Description and Background

The Tata Group, which founded Air India 87 years ago and was then forced to relinquish control,
said it will look at bidding for the airline put up for sale by the government.

The government has in recent months indicated its willingness to exit Air India completely, as
opposed to its earlier plan of retaining a minority 24%. It drew a blank in its earlier attempt last
year to disinvest 76% in AI; the Tata’s didn’t show any interest because the terms were onerous,
besides which the conglomerate was evaluating the purchase of Jet Airways.

Acquisition of Air India would help the Tata’s scale their aviation business. The group has two
joint ventures—one a full-service airline with Singapore Airlines (SIA) to operate Vistara, and a
second with budget carrier AirAsia. Combined, they made a loss of over Rs 1,500 crore in fiscal
2019.

There is a sense that unlike Jet Airways, Ratan Tata, chairman emeritus of Tata Sons and head of
Tata Trusts, might be favorably disposed towards the acquisition of Air India, which his
predecessor JRD Tata founded in 1932. Air India would help Vistara grow internationally.
Currently, Vistara flies to just four international destinations. Air India would also augment
Vistara’s domestic market share, which presently stands at 6%, with its 12% presence.
Points of Agreement

If the above economic event occurs and If it acquires Air India, it will be 66 years after its
nationalization.
History will come full circle with the move, underlining not only the sorry fate of government-
owned enterprises but also how India's indigenous business groups refused to fade out even after
decades of socialist policies.

Tata Sons set up Tata Airlines in 1932. JRD Tata, the legendary entrepreneur, himself flew the
first flight between Karachi and Bombay. In 1946, Tata Airlines became a public company and
was renamed Air India.

Flying was a passion with JRD Tata. He was the first person to qualify within India to fly,
according to the company website. "He got his license, which bore on it Number 1, on 10
February 1929. As an aviator and pioneer flier, he was the one who brought commercial aviation
to India. JRD went on to establish Air-India International in 1948 and became the president of
International Air Transport Association (IATA) within 10 years of its establishment. He
remained at the helm of Air India till 1978, making it one of the most efficient airline in the
world," the website says.

In 1953, when the government nationalized Air India “through the back door”, as Tata himself
put it, it was one of the best airlines in the world. A dream enterprise of Tata, he had built it bit
by bit with personal care, down to the menu and curtains. Tata was devastated when he came to
know about the decision of then prime minister Jawaharlal Nehru, a Fabian socialist averse to
private enterprise. Tata wrote to Nehru: “I can only deplore that so vital that a step should have
been taken without giving us a proper hearing.”

Tata accepted to become the nationalized airline’s chairman. Air India kept on doing well under
him till he was removed in 1977 by then prime minister Morarji Desai.

The airline clocked consolidated revenues in excess of Rs 27,000 crore in 2017-18, with a loss of
Rs 5,799 crore. Finance or interest charges exceeded Rs 4,000 crore in that period. Consolidated
debt on the books now stands at Rs 58,000 crore. Earlier this month, fuel suppliers led by Indian
Oil Corporation had threatened to pull the plug, discontinuing supplies at half a dozen airports.
On efficiency parameters too, Air India is a laggard.

The airline lags behind most Indian domestic airlines when compared on the basis of their
cancellations (2.6%), on-time performance (53.5%) or airline load factor (80.9%). In mid-2018,
the NDA government had tried to divest a 76% stake in the airline.
Why is the government trying to get rid of Air India, just when it appears to be turning the
corner? On Wednesday, the Union cabinet gave the nod to allow 100% ownership by Non-
Resident Indians (NRI)s in Air India. This is the culmination of a series of attempts by the
government in the last 5 years to dis-invest in Air India. The latest cabinet decision is surprising
and seen as a desperate measure to once and for all sell off Air India.

By allowing 100% for NRIs in the National Carrier through a Cabinet nod, it is trying to pass on
the investment as Domestic and safeguard violation of Substantial Ownership and Effective
Control (SOEC) norms. The SOEC is an international standard norm that the Government
enforces on the airline industry. The country where the Airlines is headquartered should be fully
or majority-owned by that country’s Government and balance by its citizens.
 Justifications for sale-out:
 In a document inviting expressions of interest, the government said it would sell a 100
per cent stake in the carrier, which operates both domestic and international routes.

