Air India Sale: Why Government Must Get Down To Business

A delay in the strategic disinvestment of Air India (AI) is starving the airline of crucial funds for day to day operations. Air India is solely dependent on the government for equity infusion, which helps it to raise funds for working capital and other needs. But the government has not been infusing all of the promised equity, hoping that the airline gets by till a strategic investor comes forward.

Now that the disinvestment process itself is delayed, this is creating worries for AI’s operations. According to the timeline given by the Ministry of Civil Aviation to a Parliamentary Standing Committee, the disinvestment process should be completed by June this year.

This is quite unlikely now, with even the Expression of Interest (EoI) document still not public. The deadline for EoI was end of February. The government itself now estimates that the disinvestment process will stretch till at least the end of the calendar year (it may extend beyond that too, now that EoI is already delayed) – which means cash shortage at the airline would likely worsen unless more funds are made available.

Sources in Air India said that EoI could be released by the end of March, and it is still awaiting approval from the Air India Specific Alternate Mechanism (AIASM) which is headed by Finance Minister Arun Jaitley. They said that the total shortfall in equity infusion stands at a whopping Rs 3,650 crore: the shortfall as per a turnaround plan earlier approved is Rs 2,500 crore and another Rs 1,800 crore is due on forex fluctuations.

This acute shortfall has lead to an unprecedented situation at Air India. The airline has had to resort to increased bank borrowings to meet its funds requirement. “Even in such case where bank borrowings are not forthcoming without adequate assurance/guarantee from the government since the company is under FRP and its borrowings are totally guided by its Consortium of Lenders. The second option for the company is to defer some creditor payments so that funds can be used to meet its day to day operational requirements. In both the cases the company has to take a financial hit because of increased interest outgo either by way of increased bank borrowings or by way of deferment of various creditor payments,” the ministry of civil aviation told the Standing Committee on Tourism, Transport and Culture, which released its 257th report yesterday.

One sign that cash shortage is hurting the airline is contained in this report: AI’s traffic dues to the Airports Authority of India stand at a whopping Rs 2046.21 crore. This is three fourths or almost 75 per cent of all traffic dues of AAI. Sources quoted earlier said vendor payments have been “slightly” delayed due to the government’s stinginess over equity infusion in Air India. “We may be compelled to raise money from banks, raising our interest costs further,” they said but did not confirm if salary payments to employees have also been affected.

The disinvestment process is not only delayed but could be on a bumpy road ahead too. The biggest elephant in the room is liabilities of the airline. A potential bidder had said earlier no one seems to know the extent of liabilities, present and contingent, and this one figure may determine the success of the disinvestment. “Everyone more or less knows the extent of losses at Air India. But different figures are emerging on the liabilities. What are the valuations for ground handling, land assets, bilateral traffic rights, aircraft – all this needs to be assigned. Then, liabilities need to be accounted for. These figures are being brushed under the carpet,” this person had said. Remember, Civil Aviation Minister A Gajapathi Raju has said several times that the airline’s books are “bad”. He was also quoted saying that the debt on AI’s books may be closer to Rs 70,000 crore, not Rs 50,000 crore.

That is an increase of about 40 per cent. Air India sources had earlier said debt was about Rs 50,000 crore if only long term and working capital debt were considered. But if all the current and contingent liabilities were also included, about Rs 20,000 crore gets added taking the total debt close to Rs 70,000 crore. While this is sound accounting, it is certain to send out confusing signals to potential investors.

Then, the latest disclosure by the government about AI’s financials in 2016-17, has again called into question the math. It seems the airline added about Rs 1,930 crore to its net loss overnight, due to certain accounting practices.

In this Lok Sabha written reply, Minister of State for Civil Aviation, Jayant Sinha, said on 21 December that provisional net loss of AI was Rs 3,643 crore for 2016-17. Since this was marginally lower than the net loss in 2015-16 and also because this was the second year that AI declared a modest operational profit, there was all round cheer. But within a span of a one-and-a-half months, the net loss figure has got inflated to Rs 5765.16 crore.

In this reply, Sinha said the net loss for 2016-17 was actually Rs 5,765.16 crore. About Rs 1,930 crore more than provisioned for, higher by almost 50 per cent. The airline added almost Rs 5 crore daily loss to its provisional net loss each day of 2016-17, it lost about Rs 16 crore each day.

Given the cash crunch and worsening financials of the airline, it is a no brainer that the strategic disinvestment should be expedited now. The intent is to offload at least 51 per cent in the airline, which will be first broken up into four different entities; much of the debt is also to be transferred to an special purpose vehicle to make the airline attractive. Delays in the disinvestment process are helping none of the stakeholders.