Thursday, July 13, 2017

Don’t fly into the same storm

Air India’s disinvestment, first attempted by the Atal Bihari Vajpayee government, is being revived. The sale bid the last time was a flop, shelved prematurely after all the bidders were either disqualified or dropped out. The many factors that were and may still be at work against the sale are not widely understood. Unless overcome, they may again endanger the sale.

In May 2000, bids were invited for a 40% stake in Air India, with a cap of 26% on foreign investment. The airline had reported losses for six straight years, had $70 million debt on its books and was fast losing traffic. More than 18,000 workers were on its rolls for a fleet of just about two dozen planes. Its employee-aircraft ratio, 750, was among the worst. Singapore Airlines, in contrast, had 91 employees per aircraft. Inefficiency, typical in a government-controlled set up, was bleeding Air India. Yet, the quantum of stake on offer made it clear that the government intended to retain a crucial stake, appoint its own directors and continue to have a say in running the business. Put off by the substantial degree of control the government wanted to retain in the airline after the disinvestment, several potential bidders stayed away from the sale, including, possibly the worthiest contender. Plus, in a sale carried out through competitive bidding, reduced interest can impact the valuation.

Doomed from start

The sale’s stated purpose was to bring on board a strategic partner who would turn around Air India. But the sale’s rules were loaded against candidates with a proven track record — foreign airlines. Lufthansa, Swissair, Emirates, British Airways and Air France-Delta in combination were among those to have expressed interest formally in buying the stake. However, a bidding rule that required foreign airlines to team up with a local partner forced them to opt out. Singapore Airlines, which had also expressed interest formally, roped in the Tatas to proceed with its bid.

Those who remained in the fray had their expressions of interest evaluated; those ineligible were disqualified. In the end, the contest was down to two bidders — the Hinduja group and the Singapore Airlines-Tata joint venture. Both were invited to inspect Air India’s books. The Hindujas’ bid was already under fire from the Opposition over allegations related to the Bofors arms scandal. After studying Air India’s financial records, the group presented to the government a whole set of conditions on management control, threatening to withdraw if these were not met. The government barred the Hindujas from pursuing its bid, leaving a sole bidder: the Singapore Airlines-Tatas combine.

Private airline owners who had so far orchestrated resistance to the sale from the background, now openly pointed out that the majority stakeholder in Singapore Airlines was a foreign government. The unmasked attack made Singapore Airlines pull out. The airline said in a statement that the intensity of opposition to the privatisation from political groups and the trade unions had surprised it and that in such an adverse climate, it was not confident it could play a useful role.
13/07/17 Puja Mehra/The Hindu