Air India – Divestment

The national carrier, Air India, was once a Maharaja of the global skies and the envy of the world. Today, the loss-making airline is estimated to have a debt burden of over 59,000 crore which is totally unsustainable, and the Government’s efforts to carry out a strategic disinvestment of the airline seem to have repeatedly failed. The debt burden of Air India Express is approximately 2,600 crore and that of AISATS, its joint venture with Singapore-based SATS Ltd., is around 200 crore. The tax payers’ money, needed for more important services such as health and education, is being utilised to sustain a loss-making airline. The Ministry of Finance is confident of exiting Air India, say officials.

A CHECKERED PAST

Air India was established as Tata Airlines in 1932 and commenced full-fledged operations in 1946, after becoming a public limited company. Then renamed as ‘Air India’, it became the first Asian airline to operate freighters when Air India Cargo was set up in 1954. Air India Cargo ceased freighter aircraft operations in early 2012. In February 1960, it took delivery of its first Boeing 707 and became the first Asian airline to induct a jet airliner. In 2007, Air India and Indian Airlines were merged to form Air India Ltd. The combined loss for Air India and Indian Airlines in 2006-2007 was 7.7 billion and after the merger, this increased to 72 billion by March 2009. Today, it has two subsidiaries - Air India Express and Alliance Air. Over 54 domestic and 40 international destinations are served by Air India across four continents. The carrier is the third largest domestic airline in India in terms of passengers carried after IndiGo and SpiceJet with a market share of 12.2 per cent in 2019.

A REPORT BY THE COMPTROLLER AND AUDITOR GENERAL ATTRIBUTED THE POOR FINANCIAL SITUATION TO THE DECISION TO ACQUIRE 111 NEW AIRCRAFT AND THE ILL-TIMED MERGER WITH INDIAN AIRLINES

TURNAROUND ATTEMPTS

In the absence of a long term solution, Air India has been attempting a turnaround in its finances. Till 2012, the national carrier had received equity infusion worth 30.231 crore. Initiatives included rationalisation of routes and enhanced utilisation of aircraft measures through which Air India, the behemoth, with nearly 20,000 employees, reportedly registered passenger revenue grows by 20 per cent in Q3 of 2018-2019, to 5,538 crore. Air India posted 8.9 per cent growth to 16.53 lakh passengers in May 2019. It has recorded 85 per cent load factor in May 2019.

TEETH-TO-TAIL RATIO

If, at near 80 per cent load factor, Air India is incurring losses, then it surely indicates that there are several non-operational expenses that are taking their toll on the balance sheet. The teeth-to-tail ratio is obviously adverse. Air India and its subsidiaries have a fleet of 172 aircraft as per their official website. Air India has employed close to 20,000 personnel. The employee-to-aircraft ratio is 116 and the employees cost to total cost is now around 11.68 per cent. In an apple-to-apple comparison, the world’s best employee-to-aircraft ratio is of Ireland’s Ryanair at 29.69, with 9,500 employees looking after 320 aircraft. The employee-to-aircraft ratio in Garuda Indonesia is 56.15, Turkish Airlines is 63.36 and Air China is 70.39.

FINANCIAL MESS

In 2000-2001, the first attempts were made to privatise Air India. In July 2009, the State Bank of India (SBI) was tasked to prepare a roadmap for recovery of the airline. The carrier sold three airbus A300 and one Boeing 747-300M aircraft in March 2009 for $18.75 million to finance the debt. The airline shut down the Frankfurt hub on October 30, 2010 because of high operating costs. In 2010, financially less lucrative routes were terminated. By March 2011, Air India had accumulated a debt of 426 billion, an operating loss of 220 billion, and was seeking funds to the tune of 429 billion from the government. A report by the Comptroller and Auditor General attributed the poor financial situation to the decision to acquire 111 new aircraft and the ill-timed merger with Indian Airlines.

