Why privatisation of Air India seems to be the only solution to revive the ailing national carrier
Air India, was the Maharaja in scheduled air transport service and domestic scheduled passenger airline until it started facing severe competition from private airlines such as Indigo, Spice Jet, Jet Airways etc. Air India used to be the largest international carrier from India, controlling 14.6% of the domestic passenger market. However, with private airlines expanding their capacity, Air India’s domestic market share dropped to about 13% as of March, 2017. Currently, Air India is burdened with a debt of about 52,000 crores and has salary arrears of approximately Rs. 1,200 crores accrued from the year 2012. The salary arrears are to be paid to approximately 27,000 odd staff of Air India that includes pilots and cabin crew. Due to unsustainable debts suffered by the airline company, the Government has decided towards disinvestment and privatization of Air India, which seems to be the only solution to revive the ailing national carrier.
Seeking disinvestment of Air India– Government options available
For the purpose of disinvestment of Air India, various options were considered by the Government, such as hiving off certain assets, a possible demerger, strategic disinvestment of three profit-making subsidiaries. Amongst the above options, the Government also initially contemplated effecting the dis- investment by selling either its entire 100% stake or 74% stake or 51% stake to a third party. A parliamentary panel had sought details from the Government on giving in-principal approval to divest its stake in Air India. On June 28, 2017, the Cabinet Committee on Economic Affairs gave their in-principle approval for considering strategic disinvestment of Air India and five of its subsidiaries.
Pursuant to the in-principle approval, the ministry received two proposals, one each for the airline’s international operations and for its assets from Bird Group and IndiGo. Tata Group (which originally established the airline in the early 1930s) has shown an interest in buying the government stake in Air India. In September, 2017, the Government invited bids to appoint financial and legal advisors for the disinvestment process and also invited applications for appointing an asset valuer for Air India as well as its subsidiaries and overseas offices. Currently the Government has received bids from six consulting companies and investment banks for the man-date of advising it on the divestment of its stake in Air India.
does privatization of Air India hold opportunities for foreign investors?
According to the Foreign Direct In- vestment Policy, 2016 (the “Policy”);
- FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service has been raised from 49% to 100%, with FDI up to 49% permitted under automatic route and FDI beyond 49% through Government approval, while 100% for NRI; and
- Foreign airlines are allowed to invest in the capital of Indian companies i.e. operating scheduled and non- scheduled air transport services to the limit of 49% of their paid-up capital, subject to government approval. How- ever, it prohibits foreign airlines from investing in Air India.
Thus, even though FDI is permitted in Indian aviation companies including Air India, it restricts foreign airlines to invest in Air India. With the proposed 100% disinvestment by the Government from Air India, foreign airlines will be free to invest in Air India.
Accordingly, once Government divest its stake from Air India it would definitely be an opportunity for foreign airlines to invest in Air India.
Legal Challenges perceived due to privatization of Air India
The employees of Air India including pilots are demanding clearance of salary dues before adoption of any formal decision for the proposed privatization plan. Air India has almost 7 (seven) unions opposing privatization of Air India. The salary arrears may pose a serious con- cern for the airline as majority of Air India unions are opposing the privatization process. Further, while negotiat- ing the sale, due caution will have to be taken to ensure that there are no job cuts on divestment by the Government.
The insurmountable debts of Air India may pose a problem to find a suitable buyer. To overcome this issue Government is willing to write-off the debt for the potential buyer. Air India has 4 subsidiaries, Air India Express Limited (AIEL), Air India Engineering Services Limited (AIESL), Air India Transport Services Limited (AISTL) and Alliance Air. Each subsidiary has different valuation with experts estimating Air India Express Limited valuation at 8,000 crore, AIESL at 3,000 crore and AITSL valued at roughly 2,000 crore. It also has a joint venture with AISATS which provides ground handling for domestic airports, with a rough estimate worth Rs. 1000 crore.
