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Selling Air India Will Be a Real Test for Modi Govt

Jan 15, 2018


The government owned airline Air India has been losing a lot of money over the years. Take a look at Table 1, which lists out the losses of the airline over the last few years.

As can be seen from Table 1, over the last seven financial years, the airline has made losses of Rs 39,535 crore. Over the years, many experts have attributed different reasons for the airline doing so badly. While we can keep debating about these reasons, what is more important is that the government stops supporting the airline now and use that money in other more important areas like education, health, agriculture etc.

Table 1:
Air India Losses (in Rs crore)
2010-2011 6,865
2011-2012 7,560
2012-2013 5,490
2013-2014 6,280
2014-2015 5,860
2015-2016 3,837
2016-2017 3,643
Total Losses 39,535
Source: Public Sector Enterprises Surveys and Loksabha Questions PDF

In 2012, the government had approved a turnaround plan for Air India. It entailed an equity support of Rs 30,231 crore from the government, over a period of ten years. Of this amount a total of Rs 26,545.21 crore had already been released by the government to Air India, as of December 2017. Given that the airline continues to lose money, it is important that the government stops investing more money in the airline.

As on September 30, 2017, the airline had a total debt of Rs 51,890 crore. Of this working capital loans amounted to Rs 33,526 crore. A reasonable question to ask here is why are the working capital loans of the airline so high? Given that the airline has been making huge losses over the years, it has needed loans to keep afloat.

The next question is why have banks lent money to an airline which has lost so much money over the years? The answer lies in the fact that lending to Air India, is like lending to the government and governments typically don't default on the money they borrow. (At least that is what the financial markets tend to assume most of the time).

Also, in order to keep repaying working capital loans over the years, the airline has had to take on more loans. Of course, the only institution which can keep taking new loans to repay old loans, without being questioned, is the government.

To its credit, the Narendra Modi government has initiated the strategic disinvestment plans for Air India (strategic disinvestment is a government euphemism for privatisation). In May 2017, the NITI Aayog recommended the disinvestment of Air India and its subsidiaries. In June 2017, the Cabinet Committee on Economic Affairs (CCEA), gave an in-principle approval for considering strategic disinvestment of Air India and its five subsidiaries.

Further, last week the government allowed 49 per cent foreign direct investment in Air India. This means that foreign airlines can now team up local players to buy the airline. Up until now, foreign airlines were allowed to buy up to 49 per cent of a local Indian airline, but this wasn't allowed for Air India.

There are a number of issues that still remain and need to be handled smoothly and successfully, if Air India has to be sold.

1) The airline has a debt of close to Rs 52,000 crore. No airline is going to buy Air India along with this debt. The CCEA which gave an approval to privatise the airline in June last year, also decided to constitute an "Air India Specific Alternative Mechanism (AISAM) to guide the process on Strategic Disinvestment of the same."

As the minister of state for finance Pon Radhakrishnan told the Lok Sabha in a written answer in December 2017: "AISAM decided for creation of a Special Purpose Vehicle (SPV) for warehousing accumulated working Capital Loan not backed by any asset along with is four Subsidiaries, noncore assets, painting and artifacts and other non-operations assets of Air lndia Limited."

This basically means that in order to sell Air India, the government is ready to take on the working capital loans of Air India.

2) If the government is ready to take on the working capital loans of Air India, amounting to Rs 33,526 crore, then the unions of Air India might have a question or two for the government. As a Business Standard report points out: "The Air India unions have represented to the government that if the government writes off the Rs 30,000 crore debt, which is the key to the financial problem, there is no justification to privatise the airline. Surely they will not take it lying down."

It remains to be seen how does the Modi government handle the nuisance value of the trade unions.

3) Further, Air India has aircraft loans of Rs 18,364 crore. It remains to be seen whether prospective bidders for the airline would want to start their business with loans of more than Rs 18,000 crore. If they do take on this debt, the price they will be ready to pay for the airline won't be very high. It remains to be seen if this will be acceptable to the government, which tends to treat its ownership in public sector enterprises as family jewels (By government I mean any government and not just the current one. This attitude of treating public sector enterprises as family jewels has cost the nation so much. But that is a topic for another time and another day).

One way to handle this would be to handover Air India to another airline or a company, at a nominal price, on the condition that they take over the debt. The Business Standard report quoted earlier points out: "Look at how the government in Malaysia sold the debt-ridden Air Asia to Tony Fernandes at just one ringgit, and he took over the debt. That has to be the approach because you are not going to make money for your disinvestment target through the Air India sale." This makes tremendous sense, but given the family jewels point, I am not sure how realistic it is. Also, in this case, the government can retain some minority stake in the airline and if and when the airline starts to do well that stake can be encashed (Precisely like it did in case of Maruti).

