Moneycontrol
Mar 29, 2018 01:55 PM IST | Source: CNBC-TV18

Air India divestment: Profitability criteria doesn't apply to domestic airlines, says Jayant Sinha

The government has cleared the runway for Air India's divestment - the government has given its 'in-principle' nod to sell 76 percent stake in national carrier Air India. CNBC-TV18's Shereen Bhan caught up with MoS, Civil Aviation Jayant Sinha to discuss the nuances of the decision.

CNBC TV18 @moneycontrolcom

The government has cleared the runway for Air India's divestment - the government has given its 'in-principle' nod to sell 76 percent stake in national carrier Air India. CNBC-TV18's Shereen Bhan caught up with MoS, Civil Aviation Jayant Sinha to discuss the nuances of the decision.

Sinha also answered a few questions asked by Kapil Kaul of Centre for Asia Pacific Aviation (CAPA) and Jintender Bhargava, Former ED of Air India.

Below is the transcript of the interview.

Shereen:  Why would the government want to retain any stake at all in Air India? Why not 100 percent disinvestment? The government has decided to retain stake, you are only offloading 76 percent, what was the rationale behind that decision?

A: One of the things we do want to be able to do is to participate in the value creation that will happen once Air India is with new owners who will of course take it to great heights and make it into a great global airline. There will be tremendous value creation.

In fact if you look at what has happened to Maruti, Maruti today has a market cap of Rs 2.7 lakh crore, it has become a very valuable company under private ownership. We think that Air India will also do exceedingly well.

We will in fact be absorbing some of the debt of Air India in the asset holding company that we are creating and because we want to pay down that debt and we want to be able to fulfil all the obligations that government has, we would like to be able to maintain a certain residual stake in Air India, so that we can participate in the value creation.

I would like to point out that we are giving full management control to the new owners. So, full management control will vest with the full owner, the government will participate so that we can be able to unlock some of the value that is in Air India.

There is another important point to note, which is that the ESOP that we will create, the stock ownership pool that we will create for employees will come out of the government's stake of 24 percent. So, government's stake will probably even fall below 20 percent once we create the ESOP pool for employees as well.

So, we want to really make sure that the value creation is fully shared by employees and of course by the people of India as Air India progresses and does much better going forward.

Shereen: You talked about value creation but you also talked about the other big concern and that is with respect to debt. Let me ask you for clarification because as per the memorandum, you basically say that liabilities - which is, current liabilities as well as net liabilities aggregating to a total of about Rs 33000 crore will remain with Air India and Air India Express (AIXL) and balance debt shall be allocated to Air India Asset Holding. So the bidder will have to take on Rs 33000 crore odd in terms of debt and how much would be the balance that would then move to Air India Asset Holding?

A: That is wrong, let me be crystal clear about it, there is Rs 24576 crore of interest bearing debt that will be transferred to the new Air India. If you look at our annual reports that we put out for fiscal year 2016-17, you will see that the total amount of interest bearing debt that we have right now is almost about Rs 50000 crore. So we will be transferring Rs 24576 crore of that to the new Air India. The remainder which is about Rs 25000 crore will stay with the asset holding company. The additional Rs 8800 crore of current liabilities that will go with the new Air India really represent net working capital, they are not interest bearing debt, but for the sake of accuracy we have said that interest bearing debt plus current liabilities will amount to Rs 33392 crore. There is interest bearing debt of Rs 24576 crore that will go with the new Air India, the rest will be current liabilities.

Shereen: I also wanted to ask about some of the eligibility criteria that you have listed as per the memorandum, you say companies with net worth of Rs 5000 crore will be allowed to bid for government's stake in Air India, you also say that the company will need to be PAT positive in at least 3 of the preceding 5 years from the expression of interest deadline. Hypothetically, because you are also allowing consortium's for the Air India disinvestment, so will every party have to comply with this? For example Vistara would not comply with the profitability criteria. So will that then be disqualified or will it still be eligible as part of a consortium?

