Barely hours after the media quoted him as saying that the government could look at privatising Air India if there was broad political consensus, Ajit Singh, under attack from the Opposition had to retract his statement. The Civil Aviation Minister needn’t have done this swift U-turn. And the Opposition, rather than being incensed by the remark, should have actually called Singh’s bluff by challenging him to undertake this mammoth task, which, experts say, seems so impracticable as to sound ludicrous.
In the long run, freeing Air India from the clutches of the government is the only option (unless the government lets it go bust), but there is a long list of things to fix before the government can even think of uttering the ‘p’ word, say experts.
While Air India has no doubt shown signs of a turnaround, turning EBITDA positive, inducting fuel-efficient Dreamliners, reducing staff costs and restructuring operations, here are just some of the reasons why the airline in its current state is an unfit candidate for privatisation:
#1 Money matters
There’s no more money after the Rs 32,000-crore bailout runs its course, said Ajit Singh! The government has put in Rs 16,300 crore into Air India in the past four years, and has committed to infuse another Rs 30,000 crore approximately over the next nine years. But we’ve already seen the Centre faltering on this commitment, holding back the Rs 3,574 crore due from last year, as a high fiscal deficit squeezes out its finances. Such delays will impact the implementation of Air India’s turnaround plan and also antagonise a potential suitor. The government needs to get its fiscal house in order first, stick to commitments on equity infusion and only then think of selling. We are a long way off from that.
#2 The current party is going to be short-lived
The carrier has reduced its losses from Rs 6,865 crore in 2010-11 to Rs 4,000 crore in 2013-14. While that might seem like a gigantic improvement, it is not. You only have to read what Aditya Ghosh, president, Indigo said while explaining the better results his carrier posted. Fewer price wars, better fares and lesser capacity as a result of Kingfisher Airlines’ demise was what led to incumbent carriers having a party in the air, not necessarily improved fundamentals. “With the arrival of more competitors in the domestic and international sectors, AI's market share, bottom line and debt servicing ability may be hit further,” says Amber Dubey, partner and head-aerospace and defense at KPMG.
#3 Rising competition
In fact, the party poopers are already on their way. Domestically, the Tata-Air Asia combine and the Tata-SIA joint ventures, and globally the Jet-Etihad endeavour could prove to be Air India’s nemeses. Qatar Airways and Emirates are among the other carriers that are reported to soon set Indian skies abuzz in the days ahead. “After all the asset stripping, mounting losses and huge debt, a bleak future thrust upon the airline by indiscriminate allocation of bilateral rights to foreign carriers – means the company is unlikely to evoke interest in any potential buyer,”says Jitendra Bhargava, former executive director, Air India, and author of the soon-to-be-released book The Descent of Air India.
#4 Too much debt
To say that Air India is debt laden is to downplay its problem of over-leverage. Air India is sinking under its Rs 40,000 crore cumulative debt pile. While banks have approved its Rs 18,000 crore debt recast, an expert seeking anonymity said, “Banks will have to take significant haircut both on interest and principal if the government wants to make a meaningful dent in the debt levels. No investor would consider a stake buyout if the status quo is maintained.” How much of a haircut banks will be willing to take at a time when the RBI is gunning down on mounting NPA’s is anybody’s guess.
#5 Structural issues, government interference
Last but not the least, there are a host of structural issues which Air India needs to sort out. The 2013 CAPA report highlights problems around sub-optimal aircraft utilisation (100 operational aircraft out of a registered 127 fleet), strategic limitations of fleet structure, a bloated workforce (which stands reduced at 13,000 down from 25,000 in March 2013 only because the restructuring of the company transferred large number of workers to other subsidiaries) and prospect of industrial action from licensed staff ‘which could be triggered off by the introduction of wage restructuring initiatives’. The report, in addition to highlighting these challenges also raises an important question on government interference which the existing management has to deal with.
Why in these circumstances would a foreign (or domestic) investor want to partner the government?
Realistically then, de-nationalising India’s national carrier is an onerous, almost impossible, feat. Globally carriers like Japan Airlines have emerged stronger from bankruptcies, but only after radical transformative measures like retiring 40% of their fleet, retrenching 16,000 employees etc.
“Bold and pragmatic action is required to provide the airline with a fresh start and a fighting chance to compete. For the process to be successful it must be led by an MD that has the full backing of the government to make the necessary cuts, as was the case at both Malaysia Airlines and Garuda Indonesia,” reads the CAPA 2013 Yearbook.
Does the government have the political will to undertake this gigantic operation in an election year? No.
Without this, does talking privatisation make sense? Clearly not.