The deadline for interested bidders to submit their bids for Air India has been extended by nearly two months to August 31. This is the third such extension since the disinvestment process for AI was restarted in January this year but the latest extension, at least, comes as no surprise.
The Covid-19 pandemic has crippled the economy, caused widespread stress in India Inc and made it quite tough for the government to push through an ambitious disinvestment under such trying circumstances. The government had offered nearly 100 per cent stake in Air India and its low cost international flying arm AI Express, besides 50 per cent stake in ground handling arm AISATS, under the disinvestment process.
Now, with the setback due to Covid-19, shouldn’t the government draw up a plan B for Air India? This will mean infusion of a significant amount of money to keep the airline afloat, examining the changed scenario and possibly further sweetening the offer for disinvestment and also making the airline’s operations far more cost efficient.
The underlying premise for pushing disinvestment of AI has been its continuing need for large cash infusion to fund losses, inability to cut costs or improve efficiency. And the fact that the government didn’t find it viable to remain in the commercial airline sector, where private airlines account for more than eight in 10 passengers. Accumulated losses in Air India had topped Rs 60,000 crore by March 2019.
So the latest deadline extension, though expected, reaffirms the government’s resolve to continue with the disinvestment process. Even if disinvestment gets started, it will likely be a long drawn affair now. Aviation consultancy CAPA Advisory’s CEO and Director Kapil Kaul pointed out that AI needs “minimum $1.5 billion (a little over Rs 11,300 crore) funding in 2020-21and will continue to depend on government funding from FY22 so a determined effort to exit AI with possibly further concessions may be necessary”. He said a plan B was necessary for privatization or even for continued government ownership.
The Modi government’s first attempt to disinvest Air India came nearly at the end of its first term, in 2018, when it invited bids for 76 per cent stake in Air India and AI Express and 50 per cent stake in AISATS (ground handing JV). The process bombed, since not even one bidder came forward to show any interest what-so-ever in picking up a stake in the airline.
So in the second attempt this year, the government sweetened the deal: it offered nearly 100 per cent stake in the airline and its low cost international arm (AI Express) along with 50 per cent in AISATS. Not only was the offer improved in terms of stake quantum, the airline’s debt pile was also reduced considerably. Of AI’s total debt of a little over Rs 60,000 crore, the buyer was now expected to take on less than half (a little over Rs 23,000 crore) only – the rest of the debt was hived off into a separate Special Purpose Vehicle (SPV).
What sector experts like Kaul are saying is that the deal for getting AI off its hands in the post-Covid-19 scenario may require a further sweetening of the offer.
A source pointed out that the airline has been surviving the hit to its operations and income during this pandemic by deferring payments to vendors, fuel companies and airport operators. This person put the dues at a staggering Rs 30,000 crore till March but the AI spokesperson remained unavailable for comments.
Anyway, before the pandemic hit the aviation sector, there was a growing buzz about the Tata group preparing to place a bid for AI. Another source close to the developments had confirmed at that time that the Tata group was ready to put in a bid for Air India and that there has been “a lot of pressure” from top government officials over Tatas’ seeming reluctance to participate in AI disinvestment.
Also, speaking at a Vistara (full service airline of the Tata group) event, Vistara Chairman Bhaskar Bhat had said that the Tata group was evaluating whether to put in a bid but that no decision had as yet been taken. Whether the Tatas or any other corporate house comes forward to place a bid for AI now remains to be seen, given the balance sheet stress of almost all companies post Covid-19.
Even at the time the Tatas were seen as frontrunners for AI, there were both pros and cons in the deal. The benefits of buying out Air India would have perhaps included valuable international airport slots of AI and its vast, experience team of licensed employees (commanders and first officers). But the downside was the debt any buyer was expected to shoulder (though backed by aircraft assets) and the additional amount needed to bring the airline up to speed with industry norms.
An AI official had earlier said that their own internal estimate of the amount needed to just refurbish the existing fleet of aircraft, change upholstery and livery and install things like entertainment systems was “tens of thousands of crores”.
Any hopes the government harbours about exiting AI may depend not just on the deep pockets of the potential buyer but also on how much and at what speed does the Indian airline market witness consolidation. The demise of Jet Airways last year has already altered market dynamics and there is the likelihood of more consolidation post Covid-19, especially for airlines unable to get substantial new funding to deal with the pandemic’s aftermath. Would the government still want to exit the airline business if the market consolidates further?
With so many moving parts and uncertain times, perhaps it would be best for the government to further defer the disinvestment process beyond August. And alongside, it needs to infuse the required funds into AI, make it operationally more efficient, cut costs and gauge interest of potential buyers a few months down the line.
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