A: Profitability requirement does not apply to domestic airlines, it applies to non-domestic airlines. So the 3 out of 5 years does not apply to domestic airlines. We have a large number of domestic airlines that have low net worth or negative net worth, if you have negative net worth, we will make it zero and we have restricted their ownership of the consortium to 51 percent. Because they have negative net worth their contribution to the net worth of the consortium will of course be zero. Nonetheless, we will enable them to own upto 51 percent of the consortium. In aggregate the consortium will have to have Rs 5000 crore in net worth. So, we made that also very clear. It is in aggregate that the consortium will have to have a net worth of Rs 5000 crore.

So, for instance if we have a domestic airline with 51 percent ownership of the consortium, because if they are contributing zero net worth then they can own upto 51 percent of the consortium, 49 percent of the consortium will have to come from their partners. That 49 percent will have to be able to bring in an aggregate of at least Rs 5000 crore in net worth.

All of these calculations in various different cases are spelt out very specifically in the information memorandum itself and so I would request you as well as all those who are interested in this to actually go through those cases and see exactly how the rules have to be followed to be able to put together a consortium or a bidder who has a net worth of Rs 5000 crore. All of that is crystal clear in the cases that we have provided.

Shereen: In terms of land monetization and there are certain assets which are now being spun over into an SPV which will not be part of this current transaction, the transaction that the information memorandum has been issued for. If you can explain the rationale behind deciding which assets need to move into SPV and why the decision to separate them from the current transaction?

A: The principle that was followed by the alternative mechanism under the chairmanship of the honourable finance minister was a very skillfully designed principle and that principle basically was that only operational core assets, real estate would go with new Air India. A real estate that was non-core would be kept in the asset holding company, would be kept in the SPV. So we basically went through and we looked asset-by-asset to understand which is an operational asset - those went to new Air India and those that were not operational assets went into the asset holding company and so we did that with real estate as well. Now all of this non-core real estate is in the asset holding company, we are of course embarked on monetization programme for all the of the non-core real estate. We have already sold well north of few hundred crore worth of that real estate and we will continue to monetize that real estate as we go forward.

Some of the important real estate that is in that asset holding company now, actually the title belongs to other government departments, for instance Vasant Vihar Air India Colony is with the ministry of urban development similarly with the Baba Kharak Singh Marg property is also with the ministry of urban development. The Nariman Point building also, the title is not with Air India. So those are all properties that we have to monetize over time and as we monetize those properties, we will continue to pay down the debt that will stay with the asset holding company which we will not be transferring to the new Air India. So that way we will continue the monetization process and ensure that the tax payers, the people of India have the least burden that they have to manage here through the asset holding company.

Kapil Kaul: My question, possibly I misunderstood that myself, was on the staff retention that the new entity would have to only retain the staff for a year and then they can decide who to keep and rest can be given a golden handshake. I didn’t see that in the document, that was on CNBC-TV18 discussion. So what is going to happen to the staff and is there a one year retention condition?

A: In government we have to balance many different interest and I think we try to do that through the structure that we have created through the conditions that we have created.

As far as your specific question regarding employees is concerned, please understand that the government is committed to safeguarding the interest of the employees in a very robust and substantial manner. First and foremost we believe that employees have a very bright future ahead of them because the new airline that has now been created is going to do extremely well going forward. So they have a very bright future ahead of them and because of the employee stock ownership plan (ESOP) that we are creating they have an opportunity with an ownership stake to actually profit from this future as well.

The other very important thing that the document, the information memorandum clarifies is that all the back wages that the Dharmadhikari Committee had recommended for employees are going to be paid to them and that will be the obligation of the government. So its Rs 1,298 crore is the assessment of what those numbers are going to be and we as government are committed to ensuring that the employees get all of that. So those are two very important commitments we have made.

Now that the information memorandum is out and the formal disinvestment process has begun we are going to now sit down with various employee groups and talk to them and see what it is that we should put in place for their protection and for their future going forward. Once that is done, it will be included in the request for proposal (RFP) and it will be in the RFP that we will put in place whatever other further protection is required, but that has to come later. That is not yet in the information memorandum.

The one year thing that you have been talking about, I think that was just speculation in the media. Let me be crystal clear that we are in the process of working through all of that right now. No such decisions have been made by the alternative mechanism yet as far as employee protection is concerned. The two decisions that have been made as I said are the ESOP decision and the back wages decision – those have been made. Further decisions will be made as we go along.

