Interview

Privatisation of Air India

Co-Authors:  Ashutosh Anand and Ravi Ranjan, 1st year students in NUSRL, Ranchi.

INTRODUCTION

With the fast-paced world, people are encountering problems managing their schedule. Time has become as invaluable as blood. Air transport has emerged as a helping hand in saving time. It is a very efficient model to save time and travel with tranquility. The story of air transportation in India is also very fascinating. India has come out as the third-largest aviation market on the planet, only after the US and China.
The Tata Sons became the first organisation to take the endeavour of setting up an airline by the name of ‘Tata Airlines’ in 1932. In 1946, Tata Airlines established itself as a public company and renamed itself as ‘Air India’ but after independence, as India was stepping up on the path of the socialistic economy, the government nationalised the airline. Although, in the last couple of decades, we have witnessed that the ‘Maharaja’ is trapped in a fiasco.
Now the government wants to sell the airline after it has incurred consecutive losses but the catch is, that not many parties have shown ample interest in the downgrading ‘Maharaja’, making the government edgy. The government has made attempts galore to entice the substantial corporations but in vain. At first, the government wanted to sell 76% of its stakes, but due to the impassive stance from the bidders, the government has reluctantly agreed on selling 100% of its stakes. Even after this, the future of ‘Maharaja’ hangs in uncertainty.

BACKGROUND

When we first think about the invention of aeroplanes, two names click to our minds – Orville and Wilbur Wright. On December 17, 1903, Orville succeeded in making the first powered flight in the history of mankind. Wilbur flew their plane for 59 seconds, over a distance of 852 feet, a phenomenal accomplishment. Even after their successful fleet, the brothers didn’t get too much appreciation in the US. Wilbur travelled to Europe where he became famous by selling aeroplanes. The brothers turned into affluent businessmen.
In India, the first modern civil aviation flight dates back to February 18, 1911, on the occasion of ‘Kumbh Mela’. Henry Piquet, an airman from France wing his way from Allahabad to Naini carrying almost 6500 mails on a Humber biplane travelling a distance of 10 kilometres. India was introduced to international flights in 1912. The first international flight was inaugurated on 12th December from London to Delhi via Karachi.

JRD Tata, the pioneer of the Tata Airlines (Source: The Indian Express)

JRD Tata, the pioneer of the Tata Airlines (Source: The Indian Express)

On October 15th, 1932, JRD Tata went with the delivery of mails from Karachi to Juhu. Later, he established Tata Airlines as part of his parent company Tata Sons in 1932 (Tata Sons was established by Jamsetji Nusserwanji Tata in Bombay in 1868). The Indian Aircraft Act came into being in 1937. Tata Airlines substituted its name with Air India in 1946. In the year 1948, the government permitted Air India to carry out its operation of international flights. Hence, in the same year, Air India started operating an international flight from Bombay to London along with the stoppage in Cairo and Geneva.

After independence, in 1948, the government acquired a 49% stake in the airline. In 1953, the Parliament passed ‘The Air Corporation Act’ which led to the nationalisation of Air India along with the entire aviation sector. Eight airlines including all the big and small players were amalgamated into two new entities, i.e., Indian Airlines and Air India. Indian Airlines mostly focused on domestic and neighbouring international flights whereas Air India focused on long-distance international flights. Even after the nationalisation of Air India, JRD Tata remained on the position of chairman till the year 1977. Air India received the delivery of its first Boeing-707, hence becoming the first airline in Asia to induct a jet aeroplane. In 2007, Air India and Indian Airlines were amalgamated into a single entity. Currently, Air India comes under the purview of Ministry of Civil Aviation.

THE PROBLEMS WITH THE MAHARAJA

The Directorate General of Civil Aviation reported that Indigo and Jet Airways had a major chunk of the domestic market share in the aviation sector at the end of the financial year 2019.

