JRD Tata once said that watches could be set on the basis of Air India flight arrivals. Based on recent news, now it would be faulty. In fact, time is fast running out for Air India as a viable airline. We hear the familiar commentary – the “in our time it was perfect”, the corruption charges, and shockingly even the “needed for our national security”. For nearly three decades, we were told that all Air India needs is debt restructuring, professional management and “some” capital.
The three requirements are valid – but cannot be met by the government: for 30,000 crore reasons. Each paisa of the Rs 30,000 crore committed to propping up Air India has better use elsewhere. Air India will soar only if the governmental umbilical cord is severed and the ownership privatised. Divestment in this context has to be real, which is minimising government influence, and maximising value realisation from assets. Moreover, the Ministry of Civil Aviation has to be released from the inherent conflict of interest in running Air India and given the bandwidth to focus on the sector’s policy and development in terms of infrastructure, financial viability, service and safety.
To begin with, doomed “highways to nowhere” solutions need discarding. Temporary holding structures don’t work. Likely to fail also is a “Hail Mary” transfer to bank ownership hoping banks can “realise” value. Banks have enough on their plate, they have a patchy record of resolving NPLs and their ability to take independent, unpopular decisions is doubtful. Finally, seeking an investor willing to take on Air India with modified liabilities is a naive bet on finding an investor devoid of rational economic decision-making!
Successful divestment will have three stages: curating and valuing non-core assets, disposing of non-core assets and then a sale of airline operations.
Air India is sitting on prize real estate and other assets. As a first step, a top international firm should make a detailed inventory of all Air India’s real estate assets, and value them to nip malafide attempts to sell assets cheap. The same firm should review expected office requirements for the pure air operations of Air India and suggest rationalisation through consolidation and moving out of premium locations. This will create a “disposable pool” of real estate assets.
The second stage involves selling non-core assets. Maintenance, repair and operations (MRO), ground handling and catering subsidiaries should be immediately sold with existing employees and their core operating assets i.e. no real estate, hotels etc. The joint venture with SATs should be offered to SATs at reasonable premium for control – or put to bid if SATs declines. Simultaneously, based on identified “disposable pool”, Air India’s real estate assets need to be put on the block starting with excess land and hotels, and gradually covering prime office buildings that can be released over time. Air India metro head offices are a gold mine. The disposal process should be run independently by the department of disinvestment, albeit in cooperation with the ministry of civil aviation. Potential proceeds from non-core sales may run into thousands of crores.
This sets the base for stage 3 or airline sale. The three “revival” requirements were capital, restructured debt and professional management. Given poor financials especially the nearly Rs 50,000 crore debt, our expectations from the sale should be stopping further outflows. To attract buyers, 75% of the estimated proceeds of sale of non-core assets may be offered as restructuring pool to potential bidders. Bidders should then be asked to tender for 100% of Air India’s flight operations on the basis of minimum additional support (MAS). The MAS will be paid out to the investor after the bank restructuring has been agreed. Similarly, the bid conditions should also define both the compensation structure for use of Air India on national duty like evacuations. The lowest MAS wins. The winning investor would then negotiate with the banks on a restructuring package using the MAS and the restructuring pool of funds.
This will still leave the question of serving remote areas – but that is a relatively easy problem to solve, and for much less than Rs 30,000 crores.
While difficult, the certain alternative is never-ending government bail-outs in a hyper-competitive industry. Or in other words, death by a thousand cuts. Privatisation will potentially create a new Air India under the control of new management and will cap government support.
Air India must remain our national airline, just not as a nationalised burden on taxpayers.
S Misra is an investment banker based in Singapore
The views expressed are pesonal