Shereen: You pointed out that no decision has been taken just yet by the alternate mechanism but if you could lay out for us what is the thinking, what are the options on the table at this point in time when we talk about employees for instance. The memorandum makes it clear that the Dharmadhikari Committee recommendations in the areas, that will be part of the transaction but if you could spell out for us what are the options that you are looking at. I think the memorandum also spells out that about 12,000 odd permanent employees and of course contractual employees are separate at this point in time but what are the options that you could consider?

A: I cannot get into that right now because that is the consultation process that is underway now and that will now pick up pace, now that the formal disinvestment process has begun. The CMD of Air India, Mr. Kharola is going to sit down, he is going to meet with the employee groups, the transition team is going to meet with them, we are going to see what is possibly, what is not possible and we will work all this out and then we will place it in front of both the core group of secretaries that looks at all these decisions as well as of course the alternative mechanism chaired by the honourable finance minister to come up with their decisions on this, but that process has now begun. I cannot talk about exactly what the details are in that process right now.

Jitender Bhargava: Air India has an emotional connect with people. Air India’s name is going to be retained as per the document. The first question is are you building a consensus because we already had political voices coming out. We wouldn’t like that Air India’s disinvestment process to be derailed for lack of political consensus. The second question is a lot of Air India employees still believe that the disinvestment is not necessary. Can we have a communication programme, of course you have alluded to the fact that the Chairman will be holding meeting with various sections of employees as to why is disinvestment necessary, why revival under the existing management is not feasible, the past track record of five years that how it is getting increasingly marginalized etc. can we have that kind of a proactive approach so that more and more employees are convinced that disinvestment is their interest, not just the ESOP, not just a future but question is there are large chunk of retired employees who are also looking forward to some kind of an assurance because from the government no assurance has so far been forthcoming on what is there for it. Of course you have clarified that it’s not a one year thing but what happens to large chunk of employees because I also recognize the fact that you cannot burden the acquiring airline with all the financial burden arising out of medical that is extended to the employees etc. What is the government’s thinking on it?

A: You asked several questions. Let me try and explain them one at a time. First, I just want to reemphasize that the winning bidder is going to have full management control of the company and will be able to operate the company in the way that will maximize revenues, profitability, value creation and so on. So that of course is going to happen.

Second, with respect to engaging with employees that of course is exactly what we are going to do now formally. We will listen and engage with employees, of course we have bene doing that all along but we now step it up. We will do it on a formal basis, we will talk to all employees including retired employees. I have been meeting with many retired employees and discussing. I know exactly what the issues are. You are a retired employee and you know that for retired employees the two most important things right now are medical benefits and the passage benefit that they have right now and of course we will be working with all the retired employees to see those promises that have been made to them, the commitments that have been made to them and that will of course be part of the process that we will be engaging in going forward.

Coming to you third question which is if indeed we are going to relieve the airline of its debt burden, reduce the debt burden from close to Rs 50,000 crore to about Rs 25,000 crore. Why should this airline be privatized, why should it be strategically disinvested, can it not be operated by the government. The answer to that is very simple Mr. Bhargava, if you look around the world, today virtually no state is operating an airline anymore and if we want Air India to be restored to its glory, restored to the preeminence, the excellence that it has, we have to be able to put it into professional hands, you argued that over and over again in your books and in all your TV appearances and media appearances and of course we have to put in place an outstanding management team that knows marketing, that knows revenue management, that knows operations, can operate it for value, can move quickly, can make decisions quickly and be able to compete and succeed in a very difficult and competitive environment that we see in the global airline industry. So that within the government framework, within the oversight, within the kind of processes that you have to follow in government is very difficult to achieve, that has not been done anywhere else in the world certainty in India, also we founded very difficult to compete in competitive markets with public sector enterprises. So the right answer for India is to enable Air India to compete, become a great global airline under private ownership, under the ownership of capable and highly motivated professional executives and that is in fact the best future for Air India and the resources, which is a very important point, the resources that we will therefore be able to save, the money that will not be required to put in to Air India that money will go into meeting very important public needs for India; healthcare like Ayushman Bharat, it will go to our farmers, it will go to our students, it will go to our children, it will go to our women – that is where we need to really focus public resources, government’s time and energy and of course the private sector is much better at running and operating a competitive airline, so we should free this airline to be able to do that. The Maharaja should once again soar and let government focus on what government can do best and that is the answer to your third question.

