Air India disinvestment: Why government might need to change terms

IndiGo, India's most profitable airline, was the first one to come out and say it was not interested. "We do not believe we have the capability to take on the task of successfully turning around all of Air India's airline operations," Aditya Ghosh, President of InterGlobe Aviation (IndiGo's parent company) had stated in a release sent by the company on April 5, just a week after the government made public the terms and conditions for bidders who were interested in buying the public sector airline.

Ghosh, in the same statement, had also said that IndiGo was primarily interested only in Air India's international operations and Air India Express."

Since then, Jet Airways has also come out and said that it is not interested in taking over Air India. Swiss Aviation Consulting, which was rumoured to be interested, has also come out and said that it is not in the race.

In terms of the other Indian airlines, none of them have the net assets required or the werewithal to take over Air India operations by themselves - they would all need to come in with partners if they wanted to. Vistara, SpiceJet and GoAir could come in with financial partners, but the government's list of conditions for the sale makes Air India a bit of a bad buy for a value seeking buyer.

Consider first what terms the government wants to sell for. It is ready to sell 76 per cent of the airline, which includes 100 per cent of Air India Express and 50 per cent of Air India SATS. The government also wants the buyer to take on about two-thirds of the debt and liabilities to the tune of Rs 33,392 crore, and give a guarantee that none of the permanent employees are sacked for one year. (Post that the new owner can work out a voluntary retirement package (VRS) for employees).

What will the bidder get in return? It gets the operations of Air India, including 100 per cent of Air India Express and 50 per cent of Air India SATS. It also gets the fleet of planes, and the slots and other flying rights that Air India (and Air India Express) has, in India and abroad. It does not get the non-core assets - that is, the lands, buildings, paintings etc that Air India owns currently.

For any bidder, the most value in Air India lies in its flight slots (take off, landing, hangers), both in India and in its international operations, and its bilaterals. Its market share (though it is far from its glory days) is also not too bad - 12 per cent domestic, and 17 per cent in the India-International flights. The fleet is a bit of a mish-mash - a mix of narrow bodies and wide bodies, both Airbus and Boeing, and a mix of new and old planes. And the people too are a mix. It has some good and experienced staff, but it also has a bad people to aircraft ratio compared to its peers, and also a lot of mediocre and bad staff and adamant unions. Its operational efficiency is not great, and the government has to pump in Rs 4,000 crore or more a year just to keep it up and running.

The problem is that the government expects the bidder to pay for both the good and the bad. And also take over a huge debt burden. For domestic airlines like SpiceJet, Vistara or Go Air, only the slots are valuable and some parts of the fleet. Guaranteeing the airline staff jobs for a full year is probably not something any bidder is looking forward to. And the debt, compared to the assets, seems huge. Also, much like Indigo, most bidders would only be interested in specific parts of the Air India operations, not the entire bit. And that, perhaps, is what the government should realize. Allowing potential buyers to bid for different parts of Air India would probably get it more bids than trying to sell the whole lot together.