Selling a chronic loss-making airline like Air India was, under the best of circumstances, going to be a hard sell, but the government went and made it harder by putting in all manners of caveats while not addressing the investor pain points. In which case, it is not surprising it got no bidders for Air India despite the fact that, in an aviation market that is growing so well, it has a 12% share in the domestic market and 17% in the to/from India market. In addition, it has 72 landing slots each in US/Canada and Europe, 70 in the UK, and 280 in the Gulf and the Middle East—building this network would take any airline several years. The flipside is the annual losses of Rs 4,000-5,000 crore, a Rs 33,400 crore debt that the buyer would have to take on, and a bloated/inefficient workforce.
Managing the debt and turning around the losses may still have been possible—indeed, any money the government could have got would have been based only on future potential. But, investors needed to be certain the government would give them the necessary permissions and support needed to take tough decisions. But, this was not forthcoming.
Instead of addressing this in a forthright manner, the preliminary information memorandum (PIM) said retrenchment would be subject to guidelines put out by the Department of Investment and Public Asset Management (DIPAM). While the DIPAM guidelines allow potential buyers to retrench staff after a year, no one addressed the fact that government laws also require government permission to retrench in firms that, like Air India, have more than 1,000 employees—so, would the government have given this permission, especially in an election year? And, would-be buyers may also have felt uncomfortable with the quality of information being put out.
Kotak Institutional Equities, for instance, looked at what the PIM said about debt and pointed out that since the government had not included the aircrafts bought after March 2017, the actual debt that had to be taken over was Rs 46,200 crore—the PIM said it was Rs 33,400 crore for both Air India and Air India Express.
Even more worrying was the possibility of the government continuing to interfere even after the sale—a 24% equity would give it at least two board seats—so perhaps the government should think about a complete exit if it decides to restart the process. Equally ridiculous were caveats which said that the airline had to be run on an arms-length basis from the other business of the buyer—but if another airline was to buy Air India, surely it would look for operational synergies that can come only from running the airlines together?
02/06/18 Financial Express
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Managing the debt and turning around the losses may still have been possible—indeed, any money the government could have got would have been based only on future potential. But, investors needed to be certain the government would give them the necessary permissions and support needed to take tough decisions. But, this was not forthcoming.
Instead of addressing this in a forthright manner, the preliminary information memorandum (PIM) said retrenchment would be subject to guidelines put out by the Department of Investment and Public Asset Management (DIPAM). While the DIPAM guidelines allow potential buyers to retrench staff after a year, no one addressed the fact that government laws also require government permission to retrench in firms that, like Air India, have more than 1,000 employees—so, would the government have given this permission, especially in an election year? And, would-be buyers may also have felt uncomfortable with the quality of information being put out.
Kotak Institutional Equities, for instance, looked at what the PIM said about debt and pointed out that since the government had not included the aircrafts bought after March 2017, the actual debt that had to be taken over was Rs 46,200 crore—the PIM said it was Rs 33,400 crore for both Air India and Air India Express.
Even more worrying was the possibility of the government continuing to interfere even after the sale—a 24% equity would give it at least two board seats—so perhaps the government should think about a complete exit if it decides to restart the process. Equally ridiculous were caveats which said that the airline had to be run on an arms-length basis from the other business of the buyer—but if another airline was to buy Air India, surely it would look for operational synergies that can come only from running the airlines together?
02/06/18 Financial Express
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