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Last Updated : Jul 11, 2019 05:27 PM IST | Source: Moneycontrol.com

Digging Deeper | A suitor for the maharaja: Updates on the Air India disinvestment

On this episode of Digging Deeper, we’re revisiting the Air India disinvestment saga and looking at what the Modi government has in store for what had become an intractable problem for previous administrations.

Moneycontrol Contributor @moneycontrolcom

Harish Puppala | Rakesh Sharma

Last week, civil aviation minister Hardeep Singh Puri announced in the Rajya Sabha that the central government remains committed to privatizing debt-laden national carrier Air India. Puri said Air India was incurring losses of Rs 15 crore per day, and, therefore, the government was attempting to make the carrier more “viable, revive it and then disinvest."

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Air India’s disinvestment is an old and tedious tale. India’s national airline was first referred for divestment back in 1998! Governments and coalitions have come and gone but Air India continues to persist despite all of them.

On this episode of Digging Deeper, we’re revisiting the Air India disinvestment saga and looking at what the Modi government has in store for what had become an intractable problem for previous administrations.

Why disinvest?

Air India paid an interest of 4,155.68 crores on its 2017-18 debt of 55,305.82 crores at the end of March. The airline’s consolidated net loss was 5,761.02 crores, which followed a loss of 7,034.18 crores in the previous year. These operations are unsustainable, even more so because the government is hard-pressed to fund its several social welfare schemes.

Air India was first referred to the disinvestment commission headed by GV Ramakrishna in 1998 when the airline’s problems were significantly smaller in magnitude. Twenty years ago, its problems were still fairly fixable: according to analysts, a capital infusion of Rs1,000 crore and induction of a strategic partner through global bids, followed by a public offering could have turned the tide. That was, of course, in the days when Air India was the international airline and Indian Airlines enjoyed a domestic near-monopoly. Some time later, the less-than-profitable – some would say disastrous – merger of AI and Indian Airlines, only served to damage its already unimpressive finances and adversely impacted staff morale.

The disinvestment commission then recommended the sale of Centaur Hotels at Mumbai and Delhi owned by AI’s subsidiary, Hotel Corporation of India Ltd (HCIL), by separating them from the parent company. This was quickly accepted by the NDA regime followed by controversial divestments in 2002 that realised a mere pittance of the real value of these valuable properties. Why? The Airport Centaur was a prized property right beside the Mumbai airport which reportedly went for just 83 crores, a fair way below the base value of Rs 92 crore fixed by JP Morgan. Interestingly, four months after the sale, the buyer reportedly sold the hotel for 115 crores!  The Juhu Centaur was a 6-acre asset in one of Mumbai’s poshest suburbs which went for 153 crores but got repeated payment extensions. 15 years later, an asset reconstruction company put it up for sale at a reserve price of Rs1,315 crore, after the loans extended by public sector banks for the acquisition turned bad. You might know of this Centaur if you followed glossy film magazines from the 80s and 90s – used to be a favourite to do photoshoots.

That was just one example of the meandering Air India disinvestment saga. The airline owns prime properties around the world and will need to liquidate some, if not all, of them to reduce its massive debt burden of Rs 59,000 crore. As of 2017, around 22,000 crores of the total debt account for aircraft acquisition loan while the rest is related to debt for meeting daily and operational expenses. Air India Chairman and Managing Director Ashwani Lohani said the “mountain of debt” which the present management “acquired appears insurmountable and is at the root of all the problems.”

Air India has been making losses for over a decade and is living off a Rs 30,231-crore bailout sanctioned by the UPA government in 2012. Nearly Rs 24,000 crore of that bailout has been disbursed. Its market share has shrunk to 12.2% of the domestic traffic and 18.6% of the traffic from India.

Said another way, Air India is bleeding continuously and common sense says the government should hand it over to private corporations to ensure no more taxpayer money is burnt. But that’s easier said than done. The government has to face another problem with this ploy too – lack of interest from prospective buyers.