Source: www.statistica.com

During the days of Vajpayee tenure, the government was in favour of privatising the Maharaja. Hence, it sets up the Naresh Chandra Committee, which advocated an autonomous civil aviation regulator and favoured privatising both the airlines, but after the UPA assumed power, the report of the committee was buried. Sources also said that Tata Group was interested in purchasing the airline in 2001 but the government was not eager for disinvestment. The UPA-1 government initiated the modernisation plan with the acquisition of 111 glimmering aeroplanes at the cost of ₹ 70,000 crore. The government planned to pay for the acquisition via debt and repay via revenue generation, but the Comptroller and Auditor General of India (CAG) in its audit of the Turnaround Plan and Financial Restructuring Plan, suggested this acquisition as a “recipe for disaster“. Later in 2017, an FIR was lodged against Praful Patel, the then aviation minister and few other senior officers of the airlines by the CBI for the opaqueness of the acquisitions which went underway during the UPA-1.
In 2007, Air India and the Indian Airlines were merged which is considered as yet another catastrophic move. Before the amalgamation, both had a combined loss of ₹ 63 crore, which multiplied to ₹ 20,000 crore in 2010-11.
The government planned a turnaround plan for the debt-ridden Maharaja in which it would infuse capital of ₹ 48,212 crore for 20 years, starting 2011-12 and ending in 2031-32 subject to meeting some performance criteria. The government anticipated improvements, but the opposite followed. The Maharaja mounted a mammoth debt of ₹ 52,000 crore at the end of 2017.
Yet another problem pointed out by the CAG was the lack of proper monetisation of assets to generate revenue. In layman’s tongue, to “monetize” something is to convert non-revenue generating assets into sources of revenue. The audit insinuated that 5 out of 12 properties could not be monetised because of the rigid terms and conditions attached to it.
The airline is seriously understaffed. For instance, the company requires more than 11,000 employees as against envisaged 7,245 employees till 2017. The international flights have also contributed a lot in the loss of the exchequer of the airline. For instance, the flight occupancy of Delhi-New York flight was 77% as other airlines were giving bitter competition to the Maharaja. The audit also revealed several accounts of mismanagement and red-tapism inside the organisation. There was a lack of congruence in the demand and availability of aeroplanes in many instances. For example, when the consultant recommended inducting A320 aircraft so that maintenance costs could be reduced, the airline took 3 years to do the same, insinuating inefficiency.
In the words of the Public Enterprises Survey 2018-19, Air India’s losses were 2nd highest in the Central Public Sector Enterprises (CPSEs). Even after incurring heavy losses, Air India survived in the aviation market due to the support of the government. Although, in 2017, the NITI Aayog in its recommendations on strategic disinvestment of CPSEs referred that more financial assistance in a mature aviation market would not be the optimal use of scarce financial resources of the government. Strategic disinvestment is that disinvestment in which the government lowers its stake than 51%.

STEPS TOWARDS PRIVATISATION

In 2017, the Modi government initiated taking earnest steps towards privatisation of the airline with the formation of a committee. In March 2018, the government offered 76% of its stakes as well as relinquishing managerial controls. Unfortunately, in the same period, the net loss amounted to ₹ 5,765 crore (net loss of the airline was ₹ 8,556 crore). The biggest deterrent in the sale of the airline was its debt of ₹ 52,000 crore (currently more than ₹ 60,000 cr).
CHANGE OF POLICY – The steps towards privatisation didn’t look lucrative enough to the bidders. The Modi administration failed to draw buyers in 2018. Ernst & Young, an audit company prepared a report mentioning the following reasons for the failure:
● Government retained 24% stake
● Volatile crude oil prices
● Fluctuation in exchange rates
● High debt of more than ₹ 60,000 cr.
● Restriction on bidding by individuals

Also, because of the general election, which was going to take place next year, bidders were not confident enough. So, the government took a decision of disinvesting 100% stake in the airline and its budget carrier AI Express to make the bidding more gainful. It has also decided to put up 50% stake in Air India SATS Airport Services Pvt. Ltd. for bidding, which is the ground handling unit. The government has also made the rules flexible for the potential bidders this time. Previously, bidders with a net worth of ₹ 5,000 crore were allowed to participate, but it was reduced to ₹ 3,500 crore. In 2018, the expression of interest required that a bidder be profitable for a minimum of three of the previous five years. This clause has been made redundant now. Earlier, at least 51% shares were needed to be owned by the lead member of a consortium and the limitation for other members was 20%. The revised clause has reduced it to 26% for the lead member and 10% for others. Previously, the entity which would gain the control of the airline would have to share ₹ 33,000 of its debt (out of more than ₹ 60,000) but over the past 2 years, the government was allocating some amounts of debt to Special Purpose Vehicle (SPY). After this, the entity will only have to own ₹ 23,286 crore of its debt.
The entitled entity will also get a massive fleet of 121 aircrafts of Air India and another 25 of Air India Express. Although, 4 Boeing 747-400 jumbo jet aircraft will be retained by the government. Similarly, some properties like Nariman Point Building, headquarters of Air India near Connaught Place in Delhi will be retained. Majority ownership and control must remain with an Indian entity as only 49% FDI is allowed in domestic airlines. The new entity must retain the brand name ‘Air India’.

