Air India disinvestment: Beyond excitement, lies the uphill task of accessing assets, keeping it lucrative for buyers

New Delhi: The cabinet on Wednesday gave an in-principle nod to the strategic disinvestment of government’s stake in Air India. This would kickstart the process of disinvestment but does not mean the process has been expedited in any way. It is a long road to the privatisation the national carrier, where the Indian government is the sole owner and has not yet taken a call on how much equity to offer to a potential strategic investor. Though some in the government have been saying that the disinvestment process is on a fast track, no final decision may be taken in this fiscal. The entire disinvestment process could take anywhere up to 18 months.

 Air India disinvestment: Beyond excitement, lies the uphill task of accessing assets, keeping it lucrative for buyers

Representational image. Reuters

The cabinet has decided to form a group of ministers (GoM) to decide, among other things, the quantum of equity to be offered, ways to deal with Air India’s "unsustainable" debt and housing some of the airline’s assets into a shell company. This group will also decide whether to demerge three of the airline’s profitable subsidiaries and do a strategic sale of these. Also, a very crucial piece of the Air India jigsaw puzzle will fall in place when this group decides if foreign investors and/or foreign airlines can also bid for the national carrier. The group will be headed by finance minister Arun Jaitley and also comprise the civil aviation minister, besides others.

So, will the government bite the bullet and completely exit the Maharaja? This is one possibility and perhaps the only sensible thing to do, according to this article.

The three options on the table are a 100% sell-off, a 74% stake sale or a 51% stake sale. What this means is, in any scenario, the government will cease to be a majority owner of the airline. Anyway, Wednesday’s cabinet decision merely affirms the intent of the government to do something about the loss-making white elephant that is called Air India – what will be done will emerge slowly. It's important to recall that in the first flush of excitement, just after the top government movers and shakers decided to disinvest government's stake in Air India, an offer had been made to Tata Sons to come forward and invest in this airline. The Tatas won’t be taking a call in a hurry, especially since how much stake is on offer is still in the realm of speculation.

Already, another powerful businessman, Anand Mahindra, has distanced himself from the Air India disinvestment. When asked by someone on Twitter on Wednesday, if he intended to buy into Air India or start a new airline, Mahindra tweeted: “I see myself as a generally courageous person….But I confess….I don’t possess THAT much courage (sic)”.

Will the Tatas, who already compete with Mahindra in the automobile space, win this round? Remember, Mahindra was one of the independent directors on the board of Air India during the UPA tenure when Praful Patel was the civil aviation minister. Mahindra was accompanied by three other professionals as independent directors on the airline’s board at that time but all four quit after a controversy over the airline’s management. They had to take their grievances to the Prime Minister’s Office of Manmohan Singh when the airline management and the government turned deaf ears to their woes. If gross mismanagement irked Mahindra enough at that time to quit the board, it would be sensible now to refrain from pouring money into the loss-making, debt-laden Air India.

Air India’s books are “bad”, as civil aviation minister A Gajapathi Raju has said often. It has over Rs 50,000 crore debt and about Rs 23,000 crore of accumulated losses to show, and the Niti Ayog proposal which sparked the selloff talk within the government, says the NDA government would like any prospective buyer to shoulder half the debt burden! So will the remaining half be written off?

An official close to the developments had told Firstpost earlier that it is possible to break up the airline into two distinct parts. One is the airline itself with aircraft and related assets. The second part comprises Air India’s subsidiaries and the real estate. This official had said that the sensible way to get maximum value in this disinvestment process would be to sell off just the airline to a prospective buyer. The government could then simultaneously dispose of the subsidiaries and real estate for a total consideration of close to Rs 20,000-21,000 crore.

This official said that the sale of standalone Air India can happen only if any prospective buyer agrees to bear about Rs 20,000 crore of aircraft loans and another Rs 6,000-7,000 crore of working capital loans.

“The current market value of the aircraft is higher than the loans. And, of the Rs 30,000 crore total working capital loans, the bidder may be asked to take on only Rs 6000-7000 crore. In return, the buyer gets a fleet of 43 owned aircraft, valuable domestic and international slots (for which buyers are usually willing to pay a premium), parking bays, etc,” the official said.

But why should the government write off the remaining debt on Air India’s books? According to the official, the government may not need to write off any large amount if the airline is broken up and its subsidiaries are sold separately. Air India has five subsidiaries: Air India Charters Ltd, Air India Transport Services Ltd (ground handling subsidiary), Air India Engineering Services Ltd (MRO subsidiary), Hotel Corporation of India and Alliance Air.

Back-of-the-envelope calculations show that AI Charters could fetch around Rs 8,000 crore – it has been profit making for the last two years —  whereas the ground handling business together with the joint venture AISATS could fetch another Rs 3,000 crore, the official said, referring to its dominant market share in the ground handling business across the country. Then, the MRO business could be valued at another Rs 3,000-4,000 crore. The person quoted above said the subsidiaries could be sold through a slump sale method. Then, real estate owned by Air India across prime locations in the country and abroad could fetch an additional Rs 5,000-6,000 crore.

What is needed now is a hard-nosed assessment of Air India’s assets versus liabilities and a workable proposal which makes the airline attractive to any prospective buyer.

Updated Date: Jun 28, 2017 21:16:54 IST