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Business Deals

No one boards Air India's divestment

Debt and labor issues scare bidders away, forcing Modi to reconsider strategy

Air India boasts network coverage of roughly 54 domestic and 39 international destinations.   © AP

MUMBAI -- Air India's divestment plan appears to have hit the end of the runway, as New Delhi's failure to receive even a single bid for the loss-making national carrier may close the lid on privatization efforts for now.

Prime Minister Narendra Modi's administration sought to offload a 76% stake in the airline, while passing on debt totaling 335.5 billion rupees ($4.97 billion) to new owners. A 50% share in ground-handling joint venture AISATS also was to be included in the sale.

But Air India's massive debt and employee-related obligations involving headcount and pensions seem to have kept airline companies away. Potential buyers also were uncomfortable with the proposal to sell the company as a whole.

"As informed by the transaction adviser, no response has been received for the expression of interest floated for the strategic disinvestment of Air India," the Civil Aviation Ministry said in a tweet after the 5 p.m. Thursday deadline. "Further course of action will be decided appropriately."

India hoped to complete the sale by the end of the year. The lack of serious bidders had prompted New Delhi to postpone the original May 14 deadline for expressions of interest to May 31. Terms were relaxed as well, allowing bidders to change the composition of their formal expression of interest once after its submission.

Yet experts think Air India -- known locally as "maharaja," or king -- still possesses a lot of positives. These include network coverage of around 54 domestic and 39 international destinations, favorable parking slots in strategic airports as well as prime real estate. But the negatives are thought to outweigh these benefits.

Dhiraj Mathur, PwC India's leader for aerospace and defense, reckons the government may need to rethink the bundling of the operations being offered -- perhaps by selling the international and domestic portions separately.

"They may have to think of unbundling it," Mathur said. "If they now go back to the drawing board, they will have to look at all options such as reducing the debt and the employees post retirement obligations' cost."

Mathur also suggests examining examples such as British Airways and Lufthansa, which took the initial public offering route to privatization, or employing a hybrid of stake sales and an IPO.

An IndiGo Airlines aircraft at the Sardar Vallabhbhai Patel international airport in Ahmedabad, India.   © Reuters

Airline companies such as InterGlobe Aviation, which runs the IndiGo brand, had shown interest in buying the troubled carrier. Reports also suggested the Tata group and Singapore Airlines were interested in participating in the bid as well.

Asked last month whether Singapore Airlines remained interested in bidding, CEO Goh Choon Phong denied having shown interest and said any developments on this front would be announced. The executive remarked that Singapore Air looks to focus Indian operations on Vistara, a joint venture with the Tata group conglomerate that plans to begin international service in the latter half of the year. Vistara is seen as "the undisputed leader in terms of product quality and services" in India, Goh said.

Senior executives at Singapore Air have repeatedly said to "keep the option open" on the potential bid for Air India. Goh's comment struck a decidedly more negative tone toward that.

The Centre for Aviation in India had said in January that it expected up to four Indian carriers -- Jet Airways, IndiGo, SpiceJet and Vistara -- to express interest, along with one or two aviation companies that were not airlines.

"If working capital debt is removed, equity valuations could be significant and will impact interest," CAPA India said in a note.

Interest also was high as India is one of the fastest-growing aviation markets. The International Air Transport Association expects India to surpass the U.K. as the fifth-biggest market by 2025, increasing new passengers by 337 million to reach 478 million by 2036.

But any effort to sweeten the bidding process may be shelved until India's general election in 2019.

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