After the Indian Government failed to attract buyers in 2018 for India’s one of the most ambitious privatization plans, it came with new and much simpler terms in 2020 to sell the debt-ridden Air India.
Even with the new terms, Air India is yet to find a single bidder till now. Here’s a glimpse into what all is wrong with the aircraft carrier and why the Modi Government’s privatization plan may never take off.
The Problem with the White Elephant
Air India has one of the nastiest balance sheets amongst all the PSUs. In the FY 2018-19, it made a monumental net loss of Rs 8,556.35 crore as compared to a net loss of Rs 5,348.18 crore in FY 2017-18. As per the latest data, the carrier has accumulated a total loss of Rs 69,575.64 crore over the past decade. Another major drawback of Air India remains its low passenger revenue. Operating inefficiencies like shortage of aircraft, low utilization of Human resources, erroneous deployment, and lack of ancillary revenue are impacting Air India’s book significantly.
Air India has accumulated a total loss of Rs 69,575.64 crore over the past decade.
In addition to low passenger revenue, improper initiatives to monetize its assets are pulling the carrier down. A CAG audit of 2017 showed that vague and impractical terms and conditions lead to the non-monetization of assets of Air India. The same audit also found out that there has been a mismatch in demand and availability of aircraft in Air India. Non-availability of proper aircraft also has led to the misery of the airlines.
Watch: Air India’s Net Loss at 8500 Crore In FY19
In addition to the above points, there has been sheer mismanagement of manpower and bilateral agreements with foreign countries by Air India. The CAG report also noted that Air India had been continuing operations in loss-making international routes, which has further contributed to the airline’s weak financials.
The Current Maharaja Offer
After a cold response to the government’s 76% stake offer of 2018, it offered the whole 100% stake in the recent offer. Along with the 100% stake, the bidder will have to bear a $3.2 billion debt. The total liabilities of the airline stand around $8 billion now. However, the government authorities are hopeful of clinching a deal this time. Nevertheless, it has failed to garner any interest even three months after the deadline for EOIs expired in March.
Currently, Air India has 146 aircraft and owns 56% of its total fleet. It also has a few lucrative parking and landing spots both in India and abroad. Air India possesses a 13% domestic and a 19% international market share, and it has extensive operational expertise of decades.
Air India owns 56% of its total fleet.
What makes Air India unappealing to potential buyers?
Despite all rosy presentation of the government, the privatization plan is unlikely to actualize. One major obstacle would be restructuring its massive workforce. Air India has an employee base of 14,000, and it has one of the highest employees per aircraft ratios in India.
Though the government has almost halved the total debt by moving a big chunk of debt to a special purpose vehicle (SPV), the remaining debt seems too big for any player. In addition to the contingent liabilities, possible legal obstacles weigh too much. Furthermore, there is a long line of parties ready to file Public Interest Litigations (PILs), and these PILs will undoubtedly delay the whole process.
Watch: What led to Air India’s downfall?
Even restructuring now seems unviable as it will require a massive pile of cash. Balance sheet restructuring may require somewhere around Rs 10,000 crore to Rs 14,000 crore, annually. Along with the restructuring costs, the airline may need around Rs 700 crore of investment in fleet, network, etc. To compete in the market, Air India needs to cut its cost by another Rs 10,000 crore annually.
Balance sheet restructuring for Air India may require somewhere around Rs 10,000 crore to Rs 14,000 crore, annually.
Immediate action but not privatization
With Air India becoming a monumental burden for the Indian government, calls have been made to stop the privatization of Air India. One major argument has been extended on a national security base. Starting from the Gulf crisis of the 1990s to the current pandemic airlift, Air India has shown remarkable performance. Another classic argument, common for all the PSUs, is losing out a public asset may create oligarchs in the Indian aviation industry.
Whether it is privatization or restructuring of Air India, the decision needs to be done at the earliest. Earlier, the civil aviation minister has admitted that Air India continues to bleed Rs 20-26 crore a day to the public exchequer. With the complexities attached to finding investors for the airline, the future of the once-prized asset, Air India continues to be gloomy.