Is Disinvestment of Air India Appropriate?

Air India, formerly known as Tata Airlines was founded by late Shri JRD Tata in 1932 with an initial investment of Rs.2lakhs. Tata Airlines went public and became a joint stock company in 1946 and was re-christened as Air India with the famous Maharaja as its mascot; it began to spread its wings to international routes. Being a profitable company, it was nationalized in 1953 when Indira Gandhi led congress government exercised its option to purchase majority stake.

Along with the acquisition Government merged seven domestic companies namely Deccan Airways, Airways India, Bharat Airs, Himalayan Aviation, Kalinga Airlines into Indian Airlines. It was a challenging task to mold all the seven companies into one single integrated organisation with uniform standard of operations, administrative common scales of pay, conditions of service, rationalise routes and reduce their cost and improve efficiency.

Once the monopoly was lost to private players, Air India soon started facing problems The Company took a turn for worst post 2004 when Shri Praful Patel ordered excess aircraft at inflated prices. that were not backed by either a viable revenue plan or expansion of routes. These decisions lead to be last nail in the coffin for the deceased airline.

Merger with Indian Airlines

To cover up the above losses government announced the merger of Air India and Indian Airlines in 2007, which was aimed at generating high profits and capturing a large market share. However, this backfired and added a lot more challenges

  1. Mismanagement of manpower: Not only high employee aircraft ratio but also under-utilisation of pilots and cabin crews.
  2. Addition of Loss making Routes – Added international routes backed with political and not economical drive
  3. One-time large Capex – 70,000 Cr capex in 2006 without any substantial future outlook of revenues.
  4. Cash Crunch – An enormous borrowing of Rs. 14,000 Cr.
  5. Falling Market Share – From 100% in 1990 to 13.5% in 2017

Bailout: a new chapter

With the financial burden of 111 aircraft and working capital loans, the airline’s debt ballooned from Rs. 5,000 crore to Rs. 54,742 crore in 10 years. In 2011, when the airline reached a point that it could not pay salaries on time, the UPA government agreed to provide Air India about Rs. 30,000 crore in equity funding, spread over a decade for financial restructuring in order to bail out Air India. Major steps included aggressive plan for cost cutting that would focus on restricting the productivity-linked incentive pan. This restructuring plan would take a period of 36 months with Air India coming with an IPO in the third phase of the period. However, the IPO never came. Till now the Government has infused a whopping Rs. 26,545 crores in equity.

Air India’s sale

A decade after an ill-fated merger threw the national carrier into a tailspin, the Modi government decided to go for privatising the airline by selling its 76% stake in Air India Ltd along with 100% stake in low cost carrier Air India Express Ltd.

 

 

 Interested Parties

  1. Indigo

Having a market share of 40% at home, the company has consistently reported profits over the past few years. IndiGo has expressed its interest primarily in the acquisition of Air India’s international operations and Air India Express, as they have a great exposure in rich country airports. Indigo was interested in Air India`s international operations only. Since the government didn’t want to sell the operations piecemeal, it may not be attractive bid of Indigo.

  1. Jet Airways

Jet Airways (India) is expected to team up with Air France-KLM and American carrier Delta Air Lines on a joint bid, according to Indian media. Buying Air India would help Jet widen its advantage over IndiGo in international flights..

  1. Vistara Airlines

Tata group and Singapore Airlines which started Vistara in 2015 are planning to start serving international routes by next year. For this, the company needs to order bigger planes. Air India may be the right company for them to dominate the international market quickly.  This acquisition will also provide an unmatched network depth to the airlines. However, being new airlines, it may be a huge acquisition for them operationally.

Deterrents to the proposed sale

  • Debt

Perhaps the biggest deterrent for a potential buyer is Air India’s huge debt pile. Air India have debt and contingent liabilities of Rs 54,742 crore as on March 2017. Under the proposed sell-off, the new buyer will have to take over some of the existing debt and liabilities of Air India (AI) and Air India Express Ltd(AIXL) – Rs 33,392 crore – as part of debt reallocation.

  • Employees

Together, Air India, AIXL and AISATS have 40,809 people under various types of employment terms. The EoI document mentions that the Air India’s employee cost is one of the lowest in its peer group, the fact that a large amount of the workforce of Air India and AIXL is working with other group subsidiaries, and vice-versa, can potentially complicate the issue. Some of this workforce is assumingly crucial for the functioning of the AI and its subsidiaries.

Conclusion

Air India`s debt problem has snowballed into a monster of stratospheric propositions creating a financial stress on the government.  Being a negative worth company and depicting the failure of the government to revive the company it seems better to handle it to a private company to streamline its working capital, bring efficiency in staff to improve its margins to make it compatible in the competition. Indigo being a well-managed company can bring a turnaround in Air India. It is also profitable for the company as Air India has a lot of valuable slots in international airports which will help Indigo to increase its market share in international markets. The only issue for Indigo is domestic airlines which they are not focused in buying but it may not be a big problem for them.

This article is penned by Khushbu Gandhi, Investment Adviser, Moneybee Investment Advisors Private Limited. For more details you can reach her on khushbu@moneybeeadvisors.com

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