Union government’s sweetener for Air India sale needs a reality check

The Union Government’s unusual alacrity in trying to get rid of Air India borders on desperation.

Unable to find buyers when the government was willing to sell only 76% stake, it is now willing to sell the entire 100% stake hoping that it will find a suitor but that may still not be possible as the latest announcement comes with some stiff conditions.

As per the 225-page preliminary information memorandum, the bidder should be willing to take on a fixed debt of ₹23,286.5 crore without any working capital in the bank account. Second, if one buys, then the buyer should also procure Air India Express and 50% of Air India SATS Airport Services Ltd. Thirdly, while foreign airlines will be allowed to buy up to 49% in the airline, the rest will have to be with an Indian national or a company.

What are the positives?

The new owner is free to sell or lease the 82-aircraft fleet of both the airlines. This will allow the buyer to reconfigure the fleet; sell of a few to make some money. Earlier, a bidder needed a net worth of ₹5,000 crore which has now been reduced to ₹3,500 crore. The earlier condition for a bidder to have a track record of profitability for at least three years of the previous five has been scrapped. Earlier, the main bidder was expected to have 51% stake which has now been reduced to 26% while the rest of the partners can have 10% compared to the 20% earlier. Even the total debt has been reduced from ₹33,392 crore to ₹23,286.5 crore. The new owner can also expect to have some tax breaks as well because of depreciation.

Also read: Govt to offer Air India Express and AI SATS to buyer of national carrier

The buyer will also get access to 98 primary destinations, 75 secondary destinations, 25 codeshares, a fleet size of 146 of which 46 are owned. The successful bidder will also have access to 4,400 domestic and 1,800 international landing and parking slots at Indian airports and 900 slots at airports overseas.

What are the negatives?

The buyer will have no access to any other asset except the two airlines and the airport services company. So, the Air India building in Mumbai will be sold separately by the government. A total of four Boeing 747s have to be kept aside for VIPs; the headquarters of Air India in Delhi is being kept out of the sale; besides hotels owned under the Centaur brand; Air India Engineering Services Ltd and Alliance Air. The new owners should also set aside 3% of the value of the airline’s equity as stock options for permanent employees. It will also have to absorb 9,400 permanent employees and 3,600 fixed-term contract staff including 1,850 pilots.

But these are the nuts and bolts of the package. What needs to be seen is whether a 100% stake sale will lure bidders and whether they will ask the government to bring down or do away with more conditions.

Also read: Air India sell-off: Viable reserve price holds the key to cut further losses

Future tense

In reality, it is going to be difficult to sell Air India even with more norms being relaxed because of the roughly $3 billion debt it has to take over and also some old aircraft. What it will also get in the bargain is a number of disgruntled employees with low morale and Subramanian Swamy who is already rolling up his sleeves to take the government to court.

What is also important to note is that even after a year of Jet Airways going down, there haven’t been many bidders while most of the assets and the landing slots have been given away to other airlines. Herein lies the clue: The government may be better off if it does something similar, sell off parts of the airline and end up making more money and write off all the debt in the process. Such a process will take a lot more time, a lot more effort and keep the bureaucrats busy for more than a year but as of now, it seems the best option available.