Privatisation of Air India: The start of a new era in the Indian aviation industry?

By Yash Saxena

The much-awaited sale of India’s national carrier, Air India, has finally arrived. This comes nearly ten months after Finance Minister Arun Jaitley announced the government’s intention to sell its stake in Air India. Given the sheer size of the airline, which has strong fleet of 115 wide-bodied and narrow-bodied aircraft, many flight slots and traffic rights and a market share of 16.9 percent on overseas routes, it is natural that the proposed sale has been generating interest among many local and foreign carriers.

Over the past few months, there was a lot of speculation regarding the disinvestment process. The Expression of Interest (EOI) released by the company, for which the audit and consulting firm Ernst and Young (EY) was roped in, put to rest much of the speculation about the deal.

Various interested parties

With the sale of the debt-ridden behemoth finally getting underway, the country’s largest domestic carrier, IndiGo, which is run by InterGlobe Aviation Ltd, and Tata Sons Ltd have shown a keen interest in acquiring a controlling stake in the airline. Naresh Goyal-led Jet Airways (India) Ltd has also been in talks with its partner Air France-KLM for a possible bid while SpiceJet chairman Ajay Singh has said that his airline is too small to bid for Air India.

Media reports have also named Singapore Airlines and Qatar Airways among the interested international carriers as well as the Tata Sons and Singapore Airlines joint venture Vistara. Apart from those, Celebi Aviation Holding of Turkey, Bird Group, Menzies Aviation Plc and Livewel Aviation Services Pvt. Ltd have also all shown an interest in acquiring the subsidiaries of the national carrier. According to Kapil Kaul, CEO, South Asia, Centre for Asia Pacific Aviation, the bid details in the EOI of the airline, which has a revenue of Rs 255 billion and carries nearly 23 million passengers every year, “are largely aligned to suit investor interests.”

The particulars of the sale

According to the memorandum of information on the airline’s proposed sale which was released on Wednesday, an in-principle approval for the strategic disinvestment of Air India by way of a transfer of management control and a sale of a 76 percent stake in the carrier was given by the government of India. The sale will include Air India’s entire shareholding in its low-cost international subsidiary Air India Express (AIXL) and a 50 percent stake of Air India Sats Airport Services (AISATS), its joint venture ground-handling subsidiary which has a presence at six airports.

However, the arrangement has been qualified with some additional riders. All the bidders must fulfil some eligibility conditions such as having a minimum net worth of Rs 5,000 crore and a net profit for three preceding years. The rules, however, have been relaxed for Indian carriers to enable them to participate in the bid process. A domestic airline which is part of a consortium does not need to fulfil the three-year profitability criteria if its shareholding in the consortium does not exceed 51 percent. Similarly, a domestic carrier which has a negative net worth can also apply as part of a consortium, provided that its share in the consortium is limited to 51 percent. The bidders, in this case, have been asked to submit their expressions of interest by May 14.

Debt: the biggest deterrent

The enormous debt pile held by Air India is perhaps the biggest hurdle for any potential buyer. Air India had liabilities of over Rs 3,000 crore and a standalone debt of over Rs 48,700 crore as of March 31, 2017. The airline reported a net loss of Rs 5,760 crore during the same period. According to the memorandum of information, the existing debt and liabilities of Air India and Air India Express are in the process of allocation.

The purchase of a 76 percent stake of Air India—which is composed of 100 percent stake in AIXL and 50 percent stake in AISATS—also means that the buyer will have to take over a part of the debt and liabilities of both these entities. Together, these subsidiaries have liabilities of Rs 54,742 crore as of March 2017. As part of the proposed selloff, the successful bidder will have to take over these liabilities to the tune of Rs 33,392 crore as debt reallocation. This includes Rs 8,824 crore of liabilities and Rs 24,568 crore of debt.

The balance of the debt and liabilities will be allocated to a 100 percent government-owned entity called Air India Asset Holding Ltd, which is a Special Purpose Vehicle (SPV), subject to approval from lenders and regulators. The SPV is an amalgamation of Air India Engineering services, the ground-handling company Air India Air Transport Services, Airline Allied Services—which operates Alliance Air—and the Hotel Corporation of India.

The financial reasoning behind the figure of Rs 33,392 crore has not been forthcoming despite enquiries. This will leave many of the potential bidders scratching their heads. The document ends, “Details of this debt/liability reallocation shall be shared at RFP [request for proposal] stage.” However, the government has clarified that contingent liabilities would continue to remain with Air India and Air India Express. The government also assured that, in case there are liabilities pertaining to income tax, customs duty and service tax against Air India, the new owner would be compensated accordingly.

Commitment to the employees

According to a senior aviation ministry official, in order to reduce the financial stress on the future owners of Air India, the government may bear the cost of the company’s flight ticket entitlements and the medical costs of its retired employees. The retired employees of Air India are entitled to passage benefits which mean free airline tickets for them and their family members and also health benefits.

The ministry official further said that the government is likely to declare the aforementioned in the Request for Proposal (RFP) which will come out in a couple of months’ time as the second stage of the process. This will happen after the government settles the salary arrears owed to employees following proposals from the Dharmadhikari committee which put the amount of this payment at Rs 1,300 crore.

Further, the official, on the condition of anonymity, said that the government was in the process of ascertaining the extent of liabilities owed to retired employees, after which it will decide whether or not to absorb the costs fully or partially or at all. Another aspect which will be clarified in the RFP is regarding the government’s representation on the company board after privatisation. According to the stake-sale proposal, the government will continue to hold a 24 percent stake in the airline which it will sell later at a premium.

The impact of privatisation

How will this huge selloff affect the winning carrier and how will it enable the winner to ramp up its operations and boost its bottom-line profits and market share? Analysing this question in the context of IndiGo Airlines and Jet Airways, which are the major domestic contenders, gives an enlightening picture. The present domestic market leader, IndiGo, which had a market share of 39.8 percent in February, would be the runaway leader in the industry if it acquired Air India’s domestic market share of 13.8 percent.

An industry expert opined that IndiGo would be at a great strategic advantage were it to acquire the international operations of Air India, as some of the slots held by the national carrier were very difficult to obtain. According to him, IndiGo had the potential to become a major brand for Indians looking to fly internationally.

Jet Airways, which currently has a share of about 16.8 percent in the domestic aviation pie, could end IndiGo’s lead by acquiring Air India. The Naresh Goyal-led airline, which has acquired the tag of feeder airline to Europe and the Middle-East after its joint venture with Etihad Airways PJSC, could establish itself as a destination airline internationally.

The tipping point

In short, the disinvestment is an opportunity of a lifetime for all the contenders and could well prove to be a defining moment in Indian aviation history. This sentiment is best expressed in the words of Amber Dubey, India head of Aerospace and Defence at the global consultancy firm KPMG: “It (the winning bidder) will be able to leverage Air India’s slots, fleet and highly trained staff better. By building on Air India’s 17 and 13 percent market share respectively in the international and domestic routes, the winning bidder will become a far more formidable force.”