4) Most importantly, what happens to all the employees of Air India. As per the 2015-2016, annual report of Air India, the airline had 19,285 employees (this does not include the people working for its subsidiaries). While, the airline seems have the right number of pilots and air crew, it is particularly bloated when it comes to maintenance and ticketing and sales divisions.

A December 2017 report in the Mint points out that the airline had 5,931 employees in its maintenance division and 4,221 employees in its ticketing and sales division. In comparison, Indigo, had 739 and 69 employees in these divisions, respectively.

It remains to be seen how does the government handle this. Any airline which wants to acquire Air India is not going to employ 4,221 employees in the ticketing and sales division.

That much is very clear.

So, what happens to these and other employees? "Various options are under consideration to protect the interests of the employees," civil aviation secretary R N Choubey told PTI. Last week, minister of state for civil aviation Jayant Sinha had told CNBC TV18, "We will make every effort to protect Air India staff."

In an answer to a Lok Sabha question, Sinha denied any plans to offer a voluntary retirement scheme to around 15,000 employees of Air India, before the disinvestment of the airline.

Handling the employees of Air India, will be the most significant challenge for the government in the run-up to the sale. In the past, when government owned airlines have been sold in other parts of the world, the number of employees working for the airline has come down considerably, for the airline to be viable for the firm buying it.

Once we consider all these factors, the privatisation of Air India will be a real challenge for the Modi government. I sincerely hope that they are able to push it through and the money thus saved is better spent somewhere else. Also, once Air India is privatised, the chances of the government getting out of many other businesses, will go up dramatically.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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5 Responses to "Selling Air India Will Be a Real Test for Modi Govt"

Deepak Padher

Jan 17, 2018

Vivek has only one answer to all loss making PSUs i.e. privatise.
Is the privatisation is only answer ?
What happened to KINGFISHER ?
They have taken loans from PSU bank and flied away.

Instead one should come with some good solution to this problem instead of privatisation.


Rajiv Ranjan Prakash

Jan 16, 2018

you have discussed only liaibilities of Air India but not discussed a single asset of AI.It would be fare enough to discuss the real valuation of AI with its real estate and other valuable assets like lands,buildings at commercial locations and residential colonies both in India and abroad.If you really understand disinvestments kindly write about previous disinvestments like Hindustan zinc,VSNL,BALCO and Many hotels how the sold entities made thousand of crores fronthese companies.You should also cover how Reliance Jio got all india spectrum to run its business and hiw BSNL supported it despite anger of other private players. I like your views but many time i found it biased.Kindly come out with balanced analysis.



Jan 15, 2018

Mr.Kaul : As a retired staff of AI ( erstwhile Indian Airlines ) and an avid reader of your columns I beg to differ when you call trade unions' demand as nuisance value. Mind it , it was the government ( whether UPA or NDA does not matter - actually it was UPA ) which ordered aircrafts many more in numbers than actually needed . Each aircraft costing several crores - more than 200 crores. Then the foolish decision to buy it against huge loans the interest alone on which was to be more than 4000 crores against revenue of twelve to thirteen crore rupees. Even a high school student would have told that this interest burden is unmanageable but the 'economists ' in South Block apparently did not think so and went for a sure recipe of disaster. Now if one acts foolish he/she has to face the consequence is'nt it ? So , what wrong if government takes the hit and writes off a big chunk of loan. Remember before this huge loan Indian Airlines was making profits and would again do so if this mill stone is taken away from it's neck !


Monita Mehra

Jan 15, 2018

I completely agree that Air India is over staffed in certain departments but it doesn't just end there, ex-employees are eligible for a lot of benefits and so are their extended families, including son-in-laws, daughter in-laws for free international tickets on a regular basis, even ESIC doesn't cover extended family but Air India extends free tickets to them.
Some %age of all flights have people travelling free of cost on account of this reason and they are allowed to book in advance and not like other airlines where they can book only if seats are available.
But unions aren't just limited to Air India, it is across public sector companies and they are working on making most of them unviable. Unfortunately individual always comes before organisations.


Gautam M

Jan 15, 2018

Good and sensible article after a long time. Author is correct in saying that govt needs to move out of Air India by devising a one time strategy that pacifies most of the stakeholders and thus plugging a perpetually leaking vessel. The amount of money saved can be invested in other important avenues.

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