Sunday, October 20, 2019

The challenges to turn Air India into an entity attractive to potential buyers

The past week was an action-packed one for the long-running disinvestment saga of Air India, the beleaguered flag carrier. On 14 October, the top management of the airline, led by chairman Ashwani Lohani, met the representatives of 13 trade unions of the company in Delhi at Airlines House, off Parliament Street.
Around 40-odd union representatives were asked to deposit their mobile phones outside before they trooped into the boardroom. In the meeting, the management outlined the impact of the divestment process on the employees. The 12,000-odd employees would be ensured job security only for a year after the airline’s sale. Other benefits and service conditions would also change, including lifelong medical support for family, free passage on Air India flights as well as rules around employee’s provident fund, leave encashment and gratuity. The meeting also carried a confidentiality rider—the union leaders are not permitted to speak publicly about what was discussed. The union leaders pressed for better terms. We’ll do our best to negotiate with the government, the management assured them.
Later in the week, on 17 October, Air India Assets Holding Ltd (AIAHL), a special purpose vehicle of the company, raised a round of government guaranteed bonds, totalling Rs 7,985 crore with tenure of 10 years at 7.39% from the markets. This was the third bond issue by AIAHL, which has now raised Rs 21,985 crore through three issues. This SPV has taken on Rs 29,500 crore worth of Air India’s working capital loans, and the bond issues are meant to help repay the loans.
With the government powering ahead with its resolve to sell the airline after a taxpayer funded bailout infused almost Rs 30,000 crore since 2012 to no avail, hectic efforts are on behind the scenes to pull it back from the brink, bring it to a manageable shape and then hand it over to a buyer who can turn it around. The 89-year-old airline, started by JRD Tata back in 1930 and nationalised post Independence, clocked consolidated revenues in excess of Rs 27,000 crore in 2017-18, with a loss of Rs 5,799 crore. Finance or interest charges exceeded Rs 4,000 crore in that period. Consolidated debt on the books now stands at Rs 58,000 crore.
Earlier this month, fuel suppliers led by Indian Oil Corporation had threatened to pull the plug, discontinuing supplies at half a dozen airports. On efficiency parameters too, Air India is a laggard. The airline lags behind most Indian domestic airlines when compared on the basis of their cancellations (2.6%), on-timeperformance (53.5%) or airline load factor (80.9%). In mid-2018, the NDA government had tried to divest a 76% stake in the airline.
The efforts drew a blank then, with no interested bidders. The actions of the last week aim to make the airline more attractive for a potential bidder, with manageable debt and a free hand on manpower. It brings us to the question of the potential bidder. What will make Air India attractive to say Indigo, which has 48% share of the domestic market, or the Tatas, who already have interests in two airlines — Vistara and AirAsia? Can it attract an international player (Qatar Airways had shown interest) or could a large Indian corporation with no interest in the aviation sector so far, be tempted to throw its hat in the ring?
R Gopalakrishnan, former Tata Sons director, who saw two divestments— CMC and VSNL— come into the Tata fold during his time, says successful disinvestments in India have depended on the ability to push back on government interference and then merging the organisations fully, like how IPCL merged with Reliance Industries. “Governments are notorious for interfering, and even if they sell off 100%, they might still interfere, because Air India can easilybecome a political issue after divestment. The new management will need skills to repel such interferences, and at the same time must have integrating skills, fully merging Air India into their own organisations,” Gopalakrishnan said.
20/10/19 Suman Layak/Economic Times
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