A white ele­phant in the sky

Do­mes­tic play­ers have backed out, and in­ter­na­tional play­ers have sev­eral pre-con­di­tions be­fore they sub­mit ex­pres­sions of in­ter­est for Air In­dia

Business Standard - - FRONT PAGE - SURAJEET DAS­GUPTA

There has been lit­tle good news for the avi­a­tion min­istry in the last few weeks. First, the coun­try’s most profitable air­line, IndiGo, an­nounced that it was not go­ing to bid for Air In­dia be­cause it was in­ter­ested only in the in­ter­na­tional busi­ness. Soon af­ter, Jet Air­ways also said no, and SpiceJet pro­moter Ajay Singh re­it­er­ated his “too small to bid” ex­pla­na­tion. To add to the drama were con­tra­dic­tory re­ports on Tata-SIA’s in­ter­est for the state-owned air­line; though Sin­ga­pore Air­lines main­tained it was open to the idea, the Tata group main­tained a stoic si­lence.

Yet sources in­volved in the bid­ding process in­sist there is no cause for worry. Many global big boys are in­ter­ested — these in­clude Lufthansa, Bri­tish Air­ways and Eti­had (it did not re­spond to a query) as well as some fi­nan­cial in­vestors, they say.

The real story will be clear when com­pa­nies ac­tu­ally sub­mit their “ex­pres­sions of in­ter­est”, which is some time away. But po­ten­tial bid­ders have raised se­ri­ous con­cerns, not un­usual in such a com­plex sale. The same ques­tions con­fronted air­lines and gov­ern­ments across the world.

On top of the list is down­siz­ing. Air In­dia has over 16,800 em­ploy­ees pro­tected by strong labour unions. No sur­prise, then, suc­ces­sive gov­ern­ments have failed to trim the work force. The gov­ern­ment says it only wants the new buyer to en­sure that Air In­dia’s em­ploy­ees are on the rolls for a year. But bid­ders point to the po­ten­tial may­hem dis­grun­tled em­ploy­ees could cre­ate, es­pe­cially when the air­line can be run with less than half the staff. A one-year mora­to­rium would amount to kick­ing this can down the road.

Says a top ex­ec­u­tive of a po­ten­tial bid­der: “The big­gest chal­lenge is not the debt but the gov­ern­ment’s de­ci­sion to shift the en­tire re­spon­si­bil­ity for the labour ques­tion to the new own­ers. If they could not han­dle them for decades, how do you ex­pect us to find a so­lu­tion af­ter one year?”

There are glob­ally suc­cess­ful models that worked to cope with this prob­lem, Bri­tish Air­ways (BA) be­ing a text­book ex­am­ple. In 1983 CEO Colin Mar­shall took a hit on the bot­tom-line to of­fer staff in­cen­tives to leave but bal­anced the ini­tia­tive with strin­gent cost-mea­sures else­where to en­sure a quick re­turn to prof­itabil­ity. Five years later, in 1987, when the Bri­tish gov­ern­ment sold its stake through the stock mar­ket, the of­fer­ing was sub­scribed eleven times.

The is­sue of a bloated labour force is not pe­cu­liar to In­dia. It has fea­tured in the on­go­ing pri­vati­sa­tion of Ital­ian car­rier Al­i­talia which had been post­poned be­cause of the elec­tions. Even here, one of the con­tenders, Lufthansa, has shown in­ter­est con­di­tional on a ma­jor re­struc­tur­ing that in­cludes re­duc­ing labour and fleet.

Po­ten­tial bid­ders for Air In­dia say the gov­ern­ment must be aware that this could be a con­tentious is­sue, which is why talk of stock op­tions has been do­ing the rounds. But a spe­cific plan of ac­tion needs to be put in place, they point out.

The other point of con­cern is whether the gov­ern­ment should in­sist on sell­ing the air­line in one piece or tweak the rules and auc­tion the na­tional and in­ter­na­tional busi­nesses separately. Opin­ion is split on this. A large chunk of the po­ten­tial bid­ders are only in­ter­ested in the in­ter­na­tional busi­ness be­cause it is more at­trac­tive with its routes, bi­lat­eral fly­ing rights, in­ter­na­tional slots and a grow­ing num­ber of In­di­ans who are trav­el­ling abroad .

Yet it is dif­fi­cult for any gov­ern­ment to sell the more lu­cra­tive piece and be left strug­gling to find tak­ers for the do­mes­tic busi­ness, which also ac­counts for the larger chunk of the labour force. The air­line does have valu­able slots in cities like Delhi and Mum­bai, where fresh land­ing ca­pac­ity is not avail­able. But that short­age will be over in two to four years. And no one buys a debt-rid­den as­set with­out a ten- to 20-year per­spec­tive.

Some po­ten­tial bid­ders say the gov­ern­ment’s in­sis­tence that they should take Air In­dia pub­lic within three years makes no sense. They ar­gue that the time-ta­ble should be left to the new buy­ers as there is no guar­an­tee that the air­line can be turned around in this pe­riod. They may be right but the route for list­ing has been a glob­ally ac­cepted prac­tice. Aus­tralian air­line Qan­tas used a com­bi­na­tion — sell­ing its stake to a strate­gic in­vestor (25 per cent to BA) and hold­ing an Ini­tial Pub­lic Of­fer­ing. BA sold its stake in 2004. West­ern air­lines like KLM or Lufthansa have also fol­lowed this model suc­cess­fully.

So the ques­tion is whether Euro­pean car­ri­ers Lufthansa and BA and West Asian giant Eti­had will make a bid. It all de­pends on In­dia’s im­por­tance in their global play, whether they will find an In­dian part­ner — and none of them are talk­ing. Eti­had’s strat­egy to close in on its re­gional chal­lengers was to buy eq­uity stakes in air­lines across the world. But two of its key in­vest­ments in Europe — Al­i­talia and Air Ber­lin — filed for bankruptcy. In­dia is surely a key coun­try to take on Emi­rates, which is why Eti­had bought a stake in Jet Air­ways. But with the Jet man­age­ment get­ting closer to the Air France-KLM com­bine, ques­tions are be­ing asked on the fu­ture of this in­vest­ment. Also, there are doubts on whether the air­line has the fi­nan­cial mus­cle to bid for Air In­dia with­out sell­ing its stake in Jet (it has de­nied this).

Lufthansa is busy in strength­en­ing its po­si­tion in Europe — bid­ding for Al­i­talia and a part of Air Ber­lin. That apart, it al­ready con­trols Aus­trian Air­lines and Swis­sair. It is dif­fi­cult to pre­dict whether it will have the time and re­sources to spread its wings to Asia via Air In­dia. If it does, it could well be a force to reckon with in the skies.

A few days ago, IAG, BA’s own­ers, said it was buy­ing a stake in Nor­we­gian Air and will make a full of­fer for the air­line that has changed the rules of the game. If suc­cess­ful, the move will neu­tralise a BA com­peti­tor with its at­trac­tive low-cost long-haul transat­lantic flights from Gatwick. Whether BA and its own­ers would also be in­ter­ested in bid­ding for AI as part of their global am­bi­tions in Asia is a ques­tion that will be an­swered very soon.

Some po­ten­tial bid­ders say the gov­ern­ment’s in­sis­tence that they should take Air In­dia pub­lic within three years makes no sense

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