News reports suggest that 11 Air India unions representing over 10,000 employees have started a social media campaign with the ‘Save Air India’ slogan. The Indian government plans to sell 76% of the Maharaja. Under the current terms, a buyer needs to provide a guarantee that permanent employees of the airline will not be fired for at least one year. After that, the buyer is allowed to offer a voluntary retirement scheme (VRS) to employees.
This condition along with the fact that any prospective buyer has to take over two-thirds of the Rs 48,447 crore debt (as on March 31, 2017) of the airline, has led to a situation where none of the Indian carriers are interested in buying Air India. We don’t know about the foreign ones as yet.
News reports also suggest that the International Finance Corporation (IFC), the private investment arm of the World Bank (WB), is likely to underwrite the debt amount of Air India for the successful buyer. It is highly unlikely that any prospective buyer will buy Air India without any arrangement to handle the $7.5 billion debt of the airline (Rs 48,447 crore at $1=Rs 65). Given how risky and difficult the airline business is, such a huge debt amount can pull down even a currently profitable airline. Also, it is worth remembering here that two out of three mergers that happen, fail.
While, the debt part of the airline can be handled, how the government handles the ailing carrier's employees is more important. As on 1 January, 2017, the airline had 18,049 employees. In comparison, IndiGo had 14,576 employees as on 31 March, 2017. IndiGo also employed 8,225 employees on a temporary/contractual/casual basis. Air India has a 12 percent share of India’s domestic market and has a 17 percent share in flights in and out of India, and it loses money. Indigo has a 40 percent share in India’s domestic airline business and is a profitable airline.
How do things look at the employee cost level? Air India’s employee benefit expenses during fiscal 2016-2017 stood at Rs 2,558 crore. This worked out to around 11.5 percent of the total revenue earned during the course of the year. By comparison, Indigo spent Rs 2,048 crore and this worked out to around 10.6 percent of the total revenue earned by the airline during the course of the year. Clearly, the employee cost is much more in the case of Air India.
Having said that, the difference is not much but can nevertheless be important in a low margin business like airlines are. For any prospective buyer of Air India, one of the easiest ways to control costs, is to get rid of the non-productive part of the employee base. And any prospective buyer having paid good money to the government would want to employ this strategy. This is a low-hanging fruit, but the current terms of sale don’t allow a prospective buyer to do that.
16/04/18 Vivek Kaul/First Post
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This condition along with the fact that any prospective buyer has to take over two-thirds of the Rs 48,447 crore debt (as on March 31, 2017) of the airline, has led to a situation where none of the Indian carriers are interested in buying Air India. We don’t know about the foreign ones as yet.
News reports also suggest that the International Finance Corporation (IFC), the private investment arm of the World Bank (WB), is likely to underwrite the debt amount of Air India for the successful buyer. It is highly unlikely that any prospective buyer will buy Air India without any arrangement to handle the $7.5 billion debt of the airline (Rs 48,447 crore at $1=Rs 65). Given how risky and difficult the airline business is, such a huge debt amount can pull down even a currently profitable airline. Also, it is worth remembering here that two out of three mergers that happen, fail.
While, the debt part of the airline can be handled, how the government handles the ailing carrier's employees is more important. As on 1 January, 2017, the airline had 18,049 employees. In comparison, IndiGo had 14,576 employees as on 31 March, 2017. IndiGo also employed 8,225 employees on a temporary/contractual/casual basis. Air India has a 12 percent share of India’s domestic market and has a 17 percent share in flights in and out of India, and it loses money. Indigo has a 40 percent share in India’s domestic airline business and is a profitable airline.
How do things look at the employee cost level? Air India’s employee benefit expenses during fiscal 2016-2017 stood at Rs 2,558 crore. This worked out to around 11.5 percent of the total revenue earned during the course of the year. By comparison, Indigo spent Rs 2,048 crore and this worked out to around 10.6 percent of the total revenue earned by the airline during the course of the year. Clearly, the employee cost is much more in the case of Air India.
Having said that, the difference is not much but can nevertheless be important in a low margin business like airlines are. For any prospective buyer of Air India, one of the easiest ways to control costs, is to get rid of the non-productive part of the employee base. And any prospective buyer having paid good money to the government would want to employ this strategy. This is a low-hanging fruit, but the current terms of sale don’t allow a prospective buyer to do that.
16/04/18 Vivek Kaul/First Post
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