Can FDI save Air India?
The new norms open up avenues for more airlines to bid for AI, but they would need greater clarity on who will bear its debt burden.
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The government has allowed up to 49 per cent foreign direct investment (FDI) in disinvestment-bound Air India. The development came just a day after a parliamentary panel suggested the government put the proposed stake sale in the national carrier in abeyance and look at alternative ways to turn it around. The question that arises is why is the government in such a hurry?
It's been months since the government proposed to sell a part of Air India to private investors to rescue it from going bust, but the response to the proposal has been lukewarm.
If one goes by the amount of money it bleeds every year, Rs 5,000 crore on an average, the airline turns out to be the worst performer among public sector enterprises. As of June 2017, the erstwhile Maharaja of Indian skies had bled a massive Rs 52,000 crore of taxpayers' money, enough for the government to finally wake up and bite the bullet. Hence, it decided in June 2017, to go for a strategic divestment of the airline.
However, there has been only one formal expression of interest for Air India so far and it has come from IndiGo. The Tatas have also said they are evaluating a deal but there has not been any formal letter to the government on this so far. There has also been some reported interest from some foreign ground handling firms for the Air India Air Transport Services, but nothing concrete there too. There are many reasons why many airlines are fighting shy of bidding for Air India.
The obvious one is the gargantuan debt of the airline. Will the government, who will obviously hold a majority stake in the airline, take all the burden of the debt upon itself? There is no clarity on that front. However, the other elephants in the room need to be equally looked into. What happens to the highly unionised carrier's over 20,000 employees? What about their pension plans? What about the modernisation of the fleet? Air India has been severely criticised in the past few years precisely over this lacuna which has led to it amassing humungous debt?
A friend who travelled from Calicut to Thiruvananthapuram a week ago said that the aircraft was so aged that it was scary to fly in it. At a time all private carriers are modernising their fleet and upping their services, AI should not want to be left behind.
As of June 2017, Air India was behind Indigo and Jet Airways in terms of domestic market share at 14 per cent, although it had a significant share of 25 per cent in the international sector. In fact, it's this international share that any investor would be attracted to, and want to place his bets on.
Will FDI, then, open new avenues for investment in Air India? Technically, it should. Aviation experts say that FDI reform was long overdue and there is no reason why Air India should be treated differently from other domestic carriers. Opening the FDI gates helps other airlines such as Jet Airways and Vistara to also bid for Air India. Naresh Goyal, an NRI, holds 51 per cent in Jet Airways, while Abu Dhabi's Etihad Airways owns 24 per cent in it. Meanwhile, Tata Sons holds 51 per cent in Vistara, while the remaining is with Singapore Airlines. With more carriers joining in the bid, the government would be able to bring in better competition among Air India bidders and possibly get a better price for the airline.
However, all these scenarios hinge on bringing in more clarity regarding the airline's debt burden. Some aviation experts say the government is considering withdrawing Rs 33,000 crore of working capital debt from the company. That leaves it with a debt of around Rs 20,000 crore that it had taken to finance purchase of aircraft, which can be covered by future cash flows. Such clarity should ultimately help bring in the right investor into Air India and give some ray of hope to the beleaguered carrier.