The airline could be privatised in multiple ways but all attempts to do so are likely to be opposed by the employees union

After deliberations for years, the Indian government finally announced its decision to privatise national carrier Air India. While the government is still to decide the process of disinvestment and how it will be carried out, it has already received one expression of interest from private airline Indigo. But according to aviation industry analysis firm CAPA, while the decision to privatise Air India is welcome, Indigo’s decision would be a strategic mistake.

“Indigo’s unrestricted cash position is in line with their liquidity requirements and won’t be enough to bid for Air India unless promoters dilute stake, which is unlikely. However, a new entity created for Air India’s bid which potentially partners with a foreign airline and is legally and operationally separate from Indigo, it will be a different case. Other airlines don’t have the balance sheet and even resources to bid for Air India,” Kapil Kaul, CEO and director of CAPA for South Asia, said in an emailed statement.

Kaul also pointed out that the government will have take a haircut on its loans to the tune of $9 billion to make Air India’s disinvestment viable.

“CAPA also expects the government to ensure the divestment process is ring fenced from vested interests, allow foreign airlines to invest up to 49 per cent, an independent assessment on AI’s assets and liabilities is carried out and a process to structure Special Purpose Vehicles for transferring non-aircraft debts and assets doesn’t consume the final outcome,” Kaul said in the statement.

The government itself has not specified how the privatisation will be carried out. A group of ministers will evaluate the treatment of unsustainable debt, hiving off certain assets to a shell company, the de-merger and strategic disinvestment of three profit-making subsidiaries, the quantum of disinvestment and fixing who can bid for a stake in the company.

“This is going to be a complex exercise and the various issues involved will need to be uniquely addressed for Air India with specific reference to facts involved as well as the context of the market and Air India’s positioning – including its various subsidiaries and their operations, Air India’s domestic and international network as well as bilateral rights,” Peeyush Naidu, partner at Deloitte Touche Tohmatsu India, said.

The government has already said there are multiple options available to try ease the burden of the debt-saddled airline. But there could be one more option: leasing the airline’s assets to a private company.

“They may look at selling the airline and its subsidiaries as one consolidated package or may unbundle the same and sell separately.  They may also consider leasing Air India’s assets to a private entity than going through the disinvestment route.  The leasing option may be faster and easier to implement,” Amber Dubey, partner and India head for aerospace and defence at global consultancy KPMG, said.

However, the employees union at the airline has said that it will oppose any move to privatise the airline.

The whole union opposes this privatisation. When Air India is showing operating profits why is there a need to privatize it? We have never been taken into the discussions. Air India has been able to reach its achievements and if the problem is with the debt then the government must come up with solutions to it,” Vivek Rao, secretary of the Air Corporation Employees Union, said.

Rao also said that privatisation may result in the airline dropping routes where it is the sole operator, which in turn could hit development in that area.

“Currently Air India is operating on routes where private careers don’t run such as Tripura where the per capita income is low, the population is low, and consequently the profitability is also low. If the airline comes in private hands, areas like this could actually lose connectivity from the nation and it will harm the brand value,” he said.

But not everyone agrees that the brand value of the airline could be hit by privatisation.

“Under an efficient private management, many expect Air India to monetize its brand value better,” Dubey from KPMG said.


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