AIR IN­DIA DISINVESTMENT

De­bate on Air In­dia disinvestment though, has been on for over two decades and the failed at­tempt at disinvestment ear­lier this year, was an an­ti­cli­mac­tic episode in the on­go­ing saga

SP's Airbuz - - Table of Contents - BY A. K. SACHDEV

De­bate on Air In­dia disinvestment though, has been on for over two decades and the failed at­tempt at disinvestment ear­lier this year, was an an­ti­cli­mac­tic episode in the on­go­ing saga.

LET US NOT MINCE words; the na­tional ‘ flag’ car­rier Air In­dia, has landed us in a sit­u­a­tion of na­tional shame. It was with the sec­ond wave of lib­er­al­i­sa­tion in the In­dian civil avi­a­tion in­dus­try that com­menced in 2003, that Air Dec­can set the Low Cost Car­rier (LCC) band­wagon rolling. There­after, in­ter­nal fi­nan­cial ef­fi­ciency be­came the core of an air­line’s sur­vival in what emerged as a fiercely com­pet­i­tive mar­ket space. Nur­tured on an in­her­ently in­ef­fi­cient pub­lic sec­tor or­gan­i­sa­tional cul­ture, Air In­dia, which con­tin­ued to ad­here to its full ser­vice le­gacy model, was doomed to a sor­did end. It could not shed the le­gacy model be­cause its clien­tele was largely gov­ern­men­tal, ac­cus­tomed to ben­e­fit­ting from free­bees, up­grades and largesse of all kinds. Its in­ter­nal in­ef­fi­cien­cies and pub­lic sec­tor cul­ture, com­pounded by some bizarre de­ci­sions re­lated to air­craft ac­qui­si­tion and other poli­cies such as pulling out of lu­cra­tive in­ter­na­tional routes, merg­ing the in­ter­na­tional car­rier Air In­dia and the do­mes­tic car­rier In­dian Air­lines and so on, led to a steady and in­ex­orable down­fall un­til, in 2012, the cen­tral govern­ment was forced to ap­prove a turn­around plan amount­ing to Rs 30,231 crore over a ten-year pe­riod. The tax payer, whose money was fi­nanc­ing this dis­grace­ful at­tempt at in­vest­ment in an inept or­gan­i­sa­tion with­out chang­ing its work cul­ture and func­tion­ing, re­mained largely un­aware of the im­pli­ca­tions. How­ever, af­ter the bulk of that huge amount had been paid, the cur­rent NDA govern­ment re­alised the folly of pour­ing in good govern­ment money af­ter bad and de­cided to dis­in­vest in Air In­dia. De­bate on Air In­dia disinvestment though has been go­ing on for more than two decades and the failed at­tempt to dis­in­vest it ear­lier this year, was just an an­ti­cli­mac­tic episode in an on­go­ing saga yet to reach its cul­mi­nat­ing point. PRESENT STATE. Cur­rently, Air In­dia has a fleet of 119 air­craft. Its sub­sidiaries Air In­dia Ex­press has 23 and Al­liance Air has 15 air­craft ac­cord­ing to their of­fi­cial sites. Ac­cord­ing to the DGCA web­site, Air In­dia has a 17 per cent share of traf­fic on routes link­ing In­dia to in­ter­na­tional des­ti­na­tions. and in the do­mes­tic seg­ment, in July 2018, the na­tional car­rier had a 12.4 per cent share of the do­mes­tic mar­ket, plac­ing it in the third slot be­hind In­diGo with 42.1 per cent share and Jet Air­ways with 13.6 per cent. Air In­dia is barely ahead of SpiceJet that is at 12.3 per cent mar­ket share. Air In­dia is a part of the world’s big­gest air­line group­ing Star Al­liance and has prime slots at air­ports across the world along with land banks and build­ings, among its as­sets.

How­ever, on bal­ance, it has a huge debt of more than 50,000 crore and a re­cur­ring an­nual loss of 5,000 crore. Pi­lots’ salaries

are in ar­rears as also the air­line is on the verge of de­fault­ing on bank loan re­pay­ments and some dues to ven­dors out­stand­ing for some time now. It has the high­est can­cel­la­tion rate and the high­est cus­tomer com­plaint sta­tis­tics amongst all do­mes­tic air­lines in In­dia. Sev­eral air­craft are re­port­edly un­ser­vice­able and so op­er­a­tions are likely to be af­fected ad­versely as we move ahead. It has per­formed at the low­est level amongst the pub­lic sec­tor en­ter­prises whose pro­duc­tiv­ity is low in gen­eral.

