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Modi to put loss-making Air India back on the auction block

Debt to be halved from $8.2bn to attract new owner for flag carrier

Debt-laden Air India has been loss-making since 2007 despite the rapid expansion of the country's aviation market. (Nikkei montage/Kosaku Mimura, Shinya Sawai)

NEW DELHI -- The Indian government is going all out in its second attempt to sell Air India and is expected imminently to invite bids, more than a year after its failed first effort to privatize the loss-making national flag carrier.

According to official sources, the expression of interest for strategic disinvestment of the airline could be issued this month, with one saying "the government is firm on its decision to sell off Air India." In late December, civil aviation minister Hardeep Singh Puri told reporters the EOI would be put out "in the coming few weeks," kicking off the privatization process.

The strategic disinvestment of some state-owned enterprises remains a priority for the government of Prime Minister Narendra Modi to shore up revenues. For the ongoing fiscal year ending in March, it has set a target of gathering one trillion rupees ($14 billion) of disinvestment revenue.

The government has high hopes that foreign investors will participate in the bidding. The success of an Air India sale, a long-standing goal for the country's leaders, will be a litmus test for future policy challenges, such as reforming state-owned companies and pulling in more foreign direct investment.

Air India is one of a clutch of struggling national airlines in Asia, along with Garuda Indonesia, Thai Airways International and Malaysia Airlines. These carriers, which face common problems such as overly bureaucratic management and political interference, have lost ground to privately-held low-cost airlines and have been in a prolonged slump.

"Our problem is the huge debt. Minus the debt, the airline can be turned around, provided the work is not hampered by the inherent constraints of the government's way of working," Ashwani Lohani, chairman and managing director of Air India, was quoted as saying by local English-language daily the Deccan Herald in August.

Air India had a debt of about 583 billion rupees ($8.2 billion) at the end of the last financial year which ended in March 2019. Following the failure of the previous sale, the government decided to cut the company's debt in half and move about 295 billion rupees to Air India Assets Holding, a special purpose vehicle, to relieve the burden on the airline.

Aviation consultancy CAPA agrees that cleaning up the airline's balance sheet will be paramount for a successful sale. "This is the most important first step. The airline can never be viable in its current [state] due to its massive debt and interest burden," it said in a commentary in July.

Since the 2011-12 financial year, the government has pumped more than 300 billion rupees into the troubled airline, whose net losses for the year ended March 2019 reached 85 billion rupees, its biggest since the 2008 financial crisis and up 59% from losses of 53 billion rupees a year earlier.

"In a mature and competitive aviation market [it] would not be the best use of the government's scarce financial resources [to give any further financial support to Air India]," the civil aviation ministry informed India's parliament on Nov. 27.

Air India has incurred losses since its 2007 merger with another state-owned domestic carrier Indian Airlines, weighed down by competition from private budget airlines such as InterGlobe Aviation-owned IndiGo, as well as rising fuel prices and high debt servicing costs.

Financial records for the past decade show that the company has tried to generate profit by aggressively increasing revenue from operations on the back of an expanding air travel market. Revenue growth, however, has failed to produce the results that management hoped.

In its previous attempt to sell Air India -- which as of Nov. 1 had a staff of 13,629, of which 9,428 were permanent employees, with the rest on contract -- the government sought expressions of interest to divest its 76% stake, but did not draw any response by the bid deadline of May 31, 2019, mainly due to the carrier's huge debt.

Another possible reason for the lack of interest was the government's plan to retain a 24% stake in the national carrier, which would have given it a presence on the airline's board and a crucial say in its important decisions.

The government has now reinitiated the process with 100% of its stake on offer. The plan also includes selling off the carrier's low-cost arm, Air India Express, and its 50% stake in Air India SATS Airport Services, a ground-handling joint venture with Singapore's SATS.

The risk of acquiring Air India has been partially mitigated by the government's concessions to change terms. However, reviving the airline will undoubtedly be a difficult task. While competition in Asia's aviation industry has hurt a number of players -- especially state-owned operators -- Air India's poor performance and huge losses stand out.

Minister Puri said there had already been a lot of interest shown by private entities and established airlines. "When we put out an EOI, we will get an indication exactly who's interested and how serious they are."

However, he refused to give any timeline for the sale -- which follows the grounding of cash-strapped private carrier Jet Airways last year -- stating that the government will not become "a slave to, or victim of, deadlines" and is trying to go for disinvestment "as quickly as possible."

Finance Minister Nirmala Sitharaman told the Times of India newspaper in November that the government was planning to wrap up the sale by the end of this financial year in March.

Some observers, meanwhile, say the government should not act in haste.

According to Ashwani Mahajan, chief of the economic wing of Rashtriya Swayamsevak Sangh -- a social organization which is the ideological parent of the ruling Bharatiya Janata Party of Prime Minister Modi, the government should first find ways to revive Air India and then look at selling it, instead of rushing into a disinvestment.

He says the government needs to look at how the airline ended up in its current shape, including "bad purchases, mishandling of its engineering department and overstaffing," and make efforts to re-energize it, following which it would be a more appealing and lucrative prospect for sale.

Amitabha Roychowdhury, an independent aviation analyst in New Delhi, echoes Mahajan, saying, "[The government] is promising to take care of the airline's debt, trying to clean up its books. They are offering it on a platter, basically [and] it will be at a much less overall value than its worth."

Mahajan says that Air India's value lies in the fact that it is the only airline in the country that has a repair and engineering department, which has huge scope but suffers from a lack of resources.

It also has more than 3,500 domestic air slots or landing rights, and over 2,500 such slots overseas. "Each landing right has got its value" and could fetch tens of millions of dollars if sold, Mahajan argues.

If the Modi administration proceeds with the sale of Air India, it will underline the government's strong belief that swift and bold private sector reform is the only remaining option to keep the company afloat.

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