Why Government’s Plan For Strategic Disinvestment Of Air India Works

Air India will be broken up into four parts. Some of its ‘unsustainable’ debt will be hived off into a special purpose vehicle and then the government will offer 51 per cent or more stake in each of the four parts to bidders.

The contours of the deal, which Minister of State for Civil Aviation Jayant Sinha said today (2 February) will be completed by the end of this calendar year, should be out shortly. The core airline business comprising Air India, Air India Express and ground handling joint venture, AISATS, will be offered as one entity. The regional arm (Alliance Air), ground-handling business (AIATSL) and engineering operations (AIESL) will be sold separately in the same process.

Apart from IndiGo, a foreign airline has also sent a confidential letter showing interest in Air India’s airline business. The minister declined to say from which region or part of the world the foreign airline was. The successful bidder will be announced by the end of June and the entire legal process of privatisation of Air India will be completed by December this year. Several confidential discussions with other interested bidders of Air India have also been held by Sinha. It is not clear if the Tatas, who originally promoted the airline and ran it successfully before it was nationalised, will come forward in the bidding process.

While the Union cabinet has decided it will be a strategic disinvestment, which implies the government will cede management control, the Air India-specific Alternative Mechanism headed by Finance Minister Arun Jaitley will decide how much stake to offer in each of the four entities. Sinha said it was possible that the stake on offer for the each of the entities differs. Also, whether the government will completely exit the airline or not will also be decided by the Alternative Mechanism.

But since the minister described Air India’s sale as the largest strategic disinvestment ever undertaken, it is clear that the government is expecting a substantial sum from the sale of the airline and its subsidiaries. Sinha also said that most likely the airline and its other businesses on offer would be considered by potential bidders on a “going concern” basis. And a reserve price – the price below which the airline and its subsidiaries would not be sold – will be determined before the sale process begins.

This essentially means two things: the government may be reluctant to exit Air India completely and at least some of the “unsustainable” debt will be retained by the government.

Anyhow, if the government indeed breaks up Air India into four distinct parts before beginning a sale, it would be one of the most sensible decisions in any disinvestment process so far. Sensible for several reasons. First, it allows the government to offer the core business of flying – the domestic and international operations and the profitable ground-handling business – as a single and separate entity, shorn of the encumbrances of the other businesses. So any bidder interested only in Air India’s experienced cabin crew, international flying rights and other aircraft-related operations need not be forced into buying its ground-handling arm or that which offers engineering services too.

Second, it allows bidders to understand the financials of the deal better. The airline business is expected to have a debt of about Rs 19,000-20,000 crore on its books, backed by aircraft which are of higher value. This enables any potential buyer to assess the merits of buying the airline operations vis-à-vis the enterprise value of the airline and any amount it would be expected to pay upfront to the government for buying this business out. Similarly, the financials of the other parts of Air India would become clearer by the breakup.

Third, it allows non-flying part of the business to also get distinct valuation and possibly a good set of buyers. The engineering business of Air India houses some industry-leading talent and has one of the most robust facilities for aircraft maintenance and repair in India. It could probably attract the right buyers with better valuation alone than when it was being bundled with the main airline business.

Air India has accumulated losses of almost Rs 40,000 crore and debt totaling around Rs 49,000 crore – of which working capital debt is around Rs 30,000 crore. This latter part of the debt is expected to be housed in a special purpose vehicle and only the remaining about Rs 19000-20,000 crore will need to be factored in for the sale of the airline.

Then, another thread in the strategic disinvestment saga is about allowing foreign entities to own up to 49 per cent stake in the disinvested parts of Air India. This is a welcome decision, though the government may find it tough to ensure that the ‘substantial ownership and management control’ caveat is followed. Sinha said the government will examine what International Air Transport Association guidelines are for an airline to remain a flag carrier of a country. When government cedes control of the airline, it is assumed that the airline becomes the flag carrier of the foreign investor’s country of origin as substantial ownership gets transferred to the foreigner.