In June last year, the govern­ment, de­spair­ing of a turn­around, had de­cided to grant ap­proval in-prin­ci­ple for the strate­gic sale of Air In­dia and its sub­sidiaries and this process is be­ing mon­i­tored by Air In­dia-Spe­cific Al­ter­na­tive Mech­a­nism (AISAM) headed by Fi­nance Min­is­ter Arun Jait­ley. The chal­lenge be­fore the govern­ment lay in se­cur­ing a strate­gic disinvestment coup wherein this huge ac­cu­mu­lated loss would be pack­aged off to the buyer or buy­ers, along with its profit mak­ing sub­sidiaries Air In­dia ex­press, a low cost in­ter­na­tional car­rier and AI-SATS, a ground han­dling com­pany. At the be­gin­ning of this year, the then Min­is­ter for Civil Avi­a­tion, P. Ashok Ga­jap­athi Raju, had pub­licly ad­mit­ted that Air In­dia’s debt may turn out to be far more than 50,000 crore if sub­jected to close scru­tiny. The Min­is­ter had hinted that the debt fig­ure could be around 70,000 crore. The ex­pec­ta­tion was that the over­all sale would some­how get this size­able debt off the govern­ment’s and the tax-pay­ers’ back through the bundling. How­ever, as find­ing a sin­gle buyer en­tity for such a large and tan­gled bun­dle, would it­self be a chal­lenge, the govern­ment had de­cided to favour the op­tion of dis­in­vest­ing the air­line in four pack­ages. The Min­is­ter also said that Air In­dia would be of­fered to po­ten­tial buy­ers as four dif­fer­ent en­ti­ties — Air In­dia, its low-cost arm Air In­dia Ex­press and sub­sidiary AI-SATS would be one en­tity, while the re­gional air­line Al­liance Air would be a sep­a­rate en­tity. Apart from th­ese, Air In­dia Air Trans­port Ser­vices Ltd (AIATSL) and Air In­dia En­gi­neer­ing Ser­vices Ltd (AIESL) would be sold sep­a­rately. The govern­ment had also re­laxed own­er­ship rules and al­lowed for­eign own­er­ship of up to 49 per cent in Air In­dia. Con­sul­tancy firm Ernst & Young had been ap­pointed as trans­ac­tion ad­vi­sor for Air In­dia’s strate­gic sale. THE LIKELY BUY­ERS. The pro­posed disinvestment plan gen­er­ated fee­ble in­ter­est as the treat­ment of the nearly 50,000 crore debt was not clearly de­fined. Kapil Kaul, CEO (South Asia) at CAPA Cen­tre for Avi­a­tion had pre­dicted that, “No ma­jor In­dian cor­po­ra­tion from out­side of avi­a­tion will in­vest in such a com­plex project with­out an ex­pe­ri­enced strate­gic part­ner.” De­spite a high ex­pected fi­nal cost of the ac­qui­si­tion, some In­dian avi­a­tion en­ti­ties singly or in con­junc­tion, were ex­pected to be in the bid­ding run. How­ever, In­terGlobe Avi­a­tion Ltd which op­er­ates In­dia’s largest air­line In­diGo, had sub­mit­ted a let­ter show­ing in­ter­est the day the disinvestment plan was an­nounced. Later, the com­pany stated that it was only in­ter­ested in Air In­dia’s in­ter­na­tional op­er­a­tions. Be­sides In­diGo, Jet Air­ways, SpiceJet and Vis­tara were re­ported to be keen in buy­ing a stake in Air In­dia. Avi­a­tion com­pa­nies SATS, Bird Group and Celebi had shown in­ter­est in ac­quir­ing Air In­dia’s ground han­dling unit AI-SATS. How­ever, the in­ter­ro­ga­tion mark over the fund­ing dilemma for such a huge val­u­a­tion com­pany, re­mained dom­i­nant as did the ques­tion of what would hap­pen to the large debt bur­den of Air In­dia.

