Terms Of Air India Privatisation Suggest That Best Price For It May Still Be Re 1

Air India, the white elephant on the taxpayers’ books, is finally up for sale. On Wednesday (28 March), the Union government unveiled the airline’s roadmap for privatisation by clearly indicating the parts that are for sale, and the strings they come attached with.

The plan involves selling 76 per cent of Air India, its subsidiary Air India Express, and 50 per cent AISATS, which runs some ground handling operations. Some operational assets, including some land, will be part of the deal, but not the iconic Air India building in Mumbai’s Nariman Point, which will go into a special purpose vehicle (AI Asset Holding Company).

Also not on the block in this round of privatisation are a few other assets: Alliance Air, the low-cost carrier, the rest of the engineering and ground handling operations, and Hotel Corporation of India will be sold separately. The asset holding company will have to deal with Rs 15,389 crore of the balance debt of Air India (read the details here)

The terms for bidders include the following: the Air India brand name will have to be retained post the sale; the airline will come with Rs 33,392 crore of debt, a big chunk of which does not relate to aircraft purchases, and bidders need a minimum net worth of Rs 5,000 crore. Indian airlines without this net worth can bid for Air India provided they bring in partners with the required net worth. Air India’s management and employees can also buy out the airline, if they satisfy the net worth criterion. This means a leveraged buyout should be possible in partnership with a large investor with the required net worth. The buyer will have a lock-in of three years, which means they must soldier on no matter what for this minimum period.

Is the recipe enticing enough to potential bidders? Maybe just about, though not much will come into the government’s kitty by way of purchase price. Perhaps, all of Re 1.

The positive aspects of the invitation for expressions of interest (EoIs) are the following.

One, the government’s retention of 24 per cent equity – a non-blocking minority holding – means there is some commitment of official handholding in the initial phases of the takeover. From the government’s point of view, this 24 per cent can be encashed later, once value is again established in the airline after a revamp by its new owners.

Two, the addition of Air India Express and AISATS, both profitable ventures, will partly counter-balance Air India’s massive losses of Rs 5,765 crore. This goes for the land parcel of around 21 acres.

Three, the unbundling of the engineering services unit means there will be clear visibility on Air India’s financials and potential, making bidding easier.

But, as currently indicated, there are some deal-breakers.

First, the debt is much higher than what would be backed by aircraft assets. This means only long-term players with lots of capital support can effectively bid for Air India. The gap between the debt incurred on aircraft purchases and the actual debt transferred cannot be filled purely by the value of the Air India brand.

Second, the net worth criterion of Rs 5,000 crore will probably narrow down the field of bidders to only the foreign airlines, and groups like the Tatas. Foreign carriers can own upto 49 per cent in Air India, which means they will need private partners. Barring IndiGo, which is not interested in buying the whole airline, the other domestic carriers will need robust foreign partners or private equity investors to bid. With IndiGo already taking up a 40 per cent market share in the domestic market, adding Air India’s 13 per cent would make it too dominant to pass muster with the Competition Commission of India (CCI), unless the deal is specifically excluded from scrutiny by the CCI.

Third, there is no mention of Air India’s staff. While pilots and ground handling staff will not be a problem, Air India’s ageing cabin crew may deter some bidders, since most airlines seek to keep stewardesses and cabin crew young. One must pay for voluntary retirements and also grounding the staff, which may raise hackles.

Fourth, the insistence on retaining the Air India brand is a bit unusual, since it will conflict with the ultimate buyer’s own long-term brand strategy. Some bidders may only be interested in buying Air India’s aircraft assets, including its landing rights abroad. Others may choose to make Air India a feeder or code sharer for their global operations (as is the case with Etihad and Jet Airways). It is only a non-airline that may be keen on the brand name, unless the buyer’s idea is to keep two brand names in different segments that complement each other.

The last date for sending EoIs has been fixed as 14 May, and the government says it wants to close the deal by December. Many experts believe the timeline is a bit too ambitious, since bidders will need more time to do their due diligence, and their queries will need answering by the government.

Most important, India has already begun the countdown to the 2019 general elections, and we cannot rule out the possibility of Air India privatisation becoming a political football. Mamata Banerjee has already begun making noises about it. So, brave though the privatisation proposal is, there are many hurdles to cross.