The Air India sale story analysed

After many years of efforts, the government finally sold Air India, and now India has no national carrier.

 The Air India sale story analysed

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Read more on - Polity | Economy | Schemes | S&T | Environment

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• The story: The government of India tried selling Air India for many years, but failed. Finally, in October 2021, it was able to find a suitor - the Tatas. The loss-making national carrier Air India will be taken over by Tata group.
• Various issues: The government saw many critical questions come up, and found solutions one by one.

1. The government was not comfortable with handing over full ownership of Air India to the chosen bidder. So, the first stake on offer was 76 percent. This didn’t impress parties and the first round of bidding failed.
2. The government finally decided to part with a 100 percent stake in Air India and Air India Express. It worked and helped the sale process to a scenario which saw expressions of interest from as many as sevn bidders.
3. In October 2020, then aviation minister Hardeep Singh Puri announced that bids for Air India would be accepted on the basis of the carrier’s enterprise value instead of equity value. The "enterprise value" of a firm includes the equity value, debt as well as cash. On the other hand, equity value measures the value of a company’s shares.
4. If the equity route is taken, the debt level needs to be pre-fixed, which may end up being understated or overstated depending on market conditions. This could make the process unviable.

• Nature of financial bids: The government followed the "reserve price mechanism".

1. The reserve price is the benchmark price, below which the government would not have accepted bids. To arrive at this figure, the Modi regime engaged an independent valuer who would consider aspects like future cash flow projection, brand value and intangible assets like bilateral rights.
2. The reserve price for the deal was set at Rs 12,906 crore and it was finalised before the opening of the sealed financial bids from the two final suitors – the Tata Group and a consortium led by SpiceJet chairman Ajay Singh.
3. The winning bid of the Tatas was comfortably above the reserve price—Rs 18,000 crore which included a Rs 2,700 crore cash component and Rs 15,300 crore of debt (enterprise value).
4. Now it is upto the Tatas to run the airline and turn it profitable.

• Pros and Cons: In the airlines business, a firm has to achieve a certain scale before making money, especially if the operations involve international routes. The Tatas may have now crossed that threshold and will get a huge number of planes as well. But it is important for a bidder to be aware of all the risks in a transaction which need to be disclosed fully.

1. An immediate concern is the cash outflows of the Tata group, which could be linked to refurbishing the Air India fleet.
2. (b) The backend systems and customer service weren’t Air India’s strengths. Those need upgradation too.
3. DIPAM Secretary had called the net worth of the airline “deeply negative” at around Rs 30,000 crore. So Tatas need to pump in money.
4. There is no bar on a merger with existing operations as well, but the owner has to maintain 51 per cent equity. So Tatas will need to have an integration strategy with existing operations at Vistara and Air Asia India.

• The HR angle: Air India has around 12,085 employees, including 8,084 permanent ones. Its arm Air India Express, on the other hand, has 1,434 employees. Tatas have promised to retain all, for one year. In the second year, if anyone is sacked, they will have to be paid VRS. The pilots and engineering crew of Air India are a valuable lot, and the presence of these employees is a positive. Critics believe the employee base is surplus and assimilation will be challenging. the integration between Air India and Indian Airlines is still an unfinished task after so many years.
• Tatas the biggies: With majority stake in three domestic carriers – Vistara, Air Asia India and AI – the Tata Group’s airlines will cumulatively enjoy the second largest domestic market share at ~25%, after Interglobe Aviation (IndiGo) at ~60%. The deal may face scrutiny from the anti-monopoly watchdog—the Competition Commission of India (CCI).

1. In airline mergers, the CCI would try to ensure continued competition on all routes affected by the merger/alliance. To examine airline mergers, the CCI uses internationally accepted ‘point of origin/point of destination’ (O&D) pair approach.
2. Accordingly, every combination of a point of origin and a point of destination should be considered to be a separate market from the customer’s viewpoint. So for the Delhi to Dubai flight route would constitute a separate market and the CCI would see whether post the merger the combined entity faces enough competition. Hence, market shares will play an important role in this assessment.
3. If after examination, the CCI feels that there are competition concerns, they can impose a set of remedies that have the effect of making new entry possible as a condition for approval. But where the network overlap is substantial, and economic benefits in relation to the harm to competition are rather low, prohibition of the transaction may be the only answer, in the absence of effective remedies.
4. A proposed acquisition of 24 percent of Jet Airways by Etihad was cleared by the CCI in 2013. It can give the green signal to such combinations if the same have no ‘appreciable adverse effect’ on competition. Under the norms, if the regulator fails to approve the deal within 210 days, or if it does not pass any order or issue any directions, then the combination is deemed to be approved.
5. In the past for specific PSU to PSU transactions in the banking and oil and gas sector, the government provided specific exemption from CCI approvals. So if the sovereign decides it is competitive enough, the CCI can only watch helplessly!

• Government liabilities: Government has some liabilities left, but not entirely. As of August 31, 2021, the total debt of government owned Air India and its subsidiaries was a hefty Rs 61,562 crore. The debt component of the Tatas’ winning bid of Rs 18,000 crore was Rs 15,300 crore. Subtract this portion and the government is left with Rs 46,262 crore. Add the current liabilities of Rs 15,834 crore, which gives you a sum of Rs 62,096 crore. The deal does not include non-core assets including land and building, valued at Rs 14,718 crore, which are to be transferred to the government’s. {From Rs 62,096 crore, deduct a combination of the cash consideration of the Tata bid (Rs 2,700 crore) and the value of the non-core assets cited above (Rs 14,718 crore).}
• EXAM QUESTIONS: (1) Explain the structure of the Air India disinvestment deal. (2) What is the difference between privatisation and disinvstment? Explain. (3) Why did Air India fail to operate profitably over the years? Explain.

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