FAREWELL TO THE MAHARAJA
THE MODI GOVERNMENT WEIGHS ITS OPTIONS TO STRATEGICALLY DISINVEST IN THE ICONIC BUT DEBT-RIDDEN NATIONAL CARRIER
Mounting losses and accumulated debts of Rs 52,000 crore force the government to consider the privatisation of the national carrier
Air India’s headquarters in a narrow bylane of Delhi’s Ashoka Road is getting a fresh coat of paint, including a large image of its famed mascot, the Maharajah. Inside, the office of Ashwani Lohani, chairman and managing director, is being spruced up too. Bristling with plans, Lohani has just announced that Air India is introducing a flight to Copenhagen and another to Tel Aviv when Prime Minister Narendra Modi is scheduled to make a historic first visit to Israel in July.
Lohani, a turnaround expert who had put Madhya Pradesh on the tourism map of India, was brought in to get Air India into shape, in September 2015. To his credit, the Indian Railway Service officer got down to the fundamentals of putting the airline back on track: motivating staff, improving on-time performance and ensuring that the passenger load factor on every flight was much higher than in previous years. That brought back some glow to Air India’s sun emblem. Helped along by dropping turbine fuel costs, AI reported an operational profit of Rs 100-odd crore in the past two financials, for the first time in a decade.
That, though, was the only glimmer of light in the fog and gloom that have enveloped India’s flagship carrier in the past 10 years. Under the glass top of his desk, Lohani has placed a written sheet to constantly remind him of the grim reality. It displays the figures of annual losses that Air India has incurred since 2007—the year the central government merged the two Indian aviation public sector giants, Air India and Indian Airlines, into a single entity. Since then, it has been haemorrhaging nonstop at a crippling average rate of Rs 5,000 crore annually. At last count, the losses totalled Rs 52,000 crore. Meanwhile, Air India’s share in the booming domestic aviation market has shrunk to just 14 per cent—a distant third behind the high-flying Indigo and the stable Jet Airways. On the international sector, it still has a significant share of 25 per cent but continues to lose heavily on these flights (see graphic: Air India in a Tailspin).
Now, much to Lohani’s discomfort, there has been a growing chorus of voices in the past few weeks, both in Delhi’s power circles and in the media, for the Narendra Modi government to take a decisive step and, if necessary, to privatise the ailing PSU. Air India’s chief thinks that such talk is having a demoralising effect on his staff and he is desperately seeking clarity. Behind Lohani’s desk, on a book easel, is a thickly-bound copy of the Bhagavad Gita with verses in Sanskrit, Hindi and English. Every morning when he enters the office, he randomly turns a page and reads a passage. On one recent morning, the book opened to a passage which read, “Krishna! Dispeller of all doubts! Remove this doubt of mine because only You can remove it completely.”
The same afternoon, Lohani got the first clear signal of the government’s intentions towards Air India. In an interview with Doordarshan, Arun Jaitley, the affable finance minister, said, “To keep Air India running, we have invested Rs 50,000 crore. That money is government’s money, that’s your money. It could have been used for school education. And if 86 per cent of flying can be handled by the private sector, it can also handle 100 per cent.” Jaitley indicated that the Union ministry for civil aviation was exploring all options, including strategic disinvestment.
Acknowledging that fact, Ashok Gajapathi Raju, the Union minister for civil aviation, said, “It is no secret that the Maharajah is impoverished and is in a debt trap. We are all applying our minds as to how Air India can be
pulled out of it.” The debt trap Raju is talking of, simply put, is the Rs 20,000-odd crore Air India owes a consortium of foreign banks towards its aircraft purchases in recent years. It also has a working capital loan of around Rs 32,000 crore advanced by 18 public sector banks. It needs Rs 6,500 crore to service its debt annually. To meet that, it receives Rs 2,500 crore from equity by the government and claims depreciation of Rs 1,500 crore. Despite all this, it still has an annual shortfall of Rs 2,500 crore, for which it is forced to borrow from banks. This is the financial vortex that has seen Air India pile up Rs 52,000 crore in debt in the past decade alone.
