What Tatas bring to the table in Air India acquisition

It is confirmed but not official yet that Tata Sons has likely won the bid for Air India, and one source indicates the reserve price could well be below Rs 10,000 crore.

Air India
Accumulated losses of Air India as of March 2020 stood at over Rs 70,000 crore.

It is confirmed but not official yet. Tata Sons has likely won the bid for Air India, with sources indicating that it has offered more for the airline than the only other bidder, Ajay Singh (promoter of SpiceJet).

The government is the sole owner of Air India and, after a failed attempt in 2018, it had announced a roadmap for exiting the airline again in 2019. In the first attempt, not a single bidder had shown interest in the sale, which led to the government tweaking many conditions and offering various concessions to make the airline more attractive to prospective bidders.

In the second attempt at selling Air India, the government received just two bids – by Tata Sons and Ajay Singh in his individual capacity.

So, while the Tatas are believed to have won the bid, a panel of ministers still has to place the seal of approval on the deal and make an official announcement.

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There is also possibly one more step: clearance by the Union Cabinet, since the initial proposal to disinvest the entire government shareholding in the airline had also been cleared by the Cabinet.

As per the terms of the sale, Air India will be broken up into five parts and its “unsustainable” debt hived off into a special purpose vehicle (SPV). The core airline business, comprising Air India, Air India Express (which is the low-cost international arm) and ground-handling joint venture AISATS, is being offered as one entity to the winning bidder.

Regional arm (Alliance Air), ground-handling business outside of the JV (AIATSL), engineering operations (AIESL) and the Hotel Corporation of India (HCI) will likely also be moved to the SPV along with unsustainable debt.

Air India’s sale will be the largest strategic disinvestment ever undertaken but the government has already sweetened the deal in a multi-step process so that it may not earn any substantial sum from the sale of the airline upfront.

The bidder has to offer only 15 per cent of the total consideration upfront, if it is willing to take over some of the asset-backed debt of the airline. Various guess estimates for the reserve price – the price below which the government will not part with the airline – have been thrown about, with one source indicating the price could well be below Rs 10,000 crore.

It would be fair to say that whoever bags the airline may well get it for a song. But will the aria continue after the sale, given the multiple skeletons in the airline’s cupboard?

The possible acquisition by the Tatas is being seen as “ghar wapsi” since Air India was started by group patriarch JRD Tata before it was nationalised.

In the present circumstances, what do the Tatas bring to the table?

Funds

What Air India needs the most is money to be put back in shape. Till now, successive governments were pumping in tens of thousands of crores of taxpayers’ money into the airline each year but the dole ended up funding mounting losses.

The airline, as it is today, emerged after the merger of erstwhile Air India and Indian Airlines in 2007 and never once declared a profit since the merger. Accumulated losses as of March 2020 stood at over Rs 70,000 crore and auditors have again voiced their doubts over Air India remaining a going concern in the latest annual report.

The airline needs money to get cannibalised aircraft – which have been on the ground because of lack of spares and which have been stripped of some parts to be used in operational aircraft – in the skies again. It needs funds to pay off vendors, airport operators and other creditors; working capital needs as well as interest repayments also need to be fulfilled.

Professional Management

For decades, Air India and its subsidiaries have been managed by babus from the ministry of civil aviation, supported by a board of directors. While some eminent Indian businessmen have, at various times, agreed to sit on the board as independent directors, their voices have remained muffled due to overarching bureaucratic powers.

This has led to inconsistent and laborious decision-making, affecting the airline’s domestic as well as international prospects. The new owner is, first and foremost, expected to bring professionals on board to manage the airline.

There is ample experience within the Tata Group as far as airlines are concerned: it already operates full-service airline Vistara in the 49:51 partnership with Singapore Airlines. And it has recently acquired the majority stake in low-cost airline AirAsia India from its Malaysian partner. With two airlines already in the fold, managing a third should come easy.

Integration

In 2007, when the two erstwhile airlines had merged to form the present Air India entity, there was no merger of people’s minds. The two sets of employees continued for years to work according to two different sets of HR policies, two different promotion and remuneration structures, etc. The government did constitute a panel to look into the HR issues many years after the merger but a full integration of operations was never achieved. In any case, the airline has more people per aircraft than the industry norm.

What the new owner would perhaps first do is rationalise headcount and then work on integrating the workforce and HR policies with that of the Tata Group. There has also been talk of the two existing Tata Group airlines (Vistara and AirAsia India) witnessing a rejig and one of them merging with Air India. Whatever form the integration takes, one thing is certain: Air India will, under its new owner, function as one integrated airline with aligned HR goals and policies.

Brand and Trust

Last, but not the least, the Tatas bring a reputed brand and along with it, trust, to the table. Vistara has already been the top-of-the-heap in terms of service among Indian airlines, bagging several awards for the top Indian domestic airline in 2020.

Air India may redeem some of its lost glory under the new owners as they go about setting performance benchmarks and service standards. The Air India brand has seen erosion of customer trust over the years due to falling service standards, poor on-time performance and cancellations.

According to the dashboard of the ministry of civil aviation, Air India had the poorest on-time performance (OTP) on September 30 among all domestic airlines at 88.4 per cent, with all others reporting over 90 per cent OTP and the two Tata airlines reporting OTP of over 95 per cent. Air India also had the lowest load factor (number of occupied seats on an aircraft) among all domestic airlines, with more than one in four seats vacant.

Also read: Air India not equipped to handle emergency, finds probe panel

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