Air India's new deal

Despite better terms, finding a buyer may still be a challenge

The government’s second attempt to sell national carrier Air India, worked out by a committee headed by Home Minister Amit Shah, reflects a partly constructive attempt to correct weaknesses in the earlier bid document. First, in place of the earlier plan to disinvest 76 per cent in Air India and Air India Express, the government is now offering a 100 per cent sale, giving the prospective new owner much-needed operational freedom. In its ground-handling facility AI-SATS, the government is offering its 50 per cent stake (Singapore-based SATS owns the rest). Second, the new preliminary information memorandum, or PIM, also lowers the debt component that the new owner will have to shoulder to Rs 23,286 crore against Rs 33,392 crore in the earlier bid documents, limiting the buyer’s debt to the cost of acquisition of aircraft that the airline will continue to operate. The government, thus, will bear the entire working capital and non-aircraft debt.

Taken together with valuable bilateral rights, which will be retained by the buyer as was done when British Airways, Lufthansa, and Qantas were privatised, the new deal is admittedly an improvement on the earlier proposal. The country’s second-largest airline by market share has a fleet of 128 aircraft, 70 of them owned by the airline. More importantly, the new owner can take advantage of the 4,486 domestic and 2,738 international slots and code share agreements with 25 airlines that the flag carrier currently enjoys. The government’s assurance that the terms of selling will be tweaked on the basis of suggestions from potential investors signals that it will be responsive to market expectations.

The question is whether the sweeteners are sufficient to entice a buyer at a time when the aviation sector is under stress worldwide. Indeed, against a robust intangible and tangible asset base, the critical problem of Air India’s bloated workforce remains. It has 13,629 employees and one of the worst employee-to-aircraft ratios in the industry at 133 (for comparison, IndiGo’s is 108). The Shah committee had indicated a one-year lock-in period, after which the buyer could offer a voluntary retirement scheme, but this remains a significant prospective cost for any new owner. The presence of 11 powerful unions certainly complicates the issue, and it is possible that the government will have to bear at least part of that burden as well. There is also some uncertainty over the issue of trademarks, including the famous Maharaja logo. The PIM states that the period for which they need to be retained will be declared in the request for proposal, which will be issued after March 31, after qualified bidders have been selected. Given that branding is the key in the airline business, the need for greater clarity on this would have gone a long way towards attracting bidders.
 

Finally, the timeline the government has proposed to close the deal also appears challenging. Bidders will have to submit their offers by March 17, and the qualified bidders will be notified by March 31. The reason for the government’s haste to complete the deal before the end of the current fiscal year is understandable in the light of its inability to meet the Rs 1.05 trillion disinvestment target. It is, however, difficult to see how any bidder will be able to complete a due diligence exercise in this timeframe or even agree to do so. An extension in this long-delayed process is, therefore, more than likely.