CONCLUSION

Currently, the bidding process of the airline is going on. Last bidding process in 2018 turned out to be a blunder for the government as not a single party showed sufficient interest in the bidding process. This time, several companies including the Tata Group, Adani Group and the association of employees are in the race.
Sources and media reported that Tata is showing keen interest in the airline, which was originally theirs’ before the nationalisation. Tata was also interested in owning the airline in 2001 but the government declined. Tata came back into the business of aviation after 2013 after it launched an airline named Vistara in collaboration with Singapore Airlines Limited (SIA).
The association of employees and an investment firm Interups Inc. which is based in the US has also participated in the bidding process. The relaxation given by the government that foreign entities can own 49% stake has enabled the US firm to participate.
Although the process is very much underway, the airline still has to go a long way before becoming a part of a private entity. The private entity will itself have to encounter several challenges to stable the airline and turn it into a profitable business.


References:

1. Pande, P., 2020. A Brief History Of Commercial Aviation In India – Simple Flying. [online] Simple Flying. Available at: <https://simpleflying.com/indian-aviation-history> [Accessed 17 December 2020].
2. HISTORY. 2009. Wright Brothers. [online] Available at: <https://www.history.com/topics/inventions/wright-brothers> [Accessed 17 December 2020].
3. Gktoday.in. 2015. History Of Civil Aviation In India – Gktoday. [online] Available at: <https://www.gktoday.in/gk/history-of-civil-aviation-in-india/> [Accessed 17 December 2020].
4. Reporter, B., 2017. Six Reasons Why Air India Is Going Downhill. [online] Business-standard.com. Available at: <https://www.business-standard.com/article/companies/six-reasons-why-air-india-is-going-downhill-117031001155_1.html> [Accessed 17 December 2020].
5. Web Desk, I., 2017. Before Tatas Buy Air India, A Look At 5 Bad Decisions That Led To National Carrier’s Downfall. [online] India Today. Available at: <https://www.indiatoday.in/india/story/air-india-tata-group-5-bad-decisions-that-led-to-downfall-of-national-carrier-984173-2017-06-22> [Accessed 17 December 2020].
6. Yadav, N., 2020. Last Date For Air India Divestment Plan Nears — Reports Suggest That Tata, Adani And Hinduja Group Are Interested. [online] Business Insider. Available at: <https://www.businessinsider.in/india/news/reports-suggest-that-tata-adani-and-hinduja-group-are-interested-in-air-india-divestment-plan/articleshow/79675955.cms> [Accessed 17 December 2020].
7. Asher, V., 2020. India – Airline Market Share | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/575207/air-carrier-india-domestic-market-share/> [Accessed 17 December 2020].
8. Chopra, A., 2019. Air India — An Asset Or A Liability?. [online] Spsairbuz.com. Available at: <http://www.spsairbuz.com/story/?id=886&h=Air-India–mdash%3B-An-Asset-or-A-Liability> [Accessed 17 December 2020].
9. Deccan Chronicle. 2018. Centre To Examine EY Report On Air India. [online] Available at: <https://www.deccanchronicle.com/business/companies/140618/centre-to-examine-ey-report-on-air-india.html> [Accessed 19 December 2020].
10. Sarkar, S., 2020. Air India Is Up For Sale Again. Here’S What’S Different This Time. [online] BloombergQuint. Available at: <https://www.bloombergquint.com/business/air-india-is-up-for-sale-again-heres-whats-different-this-time> [Accessed 17 December 2020].

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Kinshuk Sharma
Kinshuk Sharma
11 months ago

Commendable work Ravi and Ashutosh

Abhishek Narayan Trivedi
Abhishek Narayan Trivedi
11 months ago

Masterpiece

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