Moneycontrol
Get App
Last Updated : Apr 10, 2018 12:10 PM IST | Source: Moneycontrol.com

COMMENT- Dump fake nationalism, go ahead and sell Air India to a foreign bidder

But for foreign players, Air-India offers a great opportunity to participate in one of the fastest-growing markets in the world

Shishir Asthana
 
 
live
  • bselive
  • nselive
Volume
Todays L/H
More

The Air India divestment is in its final leg and the political ruckus is growing in volume. The Congress has already criticised the government for offering Air-India to a foreign airline while glossing over the fact that the pathetic state of affairs at the flag carrier was possible only because of mismanagement during its regime. Naturally, the communists are complaining as their nationalism gets triggered only when a foreigner picks up an Indian company.

Mamata Banerjee of the Trinamool Congress calls the profusely bleeding Air-India the ‘Jewel of our Nation’. This is an odd description for a company that has over Rs 50,000 crore in debt and is losing money every year.

The parliamentary panel that was set up to look into divestment was of little help, suggesting that divestment be delayed by five years. In what it calls ‘advice’ the committee recommended writing off the debt and pumping in equity to revive the airline.

Wisely, the government has decided to get rid of the airline and has taken a tough stance on it.

While homegrown budget airline IndiGo, the first airline to express interest to buy Air-India, and Jet Airways both deciding to pull out the race is seen as a body blow to the divestment process, the government has decided to continue with its stance of selling the airline without splitting Air-India’s business into domestic and international.

It was in 2007 that the Congress decided to merge Air-India and Indian Airlines into a new company. However, after five years, in 2012, civil aviation minister of the Congress Ajit Singh went on record to say that merging the two airlines was a big mistake, but de-merging them would be a lengthy business and a futile exercise.

Companies like IndiGo are not interested in the loss-making domestic business of Air-India. They cannot be blamed for it as they have already carved out a position in the domestic business. It is only late entrants like the Tatas and Air Asia who might be keen on picking up a big chunk of domestic market share by acquiring Air India’s domestic business as well as the international routes.

But for foreign players, Air-India offers a great opportunity to participate in one of the fastest-growing markets in the world. Government sources have been quoted as saying that there are a lot of interested and probable bidders who are looking at the transaction.

Among the names that are being floated are global carriers like Germany’s Lufthansa, British Airways and Singapore Airlines besides a few West Asian and Southeast Asian airlines.

The government is offering a 76% stake in Air India and 100% stake in Air-India Express (AXIL), the fully-owned budget arm of Air India along with a 50% stake in the ground handling joint venture of Air India and Singapore Airport Terminal Services (AISATS).

Air-India has 44 per cent of the international business originating in India while the remaining is shared between IndiGo, Jet Airways and SpiceJet.

What makes Air India a prized catch is that the national carrier has 2,543 international slots, including to the US, the UK and Far East, and bilateral rights for 970,389 seats negotiated with numerous countries.

The vast domestic and international network along with the infrastructure at almost all airports makes the company a valued target.

What goes against the company is its mountain of debt and a massive workforce.

But while one can be put off by these negatives, Air India offers enough room for improvement. The company has enough room to cover in terms of operational efficiency parameters as compared to its peers. This is the lowest hanging fruit for any company that acquires the airline. Without too much investment but right management, the company’s operational parameters like aircraft utilization, occupancy rates and revenue per seat can be improved by sweating the assets to the fullest. These measures will improve the company’s cash flows and help service its debt better.

On the employee front nearly 40 per cent of the employees are retiring over the next five years, so the new owners will either have to bide their time or come out with a Voluntary Retirement Scheme (VRS) to take care of the issue. Employee unions, by trying to stop the inevitable, are being short-sighted: Taxpayers already view them as free-loaders.

There are three main reasons why a foreign airline scores over Indian suitors. First is that the foreign player, who does not have any presence in the domestic segment, would surely develop its share of this prize market, as against an Indian player, who would push its own services at the cost of Air-India. Second, the foreign player, as is the case with Etihad/Jet Airways, would capitalise on the outgoing traffic from India to fill its seats on connecting flights. The slots available from Air India can supplement the slots the foreign airlines will have across the globe. Finally, a foreign airline has the biggest advantage of having access to low-cost funds. Even swapping the existing high-cost debt of Air India will be a life-saver for the airline.

The way things stand it is very likely that a global player may get Air India. Though there will be a lot of political breast-beating if Air India is sold to foreigners, it is arguably a better outcome for the airline. It's best to put the airline up for adoption rather than persist with a prodigal child for the sake of fake nationalism.
First Published on Apr 10, 2018 12:02 pm
More From
Loading...
Sections
Follow us on
Available On
PCI DSS Compliant