By Tariq Junaid
The Indian government is contemplating selling 51% of the state-owned carrier Air India which has been running in losses at a time when the airline market in India is experiencing rapid growth. What does this mean for the aviation industry?
The crown jewel defence
The government plans to push the airline towards bankruptcy first before selling it. The main reason behind this is the massive accumulated debt which cannot be covered just by outward funding. According to sources, the airline is $7 billion in debt. The creditors, who have taken up the task of formulating a viable way-out for the firm, had earlier suggested making an investment of $1.5 billion to convert the outstanding debt into 40% equity. The investment was aimed at lowering the interest burden, by a significant 25%, on the carrier. But the idea was later dropped as the business would still remain unsustainable.
Now, the government plans to implement the Insolvency Code and sever its ties with Air India in-order to instate the lenders as the sole business owners. The motive behind the move is that the lenders will forgo the loans in exchange for full control over the company and this would substantially decrease the cumulative debt on the firm. The transition is expected to reduce the total debt to $2 billion which is very likely to render a sustainable status to the business.
The big privatisation agenda
This is not the first time the government has decided to privatize the national carrier. The same scenario happened in 2000-01 when the Government slated 27 state-run firms for privatization, including Air India, aiming to improve the industrial base in the country by getting rid of loss-making state-owned enterprises. At that time, Singapore Airlines pulled out of its deal, citing losses incurred by the airlines over the last six years.
In the early 2000s, Air India’s main problem was inefficiency and unavailability of resources locally. It had three times as many staff per plane as global airlines which resulted in huge expenditure. While the rest of the airlines sector in India is enjoying stupendous air traffic growth which has remained above the 20%-mark month on month, throughout 2016, Air India dropped to its lowest share of the domestic market this calendar year in October to just 13%.
While nudging the company towards bankruptcy in-order to make it sustainable seems a viable option, the bigger task at hand is to find people who are willing to board this sinking ship. Air India, which faces a dysfunctional cost structuring and outstanding revenue problem, is considered as the one of the most unreliable airlines in the market. To compete against global airlines that have remained profitable over several years, an acquisition will be the best bet for the current stakeholders. For now, all we can hope is that the government ‘lands’ a deal that will help Air India ‘take off’.
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