Govt Revises Some Conditions Of Air India Sale. Is It Still Not Enough For Private Buyers?

So the central government has extended the deadline for bidders to submit expressions of interest (EoI) to buy Air India (AI) from 14 May to 31 May. It has also revised a few other bid conditions to encourage the prospective buyers — but apparently these changes are still not enough.

On offer is 76% equity stake in AI — India’s debt-laden “national carrier” — along with 100% stake in AI’s subsidiary Air India Express Limited and the 50% holding in joint venture Air India SATS Airport Services.

The BJP-led NDA government had announced the sale on 28 March — after years of deliberately destructive decisions taken by the previous government ran the airline into the ground, mainly by buying excessive aircrafts at colossal loans, merging AI with the domestic Indian Airlines (both of which were market leaders in their own right) and giving away lucrative routes to private airlines.

Currently, AI has a total debt of more than Rs 52,000 crore and has been suffering net losses — although it has been making increasing operational profits for the past three years and has never defaulted in its loan repayment.

The Modi government has already sweetened the deal for the private buyers by declaring that 50% of the debt will remain with the central government. The new owners would be left with a debt burden of around Rs 24,600 crore, on account of the excessive aircrafts that were bought under civil aviation minister Praful Patel during the UPA-I regime, along with current liabilities of more than Rs 8,800 crore. This means a total burden of debt and liabilities of more than 33,300 crore will stay with the new owners.

On 1 May, the civil aviation ministry announced changes in some of the bid conditions while answering 160 queries from interested bidders on its website. Apart from the EoI deadline, the deadline for intimation to qualified bidders has also been extended from 28 May to 15 June.

The government has also allowed shortlisted bidders to change partners in the bidding consortiums before they submit the final offers.

Another significant change is that the new owners will no longer be required to list list the airline in the stock exchange after three years, as they were supposed to do earlier. This condition was worrying investors as it would likely take longer than three years for AI to be turned around and become profitable again.

The eligibility criteria for the interested bidders is a minimum net worth of Rs 5,000 crore and net profit for three preceding years. Indian companies can bid either solo or form a consortium among themselves or with foreign companies, though the majority stake must be held by an Indian firm.

The civil aviation ministry on 1 May again issued a clarification regarding the foreign holding, specifying that foreign companies can own only up to 49% of the 76% stake offered for sale.

No domestic airline has come forward yet to bid for AI while two have publicly backed out, even as no private domestic airline is eligible to bid solo.

IndiGo, the one Indian airline that was likely to be eligible to bid soloand had earlier expressed interest in buying AI, backed outsaying it was only interested in the international operations and did not have the capability to turn around all of AI’s airline operations. This was followed by Jet Airways too declaringit would not participate in the bid, citing the high debt burden and other “unfavourable” bid conditions. Jet was said to have been in talks with one of its alliance partners Air France-KLM and others to form a consortium and put up a proposal.

Given this situation, the government recently announcedthat any firm — and not just airlines — with the required net worth and meeting the other eligibility criteria can bid for AI.

At least four foreign airlines seem to be interested in buying AI — Etihad Airways, Lufthansa, British Airways, and Singapore Airlines — and are looking for partners.

It is reported that foreign private equity firms like Warburg Pincus are interested. In fact, even the World Bank — through its International Finance Corporation, which deals with private investment — is closely watchingthe disinvestment process and has said it may get involved at a “later stage” after the bidding is over.

But even as the government extended the deadline and eased a few conditions, the potential investors are still not satisfied.

That is because, as of yet, the conditions regarding the government’s ownership and the bearing of the debt burden remain unchanged. Potential investors do not want any government involvement in the airline at all. But on 1 May, the government again stated that it will continue to hold 24% stake along with minority shareholder rights, although it was reported that the government was planning to sell off its residual shares to LIC, a central public-sector company, to appease investors.

The minimal protection for existing employees also stays in place — there is a lock-in period of one year, during which the new owners cannot fire the existing employees, who are around 27,000 in number. After one year, however, the new owners will be free to offer ‘voluntary retirement’ to the employees. On 1 May, the government said in response to a query, “The conditions to safeguard employees’ interest will be detailed at the RFP (request for proposal) stage.”

Besides, the government is still not willing to dismember AI into its different operations and sell it piece by piece — as the prospective buyers seem to want.

There is pressure on the government from potential investors to take on the entire debt — although given that the disinvestment has attracted criticism from nearly all opposition parties, it is likely that the government will not immediately take over the entire debt burden while selling it off, though it remains a strong possibility.

The Business Standard quotedan aviation source as saying, “The government has not relaxed conditions with respect to its own ownership and debt to be retained by the new owner. These have been among the main concerns of prospective bidders and should have been addressed before the issue of RFP.”

Indeed, industry opinionseems to be dominated by the demands that the new owners not be foisted with even 50% of the huge debt, and that the AI package on sale be broken up into different operations and entities — international operations, domestic operations, the Air India Express subsidiary, and the AISATS Airport Services. It is said this will be more attractive as interested bidders can then only bid for the parts they want.

This was also illustrated in the way IndiGo backed out, specifying it only wanted the international operations and not the whole package.

And the clause to not fire employees for a year — even just a year — remains a major thorny issue for the employers, as has previously been reportedas well.

However, foreign airlines and other firms remain immensely interested. It is possible that the government may eventually allow the foreign holding in the airline to go up more than the current stated 49%, which will effectively mean selling Air India into foreign hands. As it is, new owners of Air India will be allowed to acquire other airlines as well after the transaction is complete.

Finally, we return to the same primary question — should the government sell off Air India in the first place?

AI continues to hold extremely lucrative slots at prime airports and traffic rights internationally, with a market share of around 17% in the overseas services from India, which is the highest among Indian carriers. It has a fleet of 115 aircrafts and more than 6,200 slots for domestic and international flights. Also, it has been making operational profits for the past three years, and they have been rising.

In fact, the fact that AI is no longer a market leader is among the most compelling reasons to retain AI in the public sector. Since the market is dominated by private airlines, it is all the more important for the country to have a public-sector airlines. Why?

Because the most effective way to regulate the private sector is to have a strong and well-functioning public sector.

We must remember that the private businesses operate with the sole and over-arching aim of reaping higher and higher profits, and will do all it takes to cut down costs. Private airlines prefer to keep away from less profitable or loss-making routes — routes that connect some of the remotest areas in the country. Once there is unquestioned private monopoly in the air travel market, not only will it be difficult to keep a check on prices and quality, but there will be no one to take care of the loss-making routes.

In short, it is in the interest of the Indian people to keep Air India as a government airline, and not sell it off to private and/or foreign companies, whether whole or in pieces.