JAYANT SINHA, the savvy minister of state for civil aviation, says it is the airline’s mounting debt that has the government worried, forcing it to look at various options. He told india today, “We are now at the endgame—we are getting to the end of the process of exploring the alternatives and not the beginning.” After the Modi government came to power, he says, the first effort was to correct the tailspin by putting in place a competent management, to improve its performance and put an end to the operational losses. After having stabilised the working of the national carrier, the next step was to work out how to tackle the daunting debt issue. The big questions confronting the government were: why was this important, what are the options before it and what impact the decisions would have.
These are hard questions to answer given that the proposals for the government to get out of running airlines go as far back as 1988 when there were two national carriers, Air India and Indian Airlines, both incurring heavy losses. To his credit, then prime minister Rajiv Gandhi, an Indian Airlines pilot himself, made the first bid to break the state monopoly over the aviation sector by permitting private air taxis on feeder routes to promote tourism. But when it came to privatising the two
NITI Aayog recommends a CLEAN BREAK WITHOUT CONDITIONALITIES to avoid further erosion in value
Privatising Air India will REAFFIRM MODI’S POSITION as an economic reformer
carriers, Gandhi’s advisers told him to go slow.
After all, it was his grandfather, Prime Minister Jawaharlal Nehru, who pushed for a closed, self-reliant economy where the public sector would straddle the commanding heights of the economy, including aviation. Prior to Independence, a few pioneering private aviators ran airlines. Among them was JRD Tata, who started Tata Airlines in 1932 and renamed it Air India in 1946. In 1953, however, Nehru pushed through the Air Corporation Act that nationalised all eight private airlines and formed two corporations, Air India for international services and Indian Airlines for the domestic sector. Tata was made chairman of Air India and a board member of Indian Airlines. Under Tata, who served for
25 years, Air India became an iconic airline with classy service backed with savvy advertising that made the Maharajah a distinctive symbol across the world. It was only in the early eighties when British prime minister Margaret Thatcher privatised British Aerospace that India began seriously looking at breaking the stranglehold of Air India and Indian Airlines with their declining ability to cope with the demands of a growing aviation sector.
The real turning point came in 1994, when Prime Minister Narasimha Rao’s government introduced the Open Skies policy by passing an ordinance repealing the
Air Corporation Act. This enabled the entry of private operators, permitting foreign equity up to 40 per cent in the domestic market. Within a year, a host of new private airlines like Jet, Sahara, ModiLuft, East West and Damania had captured close to 45 per cent of the domestic market. IA plunged further into debt and officials grumbled that private airlines were being allowed to operate on the more profitable trunk routes like Delhi and Mumbai, while the national carrier was left to service loss-making ones.
The domestic sector soon faced what the aviation sector called the four deadly horsemen: low traffic, overcapacity, poor yields and high unit costs. Indian Airlines’ losses began to mount and some of the less efficient private airlines either had to merge or shut shop. Meanwhile, Air India, though still profitable, had begun to stagnate and its share of outbound international traffic, which was around 40 per cent in the eighties, dropped to 25 per cent—far below the average for flagship international carriers.
When the first NDA government came to power in 1998 with Atal Bihari Vajpayee as the prime minister, both his disinvestment ministers Arun Shourie and Arun
Jaitley, apart from civil aviation minister Rajiv Pratap Rudy, pushed for privatisation of the two national carriers. A minister in that government says, “We were thwarted by a powerful lobby that prevented the move to protect private operators who thought they would lose out.” To push ahead with liberalisation, the Naresh Chandra committee was formed in 2003 to study options. Months later, the committee submitted its report and among other things called for privatisation of AI and IA and the creation of an autonomous civil aviation regulator.
With UPA-I, led by Prime Minister Manmohan Singh, coming to power, the Chandra committee report was shelved. Instead, under the supervision of the then aviation minister Praful Patel, an ambitious programme was launched to revive the two carriers by expanding and modernising their fleets. AI had initially submitted a proposal to acquire only 28 aircraft in May 2004—10 medium-capacity long-range aircraft and 18 small capacity short-range aircraft. But Patel pushed for a more aggressive policy, including beefing up Air India Express, a no-frills subsidiary of AI to cater to the Southeast Asian and Gulf market. He also pushed for Indian Airlines to expand its reach.
