What value does Air India still bring to a suitor like the Tatas?

Last week, national carrier Air India said its financial position was grim. The airline has decided to send some employees on long term Leave without Pay (LWP) on a voluntary basis. Long term for Air India is five years! This came a day after aviation minister Hardeep Singh Puri noted that equity infusion of Rs 500-600 crore each year is not sustainable. Even if Air India wants financial assistance from the government, it may not be possible as the centre has to meet other demands too such as providing relief to vulnerable sections of the society amid the Coronavirus pandemic he noted.

In times of falling tax revenue and higher spending on social welfare schemes, Air India would probably be the last thing on the government’s mind and it is likely that the government could look at expediting the sale at earliest possible opportunity.

These remarks came within days of news reports indicating that Tata could be the sole bidder for Air India. The revised deadline to submit the Express of Interest (EoI) is end of August. At the beginning of 2020, if there was one thing that was being watched closely by everyone – it was the privatisation of Air India. The government put its best foot forward this time and offered the entire airline to the new owner. The potential deal excluded few subsidiaries including Air India Regional / Alliance Air – the all ATR operator. Instead, the five Boeing B747s in Air India’s fleet would be transferred to Alliance Air to make Air India even more attractive.

Every now and then when the topic of Air India privatisation makes a comeback, Tata is the name everyone talks about. The reason? JRD Tata founded Tata Airlines in 1932 which was nationalized and became Air India. The group has been measured in its response and while it explored investing in Jet Airways, there has been little noise or confirmations coming from the top management. Likewise, the response has been measured when it comes to Air India disinvestment.

Despite COVID-19 playing havoc and aviation being one of the most impacted sectors, if the Tatas are serious about their aviation play and want to consolidate their offerings, there may not be another time than the current one.

The initial argument in favour of the Tatas and especially its full-service arm Vistara to work in tandem with Air India was slots, access to a global alliance and a worldwide network which otherwise would take years to build for Vistara and would be a huge investment to sustain and grow.

While the buyer of Air India will still get the same things – access to slots at major foreign airports, good hold of bilateral rights, membership to Star Alliance, a good mix of narrow body and wide body aircraft and a trained workforce, bilateral rights to some lucrative destinations like the Gulf region and a profitable LCC arm—it will be challenging for the buyer to maintain all this at current demand levels and that’s where the pricing could come into picture.

Does Air India still help the Tatas?

The Tata group is often criticised for not having multiple engines to pull the group, instead relying on one engine (TCS) to pull most of the wagons. If the group does not want its airline ventures – Vistara and AirAsia India to be wagons but instead play a commanding role in the sector, the airline may have to look at a bigger ploy and that could well be Air India! While airlines are worried about new deliveries, not having any aircraft on order could be the biggest positive side to look for in Air India. There is no future liability which needs to be negotiated.

When it comes to slots, global portfolio is not the only attractive thing. Air India hold’s some prime slots at both Mumbai and Delhi. With the Air India gained little from the redistribution of Jet Airways slots, most slots were grabbed by Spicejet and IndiGo. This means that it would be easier to attract traffic back to Full service with a better slot bank.

Things have since changed due to COVID-19. While the airline did see its slot application being rejected at London Heathrow in the initial filing for winter schedule 2020, the tapering demand could mean that slots could be available across the congested airports for a new airline which is willing to deploy new capacity. However, deployment isn’t the only concern. To be in a new market as a new brand is an expensive proposition! Something, the airline may not want to invest in right now but instead invest much more in Air India with which these perks come loaded.

Tail Note

Disinvestment experience in India has been mixed bag. The biggest question in the sale of Air India would be its costing. With a huge saddle of debt on its back, what would any one pay to bag Air India? Even private airlines in India which have been involved in merger or stake sale have had to fight it out in courts. The Jet Airways–Air Sahara merger has had issues with both parties in court of law; similar fate exists for Spicejet, when Ajay Singh returned at helm after buying out stake from Maran’s.

Everything else can probably be guaranteed and indemnified but no one knows how long things would take if you have to step in the courts of law and that’s where Air India disinvestment could ended up whirring through an unending loop.

Ameya Joshi runs the aviation analysis website Network Thoughts