Air India stake sale: Breaking up of the Maharaja is a good move but govt should exit the national carrier completely

New Delhi: If the government indeed breaks up Air India into four distinct parts before beginning a sale, it would be one of the most sensible decisions in any disinvestment process so far. Minister of State for Civil Aviation (MoS) Jayant Sinha said in this piece in LiveMint that the government will break the airline into four units and offer to sell at least 51 percent in each of them besides transferring most of the non-core debt to its own balance sheet. The core airline business comprising Air India and Air India Express—the low-cost overseas arm—will be offered as one company. Its regional arm (Alliance Air), ground handling business (AIATSL and JV company AISATS ) and engineering operations (AIESL) will be sold separately in the same process. This is an eminently sensible move for several reasons. First, it allows the government to offer the core business of flying – the domestic and international operations – as a single and separate entity, shorn of the encumbrances of the other businesses. So any bidder interested only in Air India’s experienced cabin crew, international flying rights and other aircraft related operations need not be forced into buying its ground handling arm or that which offers engineering services too. Second, it allows bidders to understand the financials of the deal better. The purely airline business is expected to have a debt of about Rs 19000-20,000 crore on its books, backed by aircraft which are of higher value. This enables any potential buyer to assess the merits of buying the airline operations vis-à-vis the enterprise value of the airline and any amount it would be expected to pay upfront to the government for buying this business out. Similarly, the financials of the other parts of Air India would become clearer by the breakup. [caption id=“attachment_4302393” align=“alignleft” width=“380”] Representational image. PTI[/caption] Third, it allows non-flying part of the business to also get distinct valuation and possibly a good set of buyers. The engineering business of Air India houses some industry-leading talent and has one of the most robust facilities for aircraft maintenance and repair in India. It could probably attract the right buyers with better valuation alone than when it was being bundled with the main airline business. As for the ground handling part of the airline, it is split into a wholly owned arm (AIATSL) and a 50:50 jv AISATS. SATS has the first right of refusal in this venture and it is possible that the Singaporean company buys out the government’s stake. It has made such an offer to the government earlier too. Fourth, by breaking up the airline into different parts, it is possible that the government retains some of these parts – does not offer all the four for sale. There is a persistent view that Alliance Air, for example, which offers unmatched regional connectivity – should not be sold off since the government is anyway emphasising enhanced connectivity of the hinterland through special schemes like UDAN. Again, for AISATS and Air India Express there have been similar views – why offload these profitable ventures if the intention is to only let go of the loss making parts? Air India has accumulated losses of almost Rs 40,000 crore and debt totaling around Rs 49,000 crore – of which working capital debt is around Rs 30,000 crore. This latter part of the debt is expected to be housed in a special purpose vehicle and only the remaining about Rs 19000-20,000 crore will need to be factored in for the sale of the airline. Having decided to break up Air India, though, is no guarantee for the stake sale process to go on without a hitch. The success of this ambitious disinvestment case would also lie in whether the government continues to hold any stake at all in the disinvested entities. Indications are that the government may be reluctant to exit completely. This would be a bad idea, even if government nominees on the board of the new entities pledge not to interfere in their functioning. At least two potential airline investors have already made it clear that if the government continues to hold even a minority stake in the airline entity, they would hesitate to come forward. This means a dwindling of interest in the sale process itself. In this piece in MoneyControl, minister Sinha has indicated the government’s intention to offer at least 51 percent stake in the airline but not completely exit. Why the government doesn’t want to let go of Air India is explained in an incoherent way by officials who have pointed out that this will ensure better valuation for its (government’s) remaining stake in the airline. After a private acquirer takes over, it is presumed the airline entity will improve the running of a business which the government has systematically ruined through bureaucratic apathy and reckless misuse by politicians. At best, this is warped logic, at worst an invitation for the sale process itself to be derailed. Already, the disastrous decision to merge the two erstwhile airlines - Air India (international) and Indian Airlines (domestic) - in 2007 pushed the resultant entity into sustained losses. Never, after this merger, has the resultant entity managed to register net profit of a single rupee. Only, a meagre operational profit has been registered for two fiscal years (FY 16 and FY17) and that too, largely on the back of benign fuel prices. Any move by the government to retain control even after disinvestment may similarly backfire. Even if the government waives a significant part of the debt from the books, its looming presence would be enough to deter sound investors. Then, another thread in the disinvestment saga is about allowing foreign entities to own up to 49 percent stake in the disinvested parts of Air India. This is a welcome decision though the government may find it tough to ensure that the ‘substantial ownership and management control’ caveat is followed.