Jintender Bhargava: While you clarified the thing in detail but it wasn’t my case that government should hold on to Air India at all, I have been advocating in my book the government should have got rid of Air India quite some time ago.

One question that remains unanswered is the political consensus because the apprehension is that for lack of political will or one man etc Air India should not become a victim. The disinvestment process must go on. Is there any kind of effort to educate the political class who may have their own political agenda to oppose it, convinced that this is in national interest that what you are doing?

A: As government with full majority in parliament which I wish we could have a chance to prove fully and comprehensively, we certainly have the mandate of the people to undertake such actions and we are going ahead and undertaking these actions and doing what is right for India and what is right for the Indian public.

The timeline we have been marching on and we think we will be able to complete this transaction, be able to award it in next few months, certainly by September and be able to legally close this transaction few months thereafter makes us very well positioned with respect to the political cycle and so we should definitely be able to complete it in our term of office.

As I said we have the mandate of the people in parliament and certainly in terms of popularity to take these very necessary actions in the public interest.

Kapil Kaul:I have one suggestion to make that since 2017 this divestment process actually started and alternate mechanism was set up, the focus is on the divestment and not on the airline operations, so the suggestion is that we should create within Air India team which continues till the new management happens. So, it is much better to give a better airline to the acquirer not a further damaged airline – Everybody is talking about divestment, the focus on operation and building more commercial competitiveness, it’s almost not there and it could take 6-9 months to go through that. We shouldn’t have a further repair on the taxpayer because everybody is focused on the divestment.

Sinha: For an expert like you that is a very amateurish statement. What do you think that in the last four years we have not improved the operating parameters of Air India? We are working day and night to improve the operations of Air India, to turn it around, we have done so. We clocked an operating profit in 2015-16 and also in 2016-2017. Every operating parameter has improved. We are running right now at load factor of 82 percent.

I think you will agree with me that the quality of service has improved and we are trying to do our level best within the current set of government constraints and processes that we have to run the airlines as well as possible.

Certainly under no circumstances will we stop working day and night on your behalf and the behalf of the people of India.

So to assume and to insinuate that we have not been doing that we have not been doing it these last four years is a amateurish statement. That is not the way our government works.

Kapil Kaul: No, I just said from 2017, since the divestment process started. I did not say for four years.

A: We have doing it since 2014. Please look at the operating parameters and financial performance since 2014 onwards.

Kapil Kaul: What I wanted to say is that since the divestment process started and I am giving on ground realities and our assumptions are not based on any hearsay. All I am saying is that it’s a suggestion that more competitive airline we can hand over to the acquirer would be good because the top management is right now is on divestment focus and if the top management gives a little more attention to the day-to-day running of the airlines it would be good. I did not talk about 2014 but of last 6-9 months.

A: Kaul, you are absolutely wrong and that is not the way we operate, obviously we are focused on all the priorities that are required – operational execution as well as what we need to do in disinvestment.

We are absolutely trying to ensure that we run as good an airline as possible and please you are welcome to look at the numbers because those are in public record and you will see that month by month we have continued to improve despite the disinvestment process.

As I said, the load factors have gone up to 82 percent, revenues are growing strongly, we are performing very well and I must thank the employees, the CMD, the top management of Air India that they are able to execute despite the disinvestment process and everything else. They deserve all the credit that we can give them.

Shereen: This is the first step now with the information memorandum that the government has put out. How confident you feel about meeting the timelines that you have put together? Also in terms of the consortium, it is absolutely clear that anyone who meets the eligibility criteria, a non-airline company is welcome by the government?

A: That is right, anyone who has the requisite networth can bid for Air India and run the airline. As I said it’s a very well run airline already, it’s an airline with a lot of talented and capable people and so anyone who has the financial strength and the operating capabilities to take it over, I am sure will do a great job with the employees and management at Air India right now. So, anybody can bid for it.

With respect to the timeline, you have seen our track record, we have pretty much done what we said we would do as far as the timelines are concerned and are committed to the timelines that we have. This is a Department of Investment and Public Asset Management (DIPAM) process that we are following. We are going to hopefully have the qualified bidders by the end of May and we will award it in September.

That is the timeline as of now and then thereafter there is the legal closing, which will take its own time.

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