By Nitya Pandit
Air India, which caters to 14% of the domestic air traffic, is burdened by debt amounting to approximately Rs 60,000 crore. It has suffered losses of Rs 50,000 crores. In this backdrop, there is a call for privatisation of the state-run carrier.
What broke Air India?
Air India’s tryst with losses began years ago. The first blow came in 2004 when the then Civil Aviation Minister, Praful Patel, made a financial blunder by forcing Air India to purchase excess air crafts at an inflated price. A Comptroller and Auditor General (CAG) report rejected the alleged reason for inflating the order, that is, an increase in competition on the US route, as farce. As there were allegations against the minister and other officials of accepting bribes in return for inflated purchase orders, the Central Bureau of Investigation (CBI) has now registered a preliminary enquiry.
Additionally, the merger of Air India and Indian Airlines in 2007, which was aimed at generating high profits and capturing a large market share, backfired. It brought the challenges of high human capital and salary adjustment–the national carrier decided to offer Voluntary Retirement to 25% of the staff to reduce its staff-to-aircraft ratio. Further, the national carrier no longer operates on the profit-making routes and schedules, which are now captured by private airlines.
Privatisation: Experts’ suggestion
According to Indian Brand Equity Foundation’s (IBEF) report, the passenger traffic in India during 2015-16 had increased to 85.57 million from 70.54 million in the previous fiscal year. Also, there will be an increase in the private sector participation in the aviation sector in the country in the near future. Hence, Air India is struggling at a time when the domestic civil aviation industry is showing signs of growth and the country is expected to become the largest aviation market by 2030.
In this backdrop, the NITI Aayog has recommended complete privatisation of Air India. In April 2017, PM Narendra Modi gave the permission to start the discussion on this recommendation. A Committee of Secretaries (CoS), led by the Cabinet Secretary, has been created with the agenda to discuss and finalise the right method of privatisation to save the airline.
Privatisation may cure the ailing airline
In May 2017, NITI Aayog recommended that the airlines half liability should be written off and aircraft-related loans, as well as the working capital, should be transferred to the new owner. On the other hand, the Aviation Ministry offered a sale of subsidiaries and debt-equity swap with banks. The latter strategy can help ease Rs 30,000 crore of working capital loans and Rs 4,500 crore of the annual interest outlay.
Over the years, the airline experienced a substantial decrease in its market share due to growing competition and increasing engineering and maintenance costs. In the 2015-17 period, the government invested Rs 5,765 crore in Air India and further decided to pump in Rs 1,800 crores. This investment was used to cover fuel expenses and other maintenance costs instead of funding expansion of routes and repaying loans. Thus, Air India has not seen a change in its state.
Privatisation could possibly lead to an improvement in the airline. This would release government funds which could instead be used to develop the education, healthcare, infrastructure and other sectors. Furthermore, the government will be able to offload the losses of running the airline and avoid any future airline-related costs. Additionally, the aviation industry is experiencing the presence of tough competition and the government, unlike a private sector company, does not have the resources to keep up with the advancing technology. Thus, privatisation with its immense resources can help in the technological upgradations of Air India.
Side effects of privatisation
Air Indias current condition requires the government to give a cash incentive to the future buyer. This amount when subtracted from the monetary value of assets before the sale will form governments debt. Hence, there will still be an existing debt amount on the government’s books. Further, the investment made by the government for the airline’s revival will go in vain.
Apart from the financial losses, the airline faces issues of management, such as low employee satisfaction and pilot strikes, which may or may not be addressed by privatisation. Also, privatisation may not be the way to solve the problems caused by the Air India and Indian Airlines merger.
Instead of privatisation, the government could completely get rid of the airline by giving majority control to a private company while receiving a premium on it. Additionally, the government should work on associating Air India with more organisations such as the SkyTeam to benefit from its newest global connections. Air India, with the help of the alliances global network, was able to provide more customer benefits and thus, attracted more demand. This alliance has brought a 5% increase in the airlines revenue.
Privatisation does help: Lessons from the past
The governments all over the world have been taking a back seat by not owning airlines and hotel chains. In the past, the privatisation of Hindustan Zinc led to more positive outcomes than negative ones. For the company, the purchasing costs fell and there was only 2% job loss after the disinvestment. Further, employees benefited from several facilities like production incentive, leave encashment, etc., which they did not avail of, before the disinvestment. Given the successful privatisation of Hindustan Zinc, it is time for the Indian government to relieve itself of Air India.
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