In August 2011, the invitation to join Star Alliance was suspended as a result of its failure to meet with the minimum standards for the membership. The government pumped 32 billion into Air India in March 2012. A study commissioned in the same year by the Ministry of Corporate Affairs, recommended that Air India should be partly privatised. In May 2012, the airline was fined $80,000 by the US Transportation Department for failing to post customer service and tarmac delay contingency plans on its website and adequately inform passengers about its optional fees.

In January 2013, Air India cleared a part of its pending dues through funds raised by selling and leasing back the newly acquired Boeing 787 Dreamliner. The airline split its engineering and cargo businesses into two separate subsidiaries, Air India Engineering Services Limited (AIESL) and Air India Transport Services Limited (AITSL) in 2013. As a part of the financial restructuring, Air India sold five of its eight Boeing 777-200LR aircraft to Etihad Airways in December 2013. Plans for introducing ultra-long flights with services to US West Coast were cancelled due to high fuel prices and weak demand. On April 24, 2014, Air India issued a tender for leasing 14 Airbus A320 aircraft for up to six years, to strengthen its domestic network. Air India moved its headquarters from the iconic 23-storey Air India building on Marine Drive, Mumbai to Delhi in 2013, and rented most of the floors in that building. In August 2015, it signed an agreement with Citibank and SBI to raise $300 million in external commercial borrowing to meet working capital requirements.

On June 28, 2017, the Government announced its intention to privatise Air India and a committee was set up to start the process. In March 2018, the Government came out with the preliminary information for the strategic disinvestment of the airline wherein it planned to offload 76 per cent as well as cede management control to private players despite the Ministry of Civil Aviation claiming to have doubled its operating profits. Yet in the same period, the airline’s net loss increased to 5,765 crore. The Centre for Asia Pacific Aviation (CAPA) India estimated the carrier would make losses of $1.5 billion to $2 billion over the next two years. The winning bidder would have to remain invested in the airline for at least three years. The proposed disinvestment was to include Air India Express and AISATS.

URGENCY TO DIVEST

The cash-strapped government is under pressure to get the economy on track. The budget has set a divestment target of 1.05 lakh crore for the current fiscal, up from 90,000 crore last fiscal that it had overshot. Finance Minister Nirmala Sitharaman has stated that disinvestment in Air India was on track and the Group of Ministers (GoM), headed by Home Minister Amit Shah will meet shortly. A Committee of Secretaries has suggested that the government quit altogether, as the earlier proposal to hold on to 24 per cent equity had not generated any interest from buyers.

AIR INDIA IS INCURRING LOSSES, DESPITE EXCELLENT ASSETS AND A FLEET OF AIRCRAFT WHICH FLIES TO 80 DESTINATIONS DOMESTICALLY AND 40 INTERNATIONALLY.

Will Air India get a new owner by March 2020, is the question now being asked. The plan is to make Air India more operationally viable before disinvesting it, Civil Aviation Minister Hardeep Singh Puri told the Rajya Sabha in July 2019. Air India has also been given many of the slots vacated by Jet Airways domestically, he said. The Minister said there has been a steady improvement in finances of Air India and the airline is set to make profit during the current financial year. He said Air India is currently generating revenue of 15 crore a day. The costing and overall calculations of the airline also depends on external factors such as closure of air space over Pakistan, but should end the current year in profit after which it will be disinvested.

Prior to the 59,000 crore debt, there was a proposal to retire 29,000 crore into a special purpose vehicle. Now an alternative mechanism is being evolved. Air India is otherwise a viable airline and it has some prized assets including the Nariman point headquarters and disinvestment, will also take care of this, the Minister said.

Air India is incurring losses, despite excellent assets and a fleet of aircraft which flies to 80 destinations domestically and 40 internationally. But, it has, over a period of time, undertaken debt and that debt servicing is becoming unsustainable. The airline is incurring losses of 15 crore a day. Air India, the Minister said, also has a shortage of 20 aircraft on account of certain costcutting measures. They are hoping to bring these 20 aircraft, or at least 17 of them, back into operation by October this year.

A well-run Government-owned airline could have been a national asset, but over 70 years of operations have clearly demonstrated that it is “not the business of Governments to be in business”. As all attempts to revive the airline have failed, it has now become a liability and needs to be privatised without further delay.