Air India's privatisation efforts are welcome, but hurdles remain

The central government has floated the expression of interest (EoI) document for Air India, setting off the process of privatisation of the national carrier. This is a welcome move because a long-standing demand on the reforms checklist has, finally, been ticked. The airline has been making massive losses on a regular basis and there was simply no rationale for the government pumping in huge sums of money to maintain the airline’s public sector identity. The government has decided to offload 76 per cent of its stake in Air India, 100 per cent in the fully owned budget arm Air India Express, and 50 per cent in the ground-handling joint venture with Singapore Airport Terminal Services called AI-SATS. The remaining 24 per cent of the government’s stake in the airline is expected to be sold at a later date, hopefully providing taxpayers something to cheer about. The eventual winner will gain access to a huge fleet of wide-bodied aircraft, fairly under-utilised bilateral flying rights, and many slots in key airports around the world. All this means if managed efficiently, Air India has the wherewithal to increase its market share. The market opportunity is huge as the domestic traffic forecast suggests that the Indian market will grow close to six times between 2015 and 2035 — that is a growth rate far in excess of what is visible anywhere else in the world.

However, a successful take-off for the privatisation effort may require more than just the potential for growth. One big put-off for potential buyers is the amount of debt that they will have to subsume. Of Air India’s total debt and contingent liabilities of Rs 487 billion as of March 2017, the new buyer will have to take over almost Rs 334 billion. Making matters worse is the fact that details of this debt/liabilities reallocation will only be shared at the second — request for proposal — stage. No less formidable is the challenge posed by the huge staff on the rolls of Air India and its subsidiaries. There are close to 41,000 people working for Air India, and even though the government has argued that the airline’s employee cost is one of the lowest among its peers, the sheer size complicates the issue. The Left-backed All-India Trade Union Congress has already accused the government of trying to improve the ease of doing business at the cost of hardship for employees. That is not good news for prospective bidders for an airline that has seen its share of domestic traffic slide to 12.3 per cent and global traffic to 16.9 per cent.

Then there are aspects of the EoI document that could discourage genuine buyers. For instance, the Rs 50 billion net worth requirement is met by just one Indian carrier. Others will be forced to take the consortium route. But such a carrier cannot own more than a 51 per cent stake in the consortium, which, in turn, corresponds to a maximum 38 per cent stake in Air India. Worse still, the rules demand a freeze on the shareholding within the consortium at the EoI stage itself, when bidders have not yet reviewed Air India’s books. Lastly, the timelines in the EoI are unrealistic since such deals require anywhere between 12 months and 18 months, at the very least.