By DM Deshpande
This is the second attempt by NDA Government at disinvestment and strategic sale of premiere public sector airline Air India (AI). Its first attempt in 2018 did not elicit any bid from prospective buyers. It appears from the information memorandum document released by the government that efforts have been made to sweeten the deal.
This time around, the government has put on block 100 per cent sale of equity of AI, up from the 76 per cent that was proposed in 2018. This will encourage the bidders, for there will be no governmental interference, whatsoever. In addition, the government will absorb 30 per cent more debt. AI’s latest annual losses have exceeded Rs 8,500 crore.
But what makes the deal really attractive is also the offer for sale of subsidiary of AI-the Air India Express, the low cost subsidiary with sizeable market share. Add to this a 50 per cent stake sale in AI SATS (the ground handling arm); the combined offer is indeed attractive. AI is a huge and complex entity. The sale, its terms can hardly be expected to be simple. So, what is stated in the information memorandum is as important as what is not stated in it.
Broadly, the buyer will have to take over US $3.3billion debt in exchange for three companies. The buyer has been given the assurance of debt being fully backed up by assets. AI has the highest revenue earnings among the domestic carriers. India is already the 3rd world’s largest civil aviation market in terms of domestic travel and is slated to occupy the same overall global position by 2024. AI along with its low cost subsidiary Air India Express have an 18 per cent share in international travel market. Obviously, it controls bulk of the bilateral rights, slots and code sharing arrangements.
A successful bid for buying out AI is essentially a claim on the future. Look at the future traffic potential, earnings and expected future cash flows and market dynamics-it is all promising. Air India Express is easily the pick from the lot, if one takes in to account valuation of six to seven times the earnings. This however, is not to suggest that there are no challenges. Among many, there are two major concerns. One, brand AI should continue even after the acquisition.
Understandably, this is to please the RSS/ Swadeshi lobby but what if the buyer does not want to continue with the brand? After all, it is steadily losing market share and the new entity may think of a new brand name. Clearly, higher brand loyalty is merely a perception, not a reality in this case. Second, all the 21,364 direct and indirect employees of AI will continue, that is, they will have to be taken on roll by the buyer.
It is not clear why they were not offered VRS as was done in case of BSNL and MTNL. Yes, they were expensive but made those organizations leaner. AI employees including the pilots are a pampered lot. There are reported unsavory incidents of pilots of AI and erstwhile Indian Airlines fighting in the cock pit on the question who shall fly the aircraft! Actually, at 11 per cent employee cost as ratio of revenues is below international average. So, it is not so much the wage cost that is a worry but problem lies with productivity and ability to adapt to new rules of game after change over.
Core assets of AI like hangar in Delhi and Mumbai are included in the sale offer. However, certain other key assets such as engineering subsidiary or fixed assets such as office building and training facility shall be sold off later to a different entity. While this leaves a significant future value that can be unlocked by the government, it may not go well with one or some prospective bidders. Fortunately, in a complicated and gigantic exercise such as sale of AI, the government has spelt out that it will be flexible at the time of actual negotiations. In fact, it can even offer more concessions. This is as it should be. However, care needs to be taken to see that government does not go beyond it’s own brief to ‘help’ the final and successful bidder.
Transparency, fair deal and equal opportunity should be ensured by negotiators, especially from the government side. Every prospective bidder would like to remember what Warren Buffet, the legendary investor said, “It is far better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price!”
AI continues to bleed. Lot of tax payers money has already gone down the drain in an effort to turn around the airline. Civil aviation is too complicated a business that any government would be well off without the headache of having to run it profitably.
The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.