While speculation is rife that the government’s decision to retain 24 per cent stake in Air India (AI) may be the reason for the muted response to its disinvestment, experts say the huge burden in the form of debt and staff strength that will fall on the acquiring company makes the plan unviable.
The government had called for expressions of interest for a 76 per cent stake sale in Air India, which was to be completed by May 31. No bids were received by the government from domestic or global players.
Experts believe the terms of acquiring Air India were so onerous that the failure to attract bids was a foregone conclusion even before the stake sale.
“One of the primary problems of acquiring stake in AI is dealing with its 27,000-strong workforce, 40 per cent of which are permanent employees. There is no provision highlighted for voluntary retirement or ‘hire and fire’. The acquiring company will have its own staff strength and reconciliation of such a huge AI workforce will be difficult,” aviation expert R Krishnan told The Finapolis.
Apart from this, the unviable debt of about Rs 34,000 crore can be seen as a major “air pocket” in the Air India’s acquisition journey. Most of this arose out of the merger of Indian Airlines with Air India, former executive director of Air India Jitender Bhargava said.
Till 2007, Air India and Indian Airlines were separate entities making modest profits. Both airlines placed orders for new aircraft in 2005: 43 were ordered by IA and 68 by AI, at a total cost of Rs 65,000 crore. The debt arising out of these huge orders couldn’t be borne by the national carrier, Bhargava said.
The interest alone for the orders worked out to Rs 2,500 crore per year. On a turnover of Rs 20,000 crore, at least 10 per cent had to be earmarked for debt servicing, he said.
Post the disinvestment of Air India, the acquirer will have to absorb Rs 33,392 crore of the accumulated debt which now stands at a whopping Rs 48,781 crores.
Even the best of the airlines, like British Airways and Singapore Airlines, doesn’t make more than two to three per cent of net of its total revenue. There is no way that AI can bear the interest burden from its revenue.
“Unless a scope of earning revenues that will finance the debt is identified it is difficult to sell stake in Air India,” Krishnan said.
“The stake sale made sense a few years ago before the 5/20 rule was removed. The 5/20 rule allows all airlines in India with five years of domestic flying experience and 20 aircraft fleet to fly abroad. With this rule gone, AI is faced with stiff competition from domestic carriers,” he added.
“Apart from this, a number of global airlines like Etihad and Emirates have expanded their routes which AI failed to capture,” he said.
Another drawback for AI is its decision-making process as it is a government company, said Bhargava. The chairmen are changed very often and there is no continuity of management, he added.
What brought AI down?
Apart from lack of decision making, low productivity hit AI below the belt, despite it having the best aircraft. It could not command a good value in the market. Though the costs are high, the realisation per seat is very less compared to low-cost airlines.
As a government airline, productivity per employee is not comparable to private airlines, because of union agreements that the AI is governed by. Bhargava said the government has been able to control the wage bill, but not to the extent that it is desirable.
“The government is slow in reacting to market changes. The disinvestment process has taken unduly long. The bureaucratic approach of first safeguarding themselves that ‘I should not be accused of selling’ has been a major constraint,” he said.
Some drastic measures are needed by the government to either put AI on track or sell it, said Bhargava. “Under the government ownership, the airline can neither be revived nor can it survive,” the former AI honcho said.
The government has tried to keep the institution flying with equity infusion of Rs 25,000 crore in the last five years. It also sold assets including six flats in Sterling Apartments in Pedder Road in Mumbai that were sold at Rs 22.50 crore each. Some other real estate was also sold that mobilised a sum of about Rs 600 crore, a pittance compared to the debt burden of AI.
“Unless an acquiring company comes up with a viable revenue earning plan, there is no point in selling a part or whole of Air India,” said Krishnan.
The failed attempt of the government to sell stake in Air India raises doubts of its impact of other divestment plans. The government has set a divestment target of Rs 80,000 for this fiscal and think tank NITI Aayog has identified 45 PSUs for prospective strategic stake sale. In the light of the Air India drama, will the government rethink its divestment strategy?