The de­ci­sion of the govern­ment to al­low 49 per cent For­eign Di­rect In­vest­ment (FDI) in Air In­dia with the pro­viso that sub­stan­tial ef­fec­tive con­trol would con­tinue to be vested with an In­dian na­tional, did make the po­ten­tial buyer base larger. How­ever, con­cerns were raised over the de­ci­sion not to give man­age­ment rights to for­eign in­vestors will­ing to in­vest in Air In­dia, inas­much as this de­ci­sion was likely to af­fect the for­eign in­vest­ment process for the air­line. Harsh Vard­han, Chair­man of Starair Con­sult­ing re­port­edly said that, as Air In­dia was fac­ing a man­age­ment cri­sis, if the govern­ment did not give man­age­ment and op­er­a­tional rights, no­body would come to in­vest in an air­line on the verge of col­lapse and with a huge debt bur­den. Some other avi­a­tion ex­perts had also pointed out that a turn­around was pos­si­ble only if the man­age­ment was to­tally sup­planted so that pro­fes­sion­al­ism would re­place the cur­rent in­ef­fi­cient func­tion­ing of the air­line.

The Bud­get for 2018-19 had al­lo­cated only 650 crore for Air In­dia turn­around as against 1800 crore last year, an in­di­ca­tion that the govern­ment was se­ri­ous about disinvestment. It waited for the Bud­get to be pre­sented be­fore invit­ing Ex­pres­sion of In­ter­est (EOI) from com­pa­nies and had hoped that the whole process of disinvestment would be con­sum­mated over a year or so, but the huge debt bur­den re­mained a ma­jor ob­sta­cle. Un­cer­tain­ties about the change in man­age­ment for the em­ploy­ees who had got used to a unique, in­ef­fi­cient and in­do­lent way of func­tion­ing over the years, also dan­gled over the process. Even as the disinvestment EOI process was un­der­way, there was talk of golden hand­shake to some of the em­ploy­ees which would have added to the cost to the buyer. Rather ex­pect­edly, the dead­line came and passed with­out any bid­der. Jayant Sinha, the Min­is­ter of State for Civil Avi­a­tion re­port­edly pro­vided the al­ibi that, “The con­clu­sion that one would come to is to say that mar­ket con­di­tions and in­dus­try dy­nam­ics are such that to­day, peo­ple would not be that en­thused about the disinvestment process that was un­der­way as far as Air In­dia is con­cerned.” CON­CLUD­ING RE­MARKS. So what lies ahead? Given the im­pen­dency of the 2019 Gen­eral Elec­tions, it is un­likely that the govern­ment led by Prime Min­is­ter Naren­dra Modi would risk an­other at­tempt at disinvestment be­fore the na­tional elec­tions in 2019. Al­ready a 11, 000 crore bailout pack­age is be­ing fi­nalised at the time of writ­ing this. If BJP comes to power again, it is likely that for­eign in­vestors may be kept away and a “swadeshi” char­ac­ter is re­tained for Air In­dia. In the wake of the failed disinvestment bid, Ra­jiv Ku­mar, Vice Chair­man, NITI Aayog had stated that the govern­ment was com­mit­ted to turn­ing Air In­dia around and run­ning it pro­fes­sion­ally. More re­cently, he has re­it­er­ated that Air In­dia should be made prof­itable be­fore it is pri­va­tised so that the govern­ment can fetch a bet­ter value for it. There is no doubt that pri­vati­sa­tion will im­prove Air In­dia per­for­mance as af­ter lean­ing the work force, pro­duc­tiv­ity may be ex­pected to im­prove although the new man­age­ment will need to work re­ally hard to get the work cul­ture to change and im­prove to come up to pri­vate in­dus­try level. The na­tion has paid over the past years for Air In­dia and will prob­a­bly pay some more dur­ing the process of disinvestment; but af­ter a change in the man­age­ment in the fu­ture, the ex­ist­ing losses can be ex­pected to re­duce or even dis­ap­pear. How­ever, the shame of hav­ing failed to make the na­tional flag car­rier a suc­cess­ful busi­ness en­ter­prise, will re­main for some years to come.

AIR IN­DIA IS A PART OF THE WORLD’S BIG­GEST AIR­LINE GROUP­ING STAR AL­LIANCE AND HAS PRIME SLOTS AT AIR­PORTS ACROSS THE WORLD

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