Air India Divestment: Things To Watch Out For
The mood and intent of the NDA Government to go for divestment of national carrier Air India can be judged from what the finance minister Arun Jaitley had said in a Doordarshan programme in May. "In this country, if 86 per cent flying can be handled by the private sector... then they can also do 100 per cent." On June 28, 2017, the Union Cabinet gave its "in-principle approval" for Air India's divestment, a historic step in the history of Air India that commenced operation 71 years ago on July 29, 1946. The suggestions to go in for divestment was made by the NITI Aayog some three months ago which has been accepted by the Union Cabinet, the finance minister said after the Cabinet meeting.
As per the Union Cabinet's decision, now a panel of ministers under Jaitley will meet and decide the modalities of how to go about divesting the debt-ridden airlines that are surviving on taxpayers money. The panel will deliberate on the specific options suggested by the Department of investment and public asset management. The department has given three options:
Option 1 - Go for 100 per cent divestment
Option 2: Go for 74 per cent divestment and
Option 3: Go in for 51 per cent stake sale in Air India
The panel may also create a Special Purpose Vehicle to dispose-off the debts of Air India so as to make the divestment more attractive to the potential buyers.
Let's look at what Air India has to offer:
* Fleet Size: 110-plus aircraft
* Widebody aircraft: 43
* International Destinations: 41
* Domestic Destinations: 72
* Debt: Rs 52,000 crore-plus
* Employees: 21,000-plus
* Own Real Estate: Estimated worth over Rs 5,000 crore
The panel has to also deliberate on Air India-specific alternative mechanism like who can bid for the airline; can a foreign airline with India JV bid for Air India; or can a clutch of foreign entities be eligible to participate in the divestment process? As per the current rules, Indian airlines can be owned fully by foreign entities. However, there is a cap of 49 per cent on ownership of Indian carriers by foreign carriers. Will this rule get a re-look particularly in the case of Air India divestment process? These are some of the questions for deliberations before the panel.
Hurdles On Way:
Employees: The national carrier employs around 21,000 employees, therefore, it is but natural that Air India Employees Union (AIEU) has opposed privatisation of the airline. The Union has already met with NITI Aayog Chairman Arvind Panagariya and has insisted on looking after the job security and welfare facilities of the existing and retired employees. It told Panagariya in a letter that ..."Air India incurred Rs 50,000 crore of accumulated losses due to hasty decisions and wrong civil aviation’s policy of the Government of India such as the purchase of 111 aircraft, surrendering profit making routes to private operators, providing service to loss-making routes in the north east sector..."
The Union, which is among the seven active employee unions, wants the government to waive Rs 30,000 crore and "give an opportunity to Air India management to keep flying the flag of national carrier”, it said in a letter submitted to Panagriya. The 7 unions of Air India employees have already warned the government of large-scale protests if the NITI Aayog proposal to privatise the national carrier was approved. The government has maintained that the future of the employees will be protected in the divestment process.
Debt: The panel also has to decide on the treatment of Air India's high debt of over Rs 52,000 crore. Also, whether to hive off certain assets of the national carrier to another company or demerger and strategic disinvestment of profit-making subsidiaries. Air India has half-dozen subsidiaries including AI Engineering Services Ltd, AI Transport Services Ltd, Alliance Air, AI Express and the Hotel Corporation of India that runs Centaur Hotels. Then there is the Air India 50:50 JV with SATS Ltd of Singapore. Air India has a working capital loan of Rs 30,000 crore and Rs 22,000 crore of aircraft purchase loan on its books. It has over 110 aircraft and flies to over 40 international and 70 domestic destinations having a market share of 14 per cent in the domestic sector and 17 per cent in the international sector.
Some private agencies in their reports have already suggested Hiving off Air India Express and divesting its ground handling subsidiary Air India Air Transport Services Ltd for an effective restructuring measure.
International Examples: The recommendations made by NITI Aayog cite some international examples – British Airways and Austrian Air – where the governments have successfully diluted their control and privatised the airlines. But such decisions were both tough and challenging. A quick look at the history of privatisation of British Airways, Austrian Air and Japan Airlines tells us two things. One, the privatisation took a number of years and involved job losses and legal disputes. Two, since there was a will, the end-results were a success in each of the three instances. The plan to privatise British Airways or BA was kicked off in 1981. It finally happened in 1987. Some 23,000 jobs were lost in the process (remember Air India has a total employee strength of just under 21,000). Some of the profitable domestic carriers like Jet Airways (13,900+), SpiceJet (6000 employees) and IndiGo (3,500 employees) have much lower employee strength. Austrian Airlines, formed in 1957 by the merger of Air Austria and Austrian Airways, sustained continuous losses in the period 2000-2008 before the Austrian government decision to privatise was taken. In July 2009, the Lufthansa Group purchased the airline. But after controversy and enquiry by the European Commission.
The short point is once a decision by the Union Cabinet is taken for Air India, the road to privatisation is expected to be bumpy and full of hurdles. Only a sustained will on part of the government can make the national carrier truly become a Maharaja. It's decision time now.