BY NOVEMBER THAT YEAR, the AI board had revised its proposal and pushed for the acquisition of 50 medium-capacity, long-range aircraft in addition to 18 small-capacity short-range ones. A year later, AI signed a purchase agreement with Boeing for the supply of 50 aircraft at a cost of Rs 33,197 crore. Simultaneously, IA too signed purchase agreements with Airbus for the purchase of 43 aircraft at a cost of Rs 8,400 crore. Both these acquisitions were to be funded through debt and repaid through revenue generation. A subsequent report by the Comptroller and Auditor General (CAG) of India found that the assumptions by the civil aviation ministry were totally unreal and observed that “it was a recipe for disaster”.
Another disaster was soon to follow. In 2007, soon after the large-scale acquisition of aircraft, the UPA government pushed through a move to merge the two airlines for the purposes of “synergy”. The CAG, in its report, pointed out that it would have been better to have worked out the merger before making the acquisitions. Nor was the financial case for the merger validated. Worse, there were huge delays in the actual integration, particularly of human resources, with differential designations, seniority and salary needing to be harmonised. The single passenger code reservation system, a critical element of the process, was done only in 2011, four years after the merger. The result: the combined airline entity plunged into a debt of Rs 20,000 crore within just five years.
In 2011, the UPA-II government decided on a turnaround plan to stop the bleeding. It chose to infuse equity of Rs 48,212 crore for a period of 20 years starting 2011-12 and ending in 2031-32. Based on the infusion, AI was
expected to show positive earnings from the financial year and a cash surplus from 2017 onwards. Instead, AI’s debt only mounted with its inability to service the annual interest payments, ballooning to Rs 52,000 crore this year. Meanwhile, it had also exhausted Rs 25,000 crore or half the amount committed under the turnaround plan. That’s when the alarm bells started clanging for the Modi government.
Ironically, even as AI plunged deeper into the abyss, Indian civil aviation was booming. As Kapil Kaul, CEO, Centre for Asia Pacific Aviation (CAPA), South Asia, points out, “India’s domestic civil aviation market grew by 21 per cent last year to reach 104 million passengers, overtaking Japan to become the third-largest domestic market in the world, behind China and US.” Indigo, the savvy low-cost carrier, which is now by far the number one domestic airline by some distance with 40 per cent market share, has more than doubled both its passenger traffic and aircraft in the past five years even as AI stagnated and fell deeper into debt. SpiceJet, which was rescued from the brink by Ajay Singh, its original founder, has now turned the corner. Jet Airways, though overtaken by Indigo, continues to cruise along after its tie-up with Etihad. The new airlines, like Tata’s Vistara and Air Asia, are also beginning to find their feet.
SO WHY DOES AI find itself in such a sorry state? Ajay Singh of SpiceJet is brutally frank. “AI cannot be made viable under the present dispensation,” he says. “It should have been sold a long time ago and privatised. It is among the biggest public sector lossmakers in our history as government, politicians and bureaucrats used this airline as their own private little organisation. The whole thing was so corrupt, with previous civil aviation ministers known to be bargaining away the prime routes to foreign airlines.” Whether by coincidence or not, the CBI has filed a case against Praful Patel and officials for many of the alleged wrongs during his tenure as civil aviation minister, including conceding lucrative Gulf routes to Emirates.
Saj Ahmad, chief analyst at the UK-based StrategicAero Research, doesn’t mince words either. “Short of scrapping the airline and starting over, there isn’t a fat lot anyone can do,” he says. “AI is nothing more than a crony filling state jobs programme—it has gotten so bloated, successive inept governments do not know what to do to turn it around other than throw good money after bad. It has never really woken up out of its post-merger coma to face market realities. While it remains in this lethargic state, covered in political red tape and corruption, management apathy will ensure that AI is going nowhere fast.”
The real issue is one of smart leadership and swift decision-making given that profit margins in the aviation sector are a low 5 to 7 per cent at best. Key input costs such as fuel, staff expenses, lease rentals of aircraft, maintenance and ticketing make up close to 70 per cent of expenses. Fuel alone can account for as much as 34 per cent. AI’s chief Lohani is fond of calling aviation the mother of all businesses
because it is high on safety, tough on regulation, low on margin and stiff in competition. What he doesn’t say or want to say is that a public sector unit with its cumbersome tendering process and the fear of the four Cs—the Courts, CAG, CBI and CVC—is a misfit in a sector that requires bold and dynamic decision-making.
