Getting rid of an albatross

Imagine a situation where a promoter of a company makes huge capital investments to revive it, but fails to ensure any tangible or durable improvements in its performance. What options does a promoter have under such circumstances? Either the company could be restructured financially with the promoter taking a haircut and banks agreeing to a debt recovery settlement or it simply could be closed down. A third option would be to sell the company to a buyer before its losses become so huge that it no longer remains saleable.

All these options, however, seem to be irrelevant when the promoter in question happens to be the government of India and the company is Air India, a state-owned airline that is mired in losses, burdened by huge debts and hamstrung by a dwindling market share, an oversized manpower base and a reduced fleet size. Consider the following numbers that should scare anybody— be it a promoter, a lender or an investor.

In the five years of the second stint of the United Progressive Alliance (UPA), the government had infused into Air India fresh capital of Rs 15,200 crore to help it overcome its losses. But there was no improvement. Then came the National Democratic Alliance (NDA) government under Narendra Modi and there were great expectations that such doles in the name of equity support to a loss-making company would come to a halt.

But all such hopes were belied. The NDA seemed to be no different from the UPA as far as at least Air India was concerned. In the last three years of the NDA regime, the central exchequer has invested an additional Rs 11,545 crore of capital to provide financial support to Air India. Add another Rs 1,800 crore budgeted for the current year, the NDA government’s capital support to Air India would go up to about Rs 13,345 crore. Taken together with the capital pumped in during the UPA regime, the total equity infusion into India’s state-owned airline is over Rs 28,500 crore in nine years. This amount is a little more than what Air India’s one-year revenues are at present.

In 2009-10, Air India’s market share in the Indian skies used to be just about 17 per cent as it had already ceded ground to a host of private sector airlines. Today, that market share is further down to 14 per cent. Its fleet size of 148 at the end of March 2010 is now down to 118. 

This period also saw red ink all over its books. Its loss in 2009-10 was estimated at Rs 5,552 crore and this rose for the next two years and in 2013-14, it was Rs 6,280 crore.

The following year, the first year of the NDA government (2014-15), saw a marginal improvement as international crude oil prices began falling. But defying the industry trend of improved performance, Air India continued to remain in the red with the loss estimated at Rs 5,860 crore. Crude oil prices have stayed low since then and other airlines have begun recording handsome profits. But Air India’s performance in 2015-16 showed a loss of Rs 3,837 crore, though it did notch up an operating profit of Rs 105 crore. And one of the reasons for its continued poor performance is its alarmingly high debt level. It kept rising each year from Rs 48,359 crore in the last year of the UPA government (2013-14) to Rs 50,357 crore in the second year of the NDA government (2015-16). 

So, what are the options the government has for Air India? It has already exhausted its first option — a turnaround plan through financial restructuring. The turnaround plan has been in existence for some years, envisaging an equity infusion of Rs 30,231 crore in instalments ending in 2021. Of this, Rs 24,745 crore has already been spent. The government says it has a plan to monetise its assets and about Rs 5,000 crore is expected from the sale of buildings to reduce the company’s debts. In addition, Air India has finalised a strategy to cut costs, introduce new routes, improve marketing efforts, launch a dynamic fare fixation policy and improve operational efficiency. 

But all these measures have so far made no significant impact on the airline's financial performance.  If any private company had behaved so erratically and irresponsibly as far as financial discipline is concerned, its management would have been sacked and its promoters would have looked at options of either an exit or a closure. But then the government of India is not like any other private sector promoter and Air India, the country’s national carrier, is not like any other company.

It also appears that the second option of a closure is ruled out. The government cannot afford to be without a national carrier wherein it has a significant stake to ensure that the airline, when the need arises, can play the role expected of a national carrier. 

That leaves us with the third option of selling Air India to a private strategic partner who can run the airline independently without any government interference. The government may continue to retain a minority stake of not less than 26 per cent. If need be, the government could even set conditions that could rule out certain classes of investors to acquire strategic control of Air India. 

The accumulated financial burden of Air India is so huge that the government will have to allow it to run its operations on a clean slate and under a management that is free from government control. Like other promoters of a financially beleaguered company, the government too could take a haircut by diluting its equity or through a debt waiver.

The short point is that the sale of Air India to a strategic investor is an idea whose time has come and it would be a pity if the government did not review its earlier decision against privatising the state-owned airline. Air India today is like an albatross around the neck of Mr Modi. Coleridge’s Ancient Mariner could get his albatross off his neck, the moment he could pray. Mr Modi too could do the same, not by praying but by privatising Air India.