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Following IndiGo’s decision of not bidding for state-run Air India, the government might be pressured to tweak some of the key areas in the preliminary information memorandum that, according to many carriers, make it difficult to bid for the national carrier.
There is no doubt, say experts, that IndiGo was the only domestic airline with the cash reserves (over Rs 120 billion) and management wherewithal to turn around Air India. It was also the only carrier that met the net worth criterion of Rs 50 billion on its own. Now, IndiGo’s withdrawal from the race is surely a major setback for the government, and it also raises the red flag for other potential bidders.
The other two aviation companies that have reportedly shown interest in Air India are Tata-SIA and Jet Airways with KLM, though the latter does not have a great financial health. The names of Air Asia, SpiceGet, Go Air and Qatar Airlines, and even the Adanis, have been doing the rounds, but many of them have denied or not commented on the issue.
According to an aviation analyst, “the IndiGo decision is good in one way, as it will make the government rethink – you cannot push so many clauses down a buyer; they will rethink (their interest in bidding).” Global consultants to airlines say that most carriers are looking for more clarifications on some key issues before they would take a decision.
Some airlines say that one key area of concern is the insistence to run Air India as a separate entity. They point out that a clause says the winner will have to carry on the business of Air India as an ongoing concern, and on an arm’s length basis from its other business, till such time as the government owns any shareholding. “This is ridiculous; for any turnaround, Air India will need to be merged with the existing operation of the new owner, so that one entity can get synergy and reduce costs, and also improve efficiencies. What is the logic of running two airlines separately and not getting advantage of the synergies. Imagine, for example, Tata-SIA and Air India being run separately by the same shareholders,” says a senior advisor to a leading airline company.
Another key concern is the lack of clarity on employees’ future. Airlines say the decision on who would be retained should be with the buyer, and not more than 50 per cent of the present workforce would be required to run it. “The government is talking of the employee stock ownership plan (ESOP), and that you cannot retrench staff for a year. But in do so, the government seems to be washing its hands of a crucial issue without which no one will risk to bid,” says an airline assessing whether to take the papers for Air India.
There also are serious concerns on the speed at which the government wants to complete the sale process. Airline experts argue that even smaller and private airline acquisitions globally have taken at least 12-18 months. But the deadline set by the government is not enough for a thorough due-diligence and final decision-making on the bid. The government has put in a stiff deadline of October-end to complete the sale.
Many carriers say that they are dissuaded by the insistence that they float an IPO in three years. That would not be possible, they say. “You would like to go for an IPO when you are profitable. We don’t think that it can be turned around in just three years. The decision should have been left to the buyer, not forced on them,” says a senior executive of a domestic airline.
Many analysts also say that IndiGo’s decision announce its withdrawal from race publicly might just be a tactic to pressure the government to sell Air India in parts – domestic and international separately. IndiGo is more interested in the international business. However, others say if that happens, there is hardly any way that Air India will be able to sell its domestic business, which does not look very attractive. In international business, it has some valuable slots that can give the buyer a big kickstart in the global market.
Of course, there is a shortage of even domestic slots in cities like Delhi, Mumbai, Bangalore, Goa and Chennai. But domestic carriers say that the shortage is only temporary – for the next 2-4 years – as new airports and capacities are already being built in most of the airports. So, to buy domestic business only for the slots, based on a temporary shortage, is not a viable strategy. Before any acquisition, airlines look at the target’s value for the next 20 years.