Where are the buyers?

On March 31, 2018, the deadline for submitting Expressions of Interest (EOI) for Air India ran out but there were no bidders. The government’s terms — including retaining a 24% stake — are likely to have deterred the prospective buyers.

In June 2017, shortly after the Centre announced its intention to divest, unsolicited interest poured in from airlines such as IndiGo and various ground handling firms, both domestic and international, for specific pieces of the flag carrier. On March 28 this year, the government came out with a preliminary document seeking bids. In the days that followed, the government received over 160 queries from various parties seeking clarifications about the disinvestment process. But after that flurry of activity, the government announced on May 31 that at the end of the deadline, it had received no bids from any entity to acquire 76% stake in Air India.

While the Rs 33,000-crore debt that was to be bundled with the airline was initially seen as a major hurdle, analysts claim it was the government’s decision to retain a 24% stake that ultimately proved to be the deciding factor. In clarifications sought by interested bidders, as many as 11 questions pertained to the government retaining the minority stake. Looking back, what had generated a lot of buzz was the possibility of the airline being broken up for sale. In its letter to the government a day after the union cabinet granted in-principle approval for strategic disinvestment, IndiGo said it would be interested in the international operations of Air India and Air India Express. However, a week after AI’s preliminary information document was published, IndiGo announced it was pulling out of the race because the government’s plans for disinvestment did not suit its own, and that it didn’t “have the capability to take on the task of acquiring and successfully turning around all of Air India’s airline operations”. Soon after, Jet Airways, the biggest full-service carrier at the time (oh those were the days), also said it wouldn’t participate in the bidding.

Another reason was the size of the airline. AI has the largest number of employees per aircraft among airlines in India. As per the preliminary information memorandum, AI had 26,978 employees (including permanent, contractual, casual, and on-deputation staff) for a fleet of 115 aircraft — or 234 employees per aircraft. In comparison, as of March 31, 2017, IndiGo had 111 employees per aircraft for its fleet of 131 planes, Jet Airways had 142 for a fleet of 112 aircraft, and SpiceJet had 140 for 49 planes. The employees-per-aircraft ratio is a key metric used in the industry to identify the operational efficiency of an airline. Eventual reduction of contractual employees was one of the measures to be undertaken by Air India as part of its turnaround plan.

What's going on now?

In 2019, the Modi government has once again reiterated its stand on disinvestment. As mentioned earlier, Civil Aviation Minister Hardeep Singh Puri told the Rajya Sabha, “Our plan is to revive Air India, make it more operationally viable and then to disinvest it. So far as Air India is concerned, the government is committed to the privatisation of Air India. Let there be no ambiguity on that.”

He said the costing and overall calculations of an airline depends on a large number of factors, including external factors like closure of Pakistan air space, but should end the current year in profit after which it will be disinvested. He explained, "There has been a steady improvement in Air India's finances. It has been my expectation that in the current financial year, we are hoping to make profits. But the year that has concluded the figure shall show a loss.” He said there is an overall debt of Rs 59,000 crore and there was a proposal to retire Rs 29,000 crore into a special purpose vehicle when an attempt was made to privatise Air India. The Economic Times reported in May that the government plans to raise up to Rs 10,000 crore by selling the subsidiaries of Air India and other assets to repay a part of 29,000 crore debt. Puri added that Air India also has a shortage of 20 aircraft on account of certain cost-cutting measures, and the airline hopes to bring 17-20 aircraft back into operation by October.

CNBCTV18 reported that with Air India’s divestment on the cards, the government claimed it would look at further liberalising the foreign direct investment norms in aviation. This comes at a time when the centre is expected to float the preliminary information memorandum for divestment of Air India with lucrative terms and conditions.

Civil Aviation Secretary RN Choubey said at a press conference on June 29 that government think-tank NITI Aayog’s recommendation on strategic disinvestment of Central public sector units, including Air India, was the immediate trigger for its stake sale.

