Air India divestment process finally takes off, with sweetened deal terms

The govt has announced it would absorb 30% more in debt and liabilities, than in the previous year

Almost two years after a failed attempt, the government on Monday launched the biggest privatisation exercise in value terms, inviting preliminary bids for Air India with sweetened deal terms. Full management control, reduced debt, a leaner organisation and flexibility to form a consortium are among the relaxed terms on offer for Air India divestment as potential bidders weigh their options to buy what was once a national asset.

According to the bid document, the government would divest its entire  stake in the state-owned airline and subsidiary Air India Express, along with its joint venture Air India SATS Airport Services. The Air India brand will, however, have to be retained by the new owner. 

“After no bids were received last year, we analysed critical scenarios and worked diligently to make it more attractive this time,” Civil Aviation Minister Hardeep Singh Puri said.

The government has announced it would absorb 30 per cent more in debt and liabilities, than in the previous year. With that significant change, the government will pass on Rs 23,286.50 crore to the new owner, while absorbing a huge chunk of the current liabilities. Of around Rs 22,000 crore of liabilities, the new owner will have to absorb only those which are backed by assets.

“Out of the balance liabilities, other than debt, certain identified current and non-current liabilities that are equivalent to sum of certain identified current and non-current assets, are proposed to be retained in Air India and Air India Express, as on date of the closing of the proposed transaction,” the sale document said.
 

Sources involved in the sale process said Air India’s fixed assets had increased by over Rs 3,000 crore from Rs 27,000 crore in 2018. “Almost 56 per cent of the total fleet of Air India is owned by the airline. The new owner will be able to do sale and lease back of those aircraft, further reducing the debt,” the official pointed out.

The reduction in debt and hence, interest costs, will be about 61 per cent under the new terms, as against 35 per cent in March 2018 during the government’s previous effort to sell Air India.

Disinvestment or DIPAM Secretary Tuhin Kanta Pandey pointed out that assets of Air India were equivalent to the assets of the airline and no liabilities in excess of assets would be passed on to the new owner.

“All mergers and acquisitions take place with the theory that equivalent liabilities and assets are passed on to the buyer. In this case also, we have ensured that the government will take over excess liabilities not backed by assets. There is a fair amount of certainty this time,” Pandey said.

In a departure from the past, the government has finalised the terms and conditions as well as the duration for which the new owner has to retain the employees. Even so, officials pointed out that employees will not be a bone of contention for buyers, as Air India has employees proportional to the size of the operations. Air India has 133 employees for each aircraft against 136 in the case of Singapore Airlines. “Anybody and everybody willing to operate such a large airline will require the manpower. I can assure that Air India has no excess employees,” the airline’s chairman and managing director Ashwani Lohani pointed out. 

The government’s willingness to bite the bullet in giving up management control and absorbing debt sends out a positive message to the investor, experts believe. “This is a big and bold decision from the government. We expect significant interest as government has been able to structure a very attractive offer,” Kapil Kaul, CEO, South Asia at aviation consulting firm CAPA, said.

But potential bidders were hesitant to commit so early. Major Indian and global airlines did not offer any comment on their interest in Air India.

However, there are hurdles. An executive of an Indian airline pointed out that one reason why the deal may not go through is that investors may find it difficult to absorb such a large entity in one go. “Even if debt has been absorbed, the capability to service debt of Rs 23,000 crore from revenue of operations will be a big ask. The new owner has to significantly improve the airline’s performance. A very difficult deal I would say,” he said.

However, civil aviation minister Hardeep Singh Puri indicated that the government had better communication with bidders this time and is willing to change some terms depending on suggestions. “Last time, the government was very cautious as we were approaching an election. This time we are ready to take bold steps under home minister Amit Shah. I’m sure Air India will find a new home,” he said.