Jet Airways, SpiceJet jump in the domestic carriers' fray for Air India: Why govt nudging is only half battle won

Two more domestic airlines in the fray for Air India would be music to the government’s ears, even if the entire scheme has been orchestrated by the government itself. Fearful of a flop show, the government has been quietly nudging potential bidders to throw their hats in the ring and it would not come as a surprise if the latest names are also part of the nudging campaign.
Having committed itself to the disinvestment of the ailing airline, the government has been struggling with modalities of the sale since myriad financial and structural complications make it a difficult proposition.

Not surprisingly, even those potential bidders who have shown interest in the disinvestment process have shown interest only in parts of the airline’s business while maintaining scepticism about its pile of debt and other imponderables.

This piece quotes a top government official as saying that Indian carriers, including Jet Airways may join the fray for the Maharaja. "The economics of the game will change completely for whichever airline gets Air India. With its 14 percent domestic and 17-18 percent international market share, getting AI will be a paradigm shift for the successful bidder. Other airlines like Jet and possibly even SpiceJet will have no option but to bid for AI," said this official. It is noteworthy that neither airline has acknowledged any interest publicly, with Jet saying “thinking is on”.


As of now, IndiGo – which is India’s largest airline by passengers – has been the only airline to evince any interest in the AI disinvestment and that too primarily in the international operations of Air India. All other known expressions of interest have been from some ground handling firms who may are eyeing the ground handling business of Air India. So two more domestic airlines as potential bidders surely strengthens the government’s disinvestment drive.

Even the Tata Group, which has a rich aviation history and long past association with Air India, has not formally expressed any interest what so ever. It is believed that after first having asked the Tatas to come forward to bid for Air India, the government is now again nudging the salt-to-software conglomerate to come forward and place a bid. This, when Tata Sons’ chairman N Chandrasekaran has been advocating a consolidation within the group and the group already has equity stakes in two separate airline ventures – AirAsia India (49 percent) and Vistara (51 percent).

People close to developments have already indicated continued reluctance of the Tatas to participate in the Air India disinvestment, at least till the sale modalities are known. The biggest consideration for any potential bidder, an airline or not, is what the government decides to do about the Air India debt pile. According to information given in Parliament till recently, the airline has a debt of close to Rs 49,000 crore on its books.

This piece says half of the debt will be transferred to a separate company to make the airline more attractive to potential bidders. Of the total debt, about half is due to working capital requirements. This is specifically the portion aviation analysts have said needs to be written off before any serious buyers will come forward for the loss laden Air India.

The only trouble is, if the government were to actually write off half of the total debt, wouldn’t this set a precedent for future disinvestment of loss making PSUs? Why should the tax payer first pump money into the loss making Air India and then also fund a one-time write off of debt which was anyway a consequence of poor management and piling losses of the national carrier?

It is certain though that buyers may find the airline more lucrative if the entire working capital portion or a significant part of it is waived off. The debt write off seems to be virtually a pre-condition to the sale of the airline.

“Except Air India Express, all other subsidiaries and non-aircraft assets should be taken out of the AI balance sheet. Land and real estate assets need to be dealt with separately, given challenges and risks associated including legal,” global aviation consultancy CAPA’s CEO-India and Middle East, Kapil Kaul, said earlier. The core airline business of Air India is flanked by five different subsidiaries – Air India Express, Alliance Air, Hotel Corporation of India, AIATSL (ground handling) and AIESL (engineering). The Air India we know today is a loss-making behemoth, with a mountain of debt and a large employee base.

Potential bidders may look to purchase parts of the airline which best suit their existing businesses or future growth ambitions. IndiGo is keen on Air India’s international operations since it is preparing to launch low cost international long haul operations and the existing infrastructure of Air India would prove to be an asset.

The Bird Group (another potential bidder) is probably looking for the ground handling subsidiary of Air India to enhance its own ground handling services. With a pan-India presence, AIATSL is already the market in ground handling. During 2014-15, the first year of operationalisation, its total revenue Rs 707.22 crore and net profit was Rs 90.68 crore.
In 2016-17, AIATSL is likely to post an operational profit figure is Rs 105 crore, similar to the immediately previous fiscal. It is the only subsidiary, other than Air India Express, which is not loss making for the Air India Group.

Anyway, why would Jet Airways or SpiceJet want a pie of Air India? Remember, though Air India offers about 17 percent share of international traffic and lucrative bilateral flying rights to any bidder, Jet has already partnered Etihad for the middle-east routes and Air France-KLM for Europe. As the Bloomberg piece quoted earlier says, a successful sale of Air India is crucial for Prime Minister Narendra Modi, who wants to showcase his commitment to reduce the state’s role in business, after many of his predecessors failed to dispose of the carrier in the face of stiff political opposition.

A deal would help cement Modi’s image as a business-friendly leader. But nothing may move this fiscal, and it is entirely possible that by late next calendar year, compulsions of upcoming General Elections push Air India sale to the backburner.

Updated Date: Nov 30, 2017 15:18 PM

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