As per existing rules, foreign airlines were allowed to invest under the government approval route in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to 49 percent of their paid-up capital. However, that provision was not applicable to Air India, thereby implying that foreign airlines could not invest in Air India. With the disinvestment going not so great, the NDA government, in January 2018, decided to do away with such restrictions and allow foreign airlines to invest up to 49% under approval route in Air India subject to conditions.

In her budget speech this year, finance minister Nirmala Sitharaman had stated that the govt is committed to strategic disinvestment of select PSUs. She clarified, “In view of current macroeconomic parameters, government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more CPSEs for strategic participation by the private sector.” In fact, the centre’s target for disinvestment receipts was increased to Rs 1 lakh crore for FY20, from Rs 90,000 crore in the interim Budget presented in February.

A major indicator of what the government is planning is the budgetary backing for Air India. The centre allocated a meagre Rs 1,00,000 as extra budgetary support for the debt-laden carrier which sits on an accumulated loss of over 50,000 crores!  According to the budget document, equity backing for the airline dropped by 99.99% to Rs 1 lakh against budgetary support of Rs 3,975 crore during FY19.

There is opposition to the divestment from expected quarters. Moneycontrol reported that more than a dozen unions of Air India came out strongly against the government's second bid to sell the national carrier. After the budget announcement on July 5, chairman Ashwani Lohani called a meeting of all the 13 unions of the airline on July 8 to discuss the privatisation plan. And the unions are sticking to their guns on this issue. During the meeting, union representatives told the management they were ready to do anything to turn around the carrier but would not "accept" privatisation at any cost. One source told Moneycontrol, “The unions have asked for the payment of all pending arrears first, before considering anything. Moreover, they have also asked for protection of all post-retirement benefits of employees.”

The unions have consistently opposed al bids to sell Air India, claiming that privatisation is not a remedy.They point to the demise Kingfisher and Jet Airways. In fact, as many as six airlines, all private, including Jet Airways, Air Pegasus, Air Odisha and Air Costa, have shut shop between 2014 and April 2019 for various reasons. However, Atanu Chakraborty, Secretary, Department of Investment and Public Asset Management (or DIPAM), told BusinessLine, “...(the timeline for strategic disinvestment in Air India)...is immediate and we are preparing for re-initiating the process — papers and documents. Everything requires the final audited accounts of the latest year and that would come by middle of July. So thereafter, within 15-20 days, you can expect the expression of interest to be issued.” He also addressed the issue of the government retaining a stake in the airline, saying, “One goes by the sentiment of the buyers. The government per se, having decided to completely disinvest from Air India, gives the message fairly loud and clear that we do not want to have any say in the management. Initially the feeling was that lot of buyers will be keen towards government retaining certain equity, so they can be seen through the transition phase. However, if the larger sentiment of the buyers is towards not having any government stake and buy it fully, I guess Air India Specific Alternative Mechanism (AISAM) will take the final call.”

Kinjal Shah, Vice President and Co-Head, Corporate Sector Ratings, ICRA told BusinessLine he felt the proposal to increase FDI in aviation and steps to develop India as a hub for aircraft financing and leasing activities are positives - because these will provide access to much needed capital. Two days ago, Business Standard reported that the government shortlisted potential bidders, with the Tata group on top for its interest in aviation. The report also claimed that 95% of Air India will be up for sale, while the centre will retain 5% for the employee stock option. This would mark the first time the government will relax rules for strategic disinvestment, meant to prevent asset stripping. The relaxation of the rules was proposed by transaction advisor EY as multiple entities during the last sale process in 2017 had objected, saying it restricted the bidder from raising capital from the market and developing synergy with existing business. The Centre is also pursuing the option of selling the airline’s subsidiaries before the airline itself, in order to deal with the outstanding debt of around Rs 27,000 crore.
First Published on Jul 11, 2019 05:27 pm
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