Dec 06, 2017 06:36 PM IST | Source:

Air India divestment: No better time than now for the Maharaja

The stars are favourably aligned for Air India’s divestment. The only issue that will need to be handled is the labour issue.

Shishir Asthana
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Finally, there is some good news coming Air India’s way. After a series of losses and the government’s growing reluctance to plough in fresh equity, it was decided to sell off the airline. The problem, however, was the high level of debt, which stood at nearly Rs 52,000 crore.

The issue of high debt level has been handled by the government by keeping the working capital debt that stands at around Rs 33,000 crore out of the company which will be up for divestment. The remaining Rs 19,000 crore of debt are those taken to finance the purchase of aircraft and will continue to reside in the company, to be transferred to the successful bidder.

While the government has done its bit to sweeten the divestment of Air-India, the question raised by many was: is this enough to make someone bid? Till date, InterGlobe Aviation, which runs the Indigo airline, has shown interest in bidding for Air-India.

What seems to be working for the government in Air India’s divestment is the changing environment for the sector. For the month of October, India’s domestic air traffic grew at twice the rate of China’s. This is the 38th straight month, as per International Air Transport Association (IATA), which has seen double-digit growth. Year-on-year growth touched 20.4 percent in domestic traffic, the highest in the last 10 months.

For the month of October, domestic air traffic in China grew by 10 percent, Brazil 7.7 percent, Russia 6.1 percent, the United States 5.3 percent, Australia 2.8 percent and Japan 2.3 percent.

As a result of the continual growth, foreign airlines have now started taking India seriously. Recently Air France-KLM signed an ‘Enhanced Cooperation Agreement’ for the development of their operations between Europe and India. This alliance is over and above the arrangement that Jet Airways has with Etihad Airways, which is also an equity partner in the company.

Foreign airlines are more interested in tapping Indian passengers on their way abroad. That being the case, Air India has a much wider reach as compared to Jet Airways. Air India operates to 44 foreign destinations and 72 domestic destinations. On the other hand, Jet Airways flies to a total of 65 destinations which include 45 domestic destinations and 20 international ones.

Further, Air-India will be available to the bidder minus its subsidiaries which will be hived off into a special purpose vehicle (SPV). A recent report says that government is likely to approve the sale of Air India with only its core aviation assets packaged with low-cost subsidiary Air India Express and AI-SATS, a ground-handling joint venture with Singapore Airport Terminal Services (SATS). All non-core assets, like the Air India building in Mumbai and other offices, will not be part of the sale and become part of the special purpose vehicle (SPV).

To add to the advantage is government’s favourable policies for the sector, the stable foreign currency, and relatively stable oil prices. The stars are favourably aligned for Air-India’s divestment. The only issue that will need to be handled is the labour issue. The airline has a total of seven unions which are not known for their foresight in saving the airline but rather their selfish interests only.

Government is likely to short-list EY as the sole transaction advisor for the divestment. The time is ripe for Air India to be divested rather than wasting any more tax-payer money. No one can run this airline without taking harsh decisions, and that is something beyond vote-conscious governments of any stripe.

The sale, however, will not be good news for the listed players, unless one of them is the buyer. A healthier Air-India can strike them a lethal punch.

For more research articles, visit our Moneycontrol Research Page.
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