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Air India sale gets going, staff & net worth an issue PDF Print E-mail
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Friday, 30 March 2018 04:07
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Creating ‘good’ and ‘bad’ Air India will fix debt overload, net worth criterion too high, buyers may want labour flexibility

 

After four years of no privatisation, this finally seems to be taking off, and with a mega-sale—that of 76% of the equity of Air India (AI) whose losses have averaged around Rs 5,400 crore in FY13-17; ebitdar, though, has swung from a negative Rs 1,197 crore to Rs 3,605 crore in FY17, aided by low oil prices. To the government’s credit, it has addressed the issue of the massive Rs 50,000 crore of debt imaginatively and has, in the bargain, also avoided some other potential landmines. Congress leader Manish Tewari has said the airline was worth `5 lakh crore and cited its valuable art and iconic buildings while coming to this number—never mind that the world’s most valuable airline, the US’s Southwest Airline, is worth half that, and that’s when it has made a profit 44 years in a row. A ‘good’ Air India and a ‘bad’ Air India are, as it were, to be created—the latter will house the real estate/art, a 24% stake in the airline as well as half the airline’s debt; in which case, no charge of selling valuable real estate for a song can be made. Debt levels in the ‘good’ Air India will now be manageable within the airline’s revenues and, with perhaps some sale-and-leaseback arrangements, the debt can be further pared. With improvements in operations under a good management, the airline’s valuation can rise—from zero right now—and, in the bargain, the government’s 24% stake will fetch it more money. This is the Maruti model where, after the company’s valuation rose post-privatisation, the government’s residual stake fetched it handsome returns.

The fact that the government stake will come down to 24% should signal to investors that it will not interfere in AI’s running after the sale—a 26% stake, for instance, would have allowed it to block special resolutions and stymie the new management. Allowing foreign airlines to buy 51% of AI could attract more bidders, but the airline would no longer be an ‘Indian’ one, as a result of which its bilaterals—accorded to Indian carriers under the agreements between countries—would have been reduced to nought; the optics of AI remaining ‘Indian’, are equally important. Given many Indian carriers, such as Vistara, do not meet the profitability criterion, waiving this for domestic carriers is a good idea. It is not clear why the net worth criterion—Rs 5,000 crore for a consortium—are so stiff since, with the sale-and-leaseback route, the business is relatively asset-light. Since even an Indigo doesn’t have this net worth, this is forcing Indian airlines to team up with other players. Even more worrying is the lack of clarity on whether the bidders will have to retain all AI’s employees.

At 11,000, the permanent employees may not be excessive—it has 115 aircraft—but bidders may want the pilots and not the others. The fact that the information memorandum talks of 37.6% of them retiring over the next five years indicates the government knows it is an issue. It is hoping to get the employees to soften up before the final bids by giving them 4% of AI’s equity in the form of ESOPs—this will come from the government’s 24% stake—and also by paying them Rs 1,298 crore which arose from the Justice Dharamadhikari recommendations. If the government is not able to convince them, this could be a potential deal-breaker. Whether the government can offer more in a pre-election year is not clear, but the flip-side is getting the deal through will buttress its reform credentials and provide a solution to the financial woes of the erstwhile Maharajah who has to borrow to fund even his clothes.

 

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