A top private airline employee points out, “Why AI is in such a sorry state is because of decades of interference in management by the government. You cannot have a customer-facing enterprise that is run by a generalist. You had so many civil servants who came and rung the bell and went. What you need are thoroughbred professionals who understand all the levels of business and put it all together. The other issue is that in this industry, more than others, if the cost structure is set incorrectly, it is very hard to change quickly. You need a sustainable cost structure—if you have it, then over time you will do well. If you don’t, you will end up like AI.”
Modi, unlike his predecessors who either pampered or dithered over what to do with AI, is clear that the government share in the airline needs to reduce. As a senior official says, “The intent is not to have a commanding share in Air India. But before we do any serious thinking about privatisation or disinvestment, we have to ensure AI gets the best net worth in the given circumstances. The most difficult part is what will you do and how.”
There are several options available to the government for Air India. It would clearly have to considerably reduce the debt burden, particularly the working capital loan of Rs 30,000 crore. One suggestion was that the banks AI owes money to take a really short haircut or buy equity stakes in the airline. But an official says that banks are reluctant to expose themselves even more, with one banker telling him they have no interest in sitting on the board of the airline and running it. The other option was that instead of staggering the remaining amount of equity infusion of Rs 25,000 crore as part of the turnaround plan, the government does it upfront by issuing bonds which AI could use to service its debts.
HOWEVER, WHEN the civil aviation ministry sought the advice of NITI Aayog, the government’s premier think-tank was clear: AI should be privatised. Reason: the total debt is too high, it is not possible to service it and only a strategic disinvestment will work. As a senior NITI Aayog official told india today, “The government doesn’t want equity— the more we keep, the more the value of AI will be eroded. We need to make the disinvestment neat, clean and simple without too many conditionalities.” MoCA now has the green light to explore strategic disinvestment—which essentially means that it is willing to give the buyer a majority holding—a share of 51 per cent or more.
For the government, the sale of AI will be a totem pole kind of decision. Given the airline’s high profile, the privatisation of Air India will reaffirm Modi’s position in the world as an economic reformer willing to take bold decisions despite the political risks. Jayant Sinha understands the magnitude of the decision to be taken, stating, “Air India’s destiny will shape the destiny of India’s aviation sector and, given its consumer importance, size and geopolitical relevance, to be on a par with aviation sectors in comparable countries such as China and the US. The aviation sector is vitally important to all major economies because not only does it drive revenues, jobs and taxes but it is also strategic as it shapes the nature of the aerospace industry, including commercial and defence interests.”
Jitender Bhargava, a former AI director who has chronicled the descent of Air India in a hard-hitting book, while favouring privatisation, rejects the notion that AI has to go out with a begging bowl. Bhargava points out that AI has assets, including properties like the iconic Nariman Point building, that it could hive off into an SPV and sell to reduce AI’s debt. It also has five subsidiary companies worth several thousands of crores that it can package separately to retire much of its debt (see graphic: Assets & Liabilities). Apart from that, it has hangars, landing rights and code shares that are valuable. Ajay Singh concurs and says, “If you can sell it lock, stock and barrel, nothing like it. But I have a feeling it will be very difficult. Because anyone who does that will also be saddled with all the wretched problems that come with it—the union and unproductive staff. So it is better to go piecemeal with it.”
Instead of leaving it to the AI board, Kapil Kaul feels that just as with Satyam, the government should form an empowered committee of eminent persons—including aviation experts—that has the decision-making authority on how best to privatise Air India. Everyone, though, agrees the time is ripe for a big move. As Amber Dubey, senior partner and head, aerospace, KPMG, says, “With the domestic aviation sector booming, fuel prices still low, domestic private airlines thriving, airports expanding and regional connectivity improving, there is a constellation of factors in place for a major decision on Air India.”
Jaitley believes there is now a second opportunity that shouldn’t be missed. Given that AI has an excellent global network, among the better options is for an Indian promoter with a strong domestic network to take 51 per cent of the shares and tie up with a foreign airline to convert India into a hub of international traffic much like Singapore Airlines or Emirates has done. The time is opportune for Modi to bite the Air India bullet at last.
With the sector booming and fuel prices low, THE TIME IS RIGHT to sell the airline
AIR INDIA ONE Prime Minister Narendra Modi on his arrival in Spain