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Air India Privatisation: Now or Never for the Maharaja!

Despite Indian aviation industry being on a high growth trajectory for quite some time now, the government owned national carrier Air India continues to bleed. Things further deteriorated a few months back to the point that unpaid oil marketing companies stopped supply of fuel to the airline at six airports. Media reports suggest that oil companies resumed fuel supplies to the beleaguered airline only after the Government of India (GOI) intervened.

Air India’s debt burden at present stands at a massive INR 583.5 billion (USD 8.2 billion). A major constituent of this is the interest on its enormous debt. Heightened competition from low cost carriers, weakening rupee and rising fuel costs have pushed Air India into the deep financial mess that it finds itself in. Then there are way too many employees since the time of Indian Airlines and Air India merger and political sensitivities attached to employee downsizing have only helped exacerbate the problem.

While successive governments acknowledged the (white) elephant in the room, nothing much was done to push it out. In the context of the most recent efforts, Civil Aviation Minister Hardeep Singh Puri remarked that Air India may have to be shut down if the privatisation efforts fail this time.

Fits and Starts thus far

Air India was first referred to the disinvestment commission headed by GV Ramakrishna in the year 1998. Air India’s miseries were much smaller back then and it also boasted of a healthy market share.As time went by and governments dragged their feet, Air India opted for anill-advised merger with Indian Airlines.The national carrier has been incurring losses for over a decade now and is surviving off a bailout sanctioned by the GOI in 2012. Even post 2012, GOI has been infusing funds into the loss making airline from time to time. Last year,GOI tried to sell 76% equity in the airline to private players but none of the airlines or investors seemed interested.

So, what spooked the investors last time?

The decision of GOI to retain a 24% stake in the airline was touted as the main reason that deterred investors. Private players were understandably hesitant to buy into an airline that had to reckon with government interference on a day-to-day basis. Another reason was the large number of employees. Air India has the largest number of employees per aircraft among airlines in India. The employees-per-aircraft ratio is a key metric used in the airline industry to identify the operational efficiency of an airline.

Where is the process now?

GOIset up a disinvestment panel called ‘Air India Specific Alternative Mechanism’ (AISAM) and appears keen to sell 100 % stake and conclude the disinvestment process by the end of March, 2020. Having said that, even the Request for Proposal has not been issued yet. In the meanwhile, the GOI is working to reduce the airline’s debt load amassed over the years to make it more attractive to potential investors. A special purpose vehicle called Air India Assets Holdings Limited (AIAHL) has been established to park some of the airline’s debt not backed by any asset, non-core assets and other non-operational assets. The GOI has already transferred around USD 4 billion of debt to AIAHL in an attempt to significantly unclutter Air India’s balance sheet. As per reports, GOI is also planning roadshows in Singapore, Dubai and London to meet prospective buyers, address their concerns on Air India’s debt position and employee issues. The GOI understandably wants to put its best foot forward on what will perhaps be the last attempt at privatizing the airline.

Challenges in privatization

One of the biggest challenges for the buyer will be the rationalization of the huge workforce of Air India. According to recent reports, the airline is keen to offer job protection of one year to its employees. The airline lags behind most Indian domestic airlines on aspects such as on time performance, flight cancellations and airline load factor. The operational efficiency will have to be significantly spruced up to match the likes of Indigo, Vistara and other carriers.

Why is the airline still attractive?

Air India’s fleet size is its major strength. With more than 150 aircraft, Air India’s fleet is second only to market leader IndiGo’s, offering investors a chance to hit the ground running in the world’s fastest growing aviation market. Another advantage is the ready availability of slots in all the major airports of the world. One of the biggest challenges for Indian aviation is the capacity constraint at its main airports in Mumbai and New Delhi. The prime slots garnered by Air India at these super-busy airports should be an added incentive to the bidders. Also, Air India is a member of Star Alliance, the world’s largest global airline alliance. An investor in Air India will get the much coveted Star Alliance membership with it. Having said that, the CEO of Star Alliance, Jeffrey Goh, has raised some concerns about the ‘backdoor entry’ of an airline into the grouping if the ownership and effective control of Air India is transferred to an entity outside Star Alliance.

Apart from the bid terms being commercially more attractive this time around, the collapse of Jet Airways will also help enhance buyers’ interest in Air India. With the suspension of operations by Jet Airways, the only full service carriers left are Vistara and Air India and this may indeed be the right time for any investor to take a plunge.

Borrowing a cliché that is often used in such situations, it is now or never for the Maharaja!

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