Will the imbroglio end?
As the Government decides to sell Air India, the new owner will have the opportunity to turn it profitable through effective management of its resources
Under the target to sell Air India by the end of this year, the Government will choose the buyer in May and within six months the management of Air India will be handed over to the new buyer. Tata Group and SpiceJet have been shortlisted for the bid to buy out Air India. It is estimated that the process of calling for financial tender for the sale of Air India will be started soon. After analysing the financial position of Air India, the Tata group and SpiceJet will make financial bids. In the financial bids, they will have to tell how much loan they will pay for Air India. However, in this regard, they will have to pay at least 15 per cent as an upfront amount and the remaining loan amount will be transferred to Air India Asset Holdings Limited.
As of March 2020, Air India had a net worth of Rs 45,863.27 crore. These include land, buildings, aircraft fleets and other immovable and intangible assets. The total debt of Air India as per provisional figures of FY 2019-20 stands at Rs 38,366.39 crore. Although Air India was heavily burdened with debt, debt amounting to Rs 22,064 crore was transferred to the special purpose vehicle (SPV) called Air India Assets Holding Ltd (AIAHL) in FY20. It is estimated to have a loss of Rs 10,000 crore in the current financial year. Thus, Air India's debt may increase to Rs 48,366.39 crore.
A group of 209 former employees of Air India had shown interest to buy Air India, but later they dropped the idea. The group also had the support of NRI businessman Lakshmi Prasad and his Interups Inc. At present, Tata group is the major contender to buy Air India while SpiceJet is also in this race. It is noteworthy that apart from the Tata group and SpiceJet, the Essar group, Pawan Ruia's company Dunlop and Falcon Tires had also submitted expressions of interest (EOI) to buy Air India, but they subsequently dropped out of the bidding process.
While the Tata group can do its bidding through Air Asia India, SpiceJet has not yet disclosed its plans. The Tata group is also in talks with its South-East Asian region Singapore Airlines, with which it operates Vistara Airlines, to buy Air India. However, Singapore Airlines is not showing interest in Air India, as it has already suffered a lot of losses during the Corona pandemic.
The Tata group originally established Air India in 1932 but it was acquired by the Government of India in the year 1953. If Tata Group buys Air India, it will dominate the aviation sector as the public has unwavering trust in the company. Vistara Airlines is also doing well in India.
Many attempts have been made in the last two decades to sell Air India. Initially, it was said to sell its 20 per cent stake. Even in 2018, the Government wanted to sell Air India, but could not find a buyer as it wanted to hold a 24 per cent stake, and the company had a lot of debt. An attempt was made to sell 74 per cent of its stake in 2017 also which failed to materialize due to stringent conditions. The Central government is now trying to sell a 100 per cent stake in Air India. The Government will also sell a 100 per cent stake in Air India Express Limited, while Air India will sell a 50 per cent stake in STS Airport Services Limited.
Air India was at a profit of Rs 100 crore during its merger with Indian Airlines, but its financial situation deteriorated due to irregularities, mismanagement, political interference, and internal disturbances. According to a PIL filed in the court, 111 aircrafts were purchased for Rs 67,000 crore between 2004 to 2008. Aircrafts were leased at a cost of crores, but it was not benefiting Air India as its flights were shut down on busy air routes, benefitting the private airlines. Comptroller and Auditor General (CAG) has confirmed such irregularity in its report.
The "K-787 Dreamliner" was purchased in September 2012 to enrich Air India's fleet. The 256-seater Dreamliner can fly for 10 to 13 hours without any interruption. It is superior to the Boeing 777-200 LR in terms of design of seats and fuel efficiency. Air India can make more profit by using the superior capability of the Dreamliner.
Being equipped with all types of resources, Air India can still increase its revenue through the logical use of airplanes. For example, Air India trips can be increased on routes where there are more passengers. There may be more use of those aircrafts which consume less fuel. If a Dreamliner is used for cities such as Frankfurt, Paris, Hong Kong, Shanghai etc., it will take less time to get there and the cost of travel can also be reduced by 25 per cent per kilometre as the Dreamliner consumes less fuel in long routes. Advertising can be done to entice travellers and passenger fares can be reduced. The lesser fares can be compensated by increasing the rounds of the aircraft. Air India had partnered with Star Alliance in 2014. Star Alliance has a large network of 18,500 aircraft at 1,300 airports in 192 countries. Air India can take advantage of this huge network.
Ashwani Lohani-led Air India tried to recover from the losses, but failed to achieve its target. However, it was able to generate operating profit after eight years, but could not sustain its performance. According to the available data, Air India owed Rs 4,98.17 crore to various government departments till December 2020. Air India allows various government departments to travel on borrowings based on credit notes. Not only this, Air India also doesn't charge interest on borrowings for 15 to 30 days, but government departments often fail to pay the amount of borrowings to Air India on time. If the borrowings given to Air India are recovered by the time, then its financial position may be well up to some extent.
Although the government is now committed to selling Air India, I believe that it can still be made profitable in a planned manner. Indian Railways, UCO Bank, Punjab National Bank etc. have also done such magic in the past. In this scenario, it is not impossible to bring Air India to profit. In this case, all its stakeholders will have to manage the available resources efficiently and the government will also have to avoid undue interference in its functioning.
The writer is the Chief Manager in the Department of Economic Research at the Corporate Centre of State Bank of India, Mumbai. Views expressed are personal