Further, the profit making and loss making divisions of Air India will have to be strategically demarcated and the airline will have to go through a systematic corporate restructuring to maximise the benefit of privatization. However, this could result into a time consuming and a costly affair. With the expeditious rate at which global airline alliances are taking place, it could be difficult for Air India, albeit post privatization to thrive in such a market.
The advantages for the Buyer on privatization of Air India
Air India has the largest domestic and long haul fleet of 140 planes in the country and flies to approximately 140 international and 72 domestic destinations. Apart from the planes, it also has vast land holdings including its well- known headquarter at Nariman Point costing more than Rs. 1600 crore and nearly 32 acres in central Mumbai. Air India also has properties in New Delhi, Hong Kong, London, Nairobi, Mauritius and Japan.
The sale of prime market slots of Air India like the peak hour landing slots in the busiest airports such as London and New York could fetch the Government a whopping price estimated to be at least Rs 3,000 crore. This could act as a helping hand in clearing the debts of the carrier. Also, the sale of the prime market slots in airports like Delhi and Mumbai would attract foreign airlines to invest in India. Further if both foreign and prospective domestic buyers are allowed to bid freely for the airline, it could attract more value than it could realise from a normal sale. To sum up Air India has an extensive network, a strong brand name, momentous experience, valuable access to airport infrastructure with prime landing slots internationally, and an ideal geographic location for a global hub, thus advantageous in all angles to the buyer.
Air India chief Rajiv Bansal, who has been appointed as the interim Chairman and Managing Director of Air India is working on ways to improvise the airline’s on time performance (OTP) and reduce costs on various fronts prior to the sale of its stake. However, the airline will have to battle its own internal task force as seven of Air India’s unions are expected to meet in New Delhi to draw out a strategy for opposing the privatization process.
Despite numerous challenges and hurdles, the Government is currently in the process of selecting two key players to provide consultation services in the oncoming advisory process. Nonetheless, in light of the recent changes and developments that have taken place in the disinvestment process of Air India, one can only wait and watch how smoothly the entire process progresses.
By Tejasvini Shirodkar, Partner, Rajani Associates; Pearl Boga, Senior Associate, Rajani Associates and Karen Issac, Associate, Rajani Associates
Why Should Air India Be Privatised?
There is a fresh move to turnaround ailing, loss-making Air India. The decision to merge Air India and Indian Air- lines taken in 2007 gas not made Air Indian a strong viable carrier. Efforts of successive governments to infuse funds have not yielded desired results.
1. Case for Privatisation Strong
There is a strong case for its privatisation. The equipment and planes are old and services are pretty bad, depending on the crew assigned to take you on flight. Flights are generally late and often unpleasant as air crafts are old.
2. the Market Share
The market share of Air India is barely 13% and most of its customers enjoy freebies. Politicians, government servants, travel by Air India. Those who have options hardly choose to travel by Air India. The carrier is not a popular choice.
3. Lots of options
The government is considering various options such as disinvestment, sale of stakes to strategic partners etc. Privatisation will not trim the size of Air India and improve efficiency. It will also give a clear message that Indian economy is now market driven on principles of sound governance.
4. end of the era of Controlled economy
If privatisation takes place, it will mark an end to the era of centralised planning and controlled economy. It is an established principle of nationalisation that the government should only interfere when there is market failure. When JRD established Air India as a private carrier, there was hardly any business case for its nationalisation.
However, after nationalisation, the cost of employee per aircraft grew beyond reasonable expectations. At present, there are 221 employees per aircraft. To provide services, to tool several non viable routes. These operational costs were hidden in days of monopoly when there was lack of competition from other operators.
When Air India perceived competition, it failed to keep up and turned into an ailing giant. The only cure is privatisation.
The government’s attempts to infuse capital especially after 2007 have not yielded desired results. Certain dimensions like to acquire aircrafts on lease and surrender of profit making routes further added to its woes. Finally the government is of the view that Air India has no business being a PSU. Certainly, managing an airline should not be the business of the government.
Privatisation/disinvestment will be a step in the right direction to turn around Air India and release the government from the burden of servicing huge debts and using the funds more efficiently elsewhere.
Filed by Opinion Express News Bureau.