Privatisation of Air India – Explained, pointwise

Introduction

Government has approved Tata Group’s Rs 18,000-crore bid for the state-owned carrier, Air India. The deal, which is expected to be completed by December-end, also includes sale of Air India Express and ground handling arm AISATS.

Air India had a total debt of ₹61,562 crore as on August 31. Of this, Tata Sons holding company Talace Pvt Ltd will take over ₹15,300 crore and the remaining ₹46,262 crore will be transferred to a special purpose vehicle, Air India Assets Holding Ltd (AIAHL).

This marks the first major outright privatisation of a public sector company in almost two decades.

Why government took the decision to privatise Air India?

Air India has been in loss since its merger with Indian Airlines in 2007. It has raked in a cumulative debt of around Rs 60,000 Crore till now. Excessive debt in the airline’s balance sheet had also pushed equity value to negative at (-) ₹32,000 crore. Moreover, the government had been incurring per day expenditure of ₹20 crore to keep Air India afloat.

In a developing country like India, this arrangement was highly inefficient, given the other high priority demands on government resources.

In fact, the NITI Aayog, in its recommendations on strategic disinvestment of CPSEs in May 2017, while referring to the fragile finances of Air India, had stated that further financial support in a mature and competitive aviation market would not be the best use of scarce financial resources of the government.

Also, Air India’s presence in the civil aviation sector had severely distorted the market, since government subsidies allowed it to run at a loss and undercut private sector airlines.

And lastly, the pandemic’s impact on public finances and the carrier’s operations especially given the devastating impact on air travel both domestic and international, also contributed to government’s decision to privatise Air India.

What are the terms of the deal?

Tata’s will have to retain over 13,500 employees of Air India and Air India Express for one year, post which VRS could be offered.

The terms of the deal allow Tata to go ahead with merger and also sell up to 49% stake after one year, but ensure business continuity for three years.

The Air India brand and eight logos too would be transferred to the Tatas but it will have a 5-year lock-in and with the clause that they cannot sell them to a foreign entity.

The story of Air India’s privatisation and what led to its collapse?

Jehangir Ratanji Dadabhoy (JRD) Tata founded the airline in 1932 and named it Tata Airlines. In 1946, the aviation division of Tata Sons was listed as Air India, and in 1948, the Air India International was launched with flights to Europe.

In 1953, Air India was nationalised and for the next over four decades it remained the prized possession for India controlling the majority of the domestic airspace.

With the opening up of the aviation sector to private players in 1994-95 and private entities offering cheaper tickets, Air India gradually started losing market share.

As part of its broader privatisation and disinvestment push, in 2000-01 the government tried to sell a minority stake or 40% stake in Air India. It was unsuccessful due to opposition from Trade unions.

Air India started suffering losses every year since its merger with Indian Airlines in 2007-08.

In June 2017, the Cabinet Committee on Economic Affairs (CCEA) gave in-principle approval to the consideration for strategic disinvestment of Air India and its five subsidiaries.

In March 2018, the government invited expression of interest from investors wherein the buyer was required to take ₹33,392 crore or close to 70% of the carrier’s debt on its books. No bids were recieved.

October 2020: Government now gave flexibility to investors to decide on the amount of Air India debt they wanted to absorb.

October 2021: Government announces Tata group makes winning bid of ₹18,000 crore for Air India.

Reasons for Air India’s collapse:

– The main reason for Air India’s collapse has been mismanagement over the decades by successive governments.

– Among other things, Air India has had a record of trading away valuable landing slots, acquiring aircraft far in excess of what is financially justifiable (thus saddling it with a mountain of debt), fudging accounts and going in for needless expenditure programmes.

– Absence of a strong independent regulator for civil aviation.

What is the global scenario?

The government’s sale of its 100% stake will see Air India finally join a long list of airlines the world over that were once owned by national governments but have since been privatized.

– Privatised: Qantas, Air Canada, Lufthansa and British Airways

– Still state-owned: Singapore Airlines, Emirates and Etihad

What are some post-privatisation challenges?

Integrating the state-run carrier’s sizeable workforce is going to be one among the many serious challenges, awaiting the Tatas.

To turn around Air India at a time of soaring fuel costs and COVID-hit air travel, will be another challenge.

With privatisation of Air India done, government may face pressure for doing away with other loss-making PSUs like BSNL.

What are the potential implications/impacts of the privatisation of Air India?

i). Privatisation of loss-making assets: That there was little opposition to the sale from employees of the beleaguered PSU or, for that matter, from political parties, suggests an acceptance of the fact that the government could no longer throw good money after bad. The government has also displayed flexibility and pragmatism in pushing the sale of Air India by retaining a part of its huge debt with itself, this time. Air India’s privatisation is an excellent signal for the government’s broader disinvestment programme.

ii). Freeing up of scarce resources: With the conclusion of this sale, the government will no longer need to constantly infuse cash in the loss-making enterprise. It has pumped in around Rs 1.1 lakh crore since 2009-10 to keep the airline up. In 2019-20 alone, the airline’s operational losses were to the tune of Rs 8,743 crore. This now frees up scarce resources which are better spent on providing public services like health and education.

iii). Creation of a monopoly: A complete lack of state control might give rise to private monopolies. To prevent this some form of govt regulation still needs to be there.

iv). Rise in prices: Since, government will no longer be there to subsidies losses for Air India, it might lead to a rise in ticket prices.

v). No political influence: As the public sector industries are managed by the government, political interference is bound to take place. Similar was the case with Air India. Several decisions were made under political pressure without consideration of their impact on company as well as its employees. Privatisation will put a stop to this.

What is the way forward?

Strong regulator: With no state-run carrier left in a licensed market category, good regulation is even more important now. If the Centre wants the example of Air India’s privatization to serve as a successful template, it should have an empowered regulator that can use an even hand, focus on consumer interests, and keep crony capitalism at bay.

Effective People Management: Work practices need to be reengineered to make employees more productive and efficient. At present most of the departments are overstaffed. There are also certain departments —Vigilance, Hindi implementation, Parliament Cell, etc. that will require shutting down as Air India transits from a govt to a private entity. Manpower rendered surplus will need to be redeployed more gainfully.

It is hoped that the next years will see more high-profile privatisations.