Air India airline (Sreenath Y/Wikimedia Commons)
Snapshot
  • There are enough examples from the past of how a government holding control over an airline does more harm than good.

The government seems inclined to keep a toehold in Air India even after the disinvestment process is completed. This would be a bad idea, whatever is the actual number of seats government nominee(s) would continue to hold on this airline’s board and regardless of assurances about not interfering in the acquirer’s game plan. At least two potential airline investors have already made it clear that if the government continues to hold even a minority stake in Air India, they would hesitate to come forward. This means a dwindling of interest in the sale process itself. Besides, the government has owned and operated the airline for decades, leaving it bruised and battered with a mountain of debt and substantial accumulated losses. It is about time the government makes a clean break with the airline business.

This piece quotes sources to say that the government may continue to hold at least 26 per cent after the stake sale process in Air India is finished.

And here, the Minister of State for Civil Aviation Jayant Sinha also indicates the government’s intention to not completely exit the airline. Sinha, in fact, provides an example wherein the incoming private entity indeed gets to own majority stake in the airline, but the government retains up to 40 per cent stake. At least one board seat is assured if the government continues to hold even 26 per cent stake after disinvestment. Greater the equity stake, greater the influence automatically in post-disinvestment decision-making.

The world over, examples abound of national airlines where the state has either continued to support  the airline business by retaining control or has had to resuscitate a dying airline even after having given it up to private enterprise. But the exceptions to this general proclivity of governments rescuing national airlines are also worth a study – the Gulf carriers, Singapore Airlines and Ethiopian Airlines.

All these carriers run with minimal interference from the government, at maximum profitability, due to professionally managed operations and favourable policy initiatives from respective governments. Take the case of domestic hubs – though India owns its national carrier, it has never bothered to develop its own large airports as international hubs, leaving lucrative international traffic to gravitate to the Gulf or the South East Asian airports. Fuel is taxed heavily in India, making operational profitability that much harder for our airlines. What countries like Singapore and the Gulf have done is, along with minimum interference in running airlines, they have facilitated the operations of their own national carriers through a sensible policy environment instead of merely hanging on to equity stakes.

Here’s another example, of what even a minority stake can empower a devious stakeholder to do. Jet Airways offloaded just 24 per cent stake to Etihad Airways in 2013 but witnessed unprecedented seizure of control by the minority partner. While Etihad brought in much-needed cash to the precarious balance sheet of Jet Airways through this transaction, it also simultaneously tried to exert influence hugely disproportionate to its equity stake in Jet’s day-to-day business.

The Abu Dhabi-based carrier tried to shift several key functions of Jet to its home turf. Concerns were raised about the ‘Substantial Ownership and Effective Control’ clause and more. This is just an example to show how much control even a 24 per cent partner can exert in the operation of a company. And why the government’s claims of not interfering in Air India’s day-to-day operations after disinvestment are not credible.

Why the government doesn’t want to let go of Air India is explained in an incoherent way by officials who have pointed out that this will ensure better valuation for its (government’s) remaining stake in the airline. After a private acquirer takes over, it is presumed this entity will improve the running of a business, which the government has systematically ruined through bureaucratic apathy and reckless misuse by politicians. At best, this is warped logic, at worst an invitation for the sale process itself to be derailed.

In fact, by thinking of partial disinvestment for Air India, is the government not pandering to the sentiment that was expressed by Members of Parliament a while back, where they said that the airline should be allowed to run on taxpayer money for another five years before it is put up for disinvestment? The Parliamentary Standing Committee on Tourism, Transport and Culture had said that the government ought to continue its monetary support to the airline and wait for the business to turn around.

The government’s hesitation to completely give up control of the national carrier could well stem from the apprehension that any such move would call into question its ‘nationalist’ credentials. The entire disinvestment process for Air India may just be an illusionary move to show off its reformist credentials without having the courage to go the whole distance. Remember, when Air India’s privatisation was first proposed in 2000, it was under a National Democratic Alliance (NDA) government. Then too, the proposal was to divest only a part of the airline, but this eventually fizzled out after intense political opposition. Why go down the same path again?

Already the disastrous decision to merge the two erstwhile airlines – Air India (international) and Indian Airlines (domestic) – in 2007 has pushed the resultant entity into losses. Never, after this merger, has the merged entity managed to register net profit of a single rupee. Only a meagre operational profit has been registered for two fiscal years and that too largely on the back of benign fuel prices. Any move by the government to retain control may similarly backfire. People close to developments have already indicated that neither the Tatas nor IndiGo would like to come forward for acquiring a stake if the government continues to hold any equity in Air India. Most likely, any foreign player wanting to partner an Indian entity to place a bid would have similar considerations. Even if the government decides to waive or remove a significant part of the debt from the airline’s books, its looming presence would be enough to deter sound investors.

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