Will the Maharaja fall out of government arms this time?

Air India’s divestment is back in the news. This time because the government has extended the deadline for interested parties to submit their Expression of Interest (EoI) to October 30, from the August 31 deadline earlier. Ostensibly, this extension has been given at the request of the bidders and in view of the prevailing situation due to the Covid-19 pandemic.

This, however, is not the first time that the Modi-led government is trying to privatise the Maharaja. It made a similar attempt two years ago, which ended in a whimper as it found no bidders.

Bleeding losses

When the divestment process started, the government set March 17 as the deadline for interested parties to submit their proposals and it was hoping to complete the sale by the middle of the year. And then Covid happened.

There is little doubt that the state-owned carrier has been bleeding financially for some time and needs help. Its net losses increased to ₹8,556.35 crore in 2018-19, compared to net losses of ₹5,348.18 crore reported for 2017-18. The cash-strapped carrier’s accumulated losses in the past decade stood at ₹69,575.64 crore.

The government has given the airline a bailout package in excess of ₹30,000 and infused equity capital of ₹3,430 crore over the years.

However, the government has now realised that it can’t keep pumping in money to keep the airline afloat. Minister for Civil Aviation Hardeep Puri is on record saying, “Privatisation is not only necessary but leaves us with no option for the simple reason that airlines the world over were under strain in the pre-Covid time and Covid has introduced a new element. Even if Air India wants to be dependent on the government, the government may not be in a position in view of the other demands being made on it in the current situation. We do not have a choice, we have to privatise Air India.”

But despite these intentions, the key question that remains is whether the government will be able to find a buyer this time around.

More attractive

There is near unanimity that the changes introduced in the bid document, like selling off 100 per cent stake in Air India and the Maharaja’s debt being reduced to ₹23,286 crore from ₹60,074 crore previously, will help.

The government has also clarified that the airline’s net working capital is zero, which means that its current assets are equal to its current liabilities.

Lewis Burroughs, Head of Aviation, India, ICF Consulting India Private Ltd, says that the decision to reduce debt to around $3 billion makes the prospect more appealing to would-be bidders.

Abhilash Varkey Abraham, Research Analyst, Aerospace, Defense & Security Practice, Frost & Sullivan, agrees, pointing out that a complete sale of the organisation with reduced debt for the new owner, along with premium slots in the airline’s international network, will make the national carrier much more attractive for potential bidders. “The government recently allowed Non-Resident Indians (NRIs) to acquire up to 100 per cent of Air India, up from the previous limit of 49 per cent. This move may entice individuals interested in the carrier,” he adds.

According to Jagannarayan Padmanabhan, Director & Practice Leader – Transport & Logistics, CRISIL Infrastructure Advisory, the government has removed the biggest stumbling block of continued government ownership in the airline.

Not the best timing

However, industry watchers are also quick to point out that the timing of the sale may be all wrong. For one, there is the still continuing Covid crisis, which has impacted the aviation sector very badly.

According to estimates by the International Air Transport Association, the global airline industry is likely to lose $84 billion this year. It has also pushed back recovery of the global airline industry to 2019 levels to 2024, one year later than what it had predicted earlier.

According to Burroughs, the Covid crisis has naturally scared some potential investors. He cites the example of Warren Buffett who sold his shares in US airlines recently because of the pandemic. He adds that the pandemic is likely going to result in lower prices than the pre-Covid levels. “The market isn’t going to recover for a few years so it is going to take some time to realise the investment,” he says.

Abraham agrees, pointing out that the pandemic will further exacerbate Air India’s struggles to contain operating costs and debt. “There is a possibility that the pandemic could deter potential bidders who would have otherwise sought to acquire Air India,” he adds.

How free a hand?

Some others maintain that, besides Covid, some other road blocks remain. They point out that a stake sale of 100 per cent in theory means that whoever comes in can give the Maharaja the overhaul it needs to modernise operations and bring the airline back into competition with other Indian and foreign airlines. However, it will be interesting to see how the 100 per cent ownership plays out. “While the owner may have control in theory, will it be able to restructure the workforce without government intervention? Will politicians and those in other government agencies continue to exert influence over operations?” asks an industry watcher.

This was a crucial aspect even during the government’s earlier attempt at privatising Air India and it still remains a key question. Add to this the current climate of low fares, increasing competition on the long-haul sector and West Asia flows likely to recover slowly and it will be a challenge for anyone to work on reducing Air India’s debt.

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