Surprise! Someone Actually Wants To Buy Air India. Here’s How To Make It Happen

The Narendra Modi government bit the bullet last week when it took an in-principle decision to privatise the loss-making Air India. Gifting a White Elephant is tough in the best of times; hoping that someone will take a fancy to the pachyderm and actually pay a price for it is fantasy.

And yet, the signs appear propitious. Already two parties have shown an interest in acquiring a majority state. One is the Tata Group, which may want to bring in Singapore Airlines as partner; the other is IndiGo, the domestic market leader with over 41 per cent market share.

The question is for whom will the acquisition make most sense? For IndiGo, any acquisition of Air India, with a market share of around 13 per cent, will invite scrutiny from the Competition Commission of India. With Air India, it will have more than half the air traffic in India, and a significant share of the foreign traffic in many sectors. Air India’s accumulated losses of Rs 50,000 crore may also give it a tax shield, since future profits can be set off against these losses, especially if the airlines get merged.

For the Tatas, who have a very low share of market through Vistara (3.2 per cent), the Air India acquisition would make more sense, as it will immediately make it No 2 in Indian skies, apart from providing access to a lot of international traffic.

But the key deterrent is Air India’s debt, which is around Rs 55,000 crore, and eats up Rs 4,500 crore in terms of interest payments annually.

On the assets side, the airline has aircraft worth nearly Rs 20,000-25,000 crore, some valuable real estate, including Mumbai’s iconic Air India building, and good landing slots in India and abroad, etc.

What the expressions of interest by the Tatas and IndiGo show is that Air India is not completely without suitors. The government can thus focus on getting the best deal from them. The eventual price will be better if the bidding is opened to foreign airlines too. However, the word “price” is a bit misleading, as it is unlikely that the government will get any payment for an airline with such high accumulated losses. At best, it can get somebody to take the airline off its hands, so that it does not have to pay for future losses.

The question is how should this be done.

First, the sale terms should be transparent and competitive bidding should be the norm.

Second, it may be a good idea to offer the attached real estate and properties as part of the deal. Trying to separate the real estate from the airline will be time-consuming, and will also make the bid less attractive to potential buyers. Private parties find a way to develop real estate more easily than public sector players.

Third, the basic competitive part of the bidding process should be based on the debt: bidders offering to take up the maximum portion of Air India’s debt should be preferred over those wanting the government to take the debt off Air India’s books.

Fourth, the brand Air India (which has value of its own) should not be part of the bid. It should be retained by the government. If foreign bidders are invited, it should be made clear that the name will not be given to them. It makes no sense to have, say, a Qatar Airways owning an airline called Air India. The name “Air India” should remain with India; at best the name can be leased out for a limited period after the sale to prevent confusion among travellers.

Fifth, if IndiGo can bid despite its very large existing share of the Indian aviation market, it may need special restraints on what it can do on fares and pricing.

Sixth, the bidder will also have to be evaluated on what he intends to do with employees, including the possibility of offering a voluntary retirement scheme for the older staff.

Unlike what was feared, the government should consider itself lucky that Air India is still finding buyers despite its overmanning and heavy debts. It must make the most of this window of opportunity and speed up the process of privatisation.

(A modified version of this article was published in Dainik Bhaskar)