Another red alert

Word from New Delhi is the powers that be plan to invite expressions of interest in Air India by the end of this month (September), with a view to completing a transaction by year’s end.

Preparations are underway with the Department of Investment and Public Asset Management (DIPAM) asking the carrier to freeze all promotions, stop hiring new staff and refrain from launching any new flights until it is extremely necessary.

A group of ministers, headed by Home Minister Amit Shah, has also been reconstituted to oversee the privatisation and a series of roadshows will be held with prospective buyers.

It will, however, be an extremely hard sell. Efforts to sell a 76 per cent stake in the carrier failed in 2018 with not a single bidder coming forward and the new plan is a pretty ambitious timetable given the reality of Air India’s situation.

What potential investors will see when they examine the airline books is hardly reason for optimism that there will be a bidding war. Currently surviving on a A$6.2 billion taxpayer-funded bailout, it now has total debts of about A$12.5 billion, with cumulative losses over the past few years now hitting around the $15 billion mark. In the financial year ending March 31 2019 alone it lost another $1.4 billion. This despite impressive revenue of $5 billion. Trouble is, expenses were $6.6 billion.

A new owner would also have to cope with a workforce of some 10,000 permanent employees not averse to taking crippling industrial action if there is any hint of staff cuts, changes to working conditions or other money-saving schemes.

In the meantime, Air India continues to be dogged by hurdles impacting on all of the country’s airlines, including high taxes and fuel costs in excess of anywhere in the world, again because of excessive taxation. Twenty of the carrier’s 124-strong fleet are also currently grounded because of lack of spare parts, and the debt-ridden airline didn’t have funds to buy engines (funds have recently been released to the engineering division to procure 30 new engines).

The recent closure of airspace by Pakistan in the wake of airstrikes by the Indian Air Force in February also hasn’t helped. That cost Air India $1 million a day because of the additional distance it had to fly to get to the US and Europe.

Even the demise of major competitor Jet Airways has failed to boost Air India’s fortunes. It now has only 12.9 per cent of the domestic market in the face of ongoing competition from the likes of budget IndiGo (with 48.1 per cent marketshare) and SpiceJet (15.6 per cent).

Privately, Air India management has tried to put a brave face on the situation, saying the carrier does expect to make an operating profit of at least $216 million a year, which is hardly helpful given that figure is before tax and other expenditure.

One official said the airline is targeting an increase in revenue during 2019-20 to $6.8 billion with the aim of increasing operating profit to $360 million.

All in all, none of this bodes well for the prospect of any potential buyer getting a decent return on their investment in the foreseeable future.

It seems, however, that the government is definitely hell bent on having another go. Civil Aviation Minister Hardeep Singh Puri said recently Air India has to be privatised in order to save it. He suggested that government was not equipped to run an airline where operational decisions on a day-to-day basis have to be taken immediately rather than following a bureaucratic process or going for tender process, adding that the government is committed to the disinvestment and the plan is to make it more operationally viable before stake sale.

“It will be sold when the buyer ultimately gives the cheque and there are certain prerequisites before any sale, those also have to be met. I do expect that to be finished in four to five months but nevertheless to provide for that exigency, we have not accounted for Air India sale proceeds (in budgeted disinvestment proceeds).”

Which seems a wise move. “We will try to finish it off by Diwali (end of October), if not before,” DIPAM Secretary Atanu Chakraborty added. Given that India is one of the world’s fastest growing aviation markets it might be thought the prospect of getting a foot in the door would be tempting for any investor. But in the case of Air India there is little doubt such a move would be highly risky.