 The government has set March 17 as a deadline for potential buyers to submit their initial
expressions of interest. Any bidder would have to agree to assume roughly $3.26 billion
in debt, along with other liabilities, according to the document.

 While several of Air India's subsidiaries will be excluded from the sale, the buyer will get
100% of low-cost arm Air India Express and 50% of AISATS, which provides cargo and
ground handling services at major Indian airports, the bid document showed.
 The government said that as part of the sale, the control of the carrier will remain with an
Indian entity, limiting the scope of any foreign bidders interested in the asset. A
successful bidder would win control of the airline's 4,400 domestic landing and parking
slots and 1,800 international slots at Indian airports, as well as 900 slots at airports
overseas.

 The Minister of State for Civil Aviation Hardeep Singh Puri said that the successful
bidder would continue to use Air India brand. He also added that Air India along with Air
India Express is a "great asset."  CAPA aviation consultancy India head Kapil Kaul said
the latest offer should garner significant response partly because it involves a clean exit
by the government.\

 In 2018, the government had tried to sell a 76 per cent stake in the ailing carrier and
offload about $5.1 billion of its debt, terms that potential buyers at the time viewed as too
onerous.

 In the past decade, Air India's accumulated losses stood at about Rs 69,575.64 crore,
aviation minister Hardeep Singh Puri told Parliament in December. With Air India
reeling under around Rs 80,000 crore worth of debt, the government has said there is no
option left with it but to privatize the carrier.

 The government needs cooperation of Air India employees for carrying out the
privatization process, Mr Puri is said to have told the airline unions on 2nd January.

 In an exclusive interview to NDTV, Air India Chairman and Managing Director Ashwani
Lohani said that prospective buyers of the state-run carrier will "get an airline with a
massive reach".
 Air India, known for its Maharaja mascot, has some of India's most lucrative international
and domestic landing and parking slots that are key for airlines.
What is needed?

What Air India requires today is a good management team to handle its affairs as an autonomous
corporate entity without any Government interference. Instead of a sell-out, the best option
available is to create Air India as a corporation with a 51% stake by the Government of India and
list 49% stake through an Initial Public Offering (IPO) for Indian Nationals. Privatization is a
sellout and is a game by some vested interests to grab the airlines.
Points of Disagreement:

Here are the five reasons why it will be difficult for the government to go for a possible stake
sale in Air India:

1) Restructuring plan fails to cut debt

In 2012, the government approved a Turnaround Plan (TAP) and Financial Restructuring Plan

(FRP) for Air India, promising to infuse Rs 30,231 crore till 2021.

The government infused Rs 6,750 crore worth of equity in 2011-12, apart from offering equity

for cash deficit support of Rs 4,552 crore till 2017-18, equity for guaranteed aircraft loan of Rs

18,929 crore till 2021.

Yet, Air India’s debt has piled up to nearly Rs 50,000 crore, according to Jaitley. Of the total

debt, around Rs 25,000 crore are related to aircraft valuation, he said. Banks have recently turned

down a request to convert close to Rs 9,000 crore of debt into equity. If a company acquires Air

India, it has to repay the debt or face liquidation action from lenders.

2) Not a profitable venture

High debt coupled with expensive operating costs, including for staff, have prevented Air India

to book net profit for more than a decade now. As per provisional figures for 2016-17, the airline

is projected an operating profit of Rs 300 crore and net loss Rs 3,643 crore.

Last fiscal, Air India had an operating profit of Rs 105 crore and a net loss after tax of Rs

3,836.77 crore.

According to the civil aviation ministry, Air India’s losses has come down significantly in recent

years from Rs 6,865.17 crore in 2010-11, Rs 7,559.74 in 2011-12, Rs 5,490.16 crore in 2012-13,

Rs 6,279.60 crore in 2013-14 and Rs 5,859.91 crore in 2014-15.

Air India is trying to shore up revenues through streamlining routes, phasing out of old fleet and
consequential reduction in maintenance cost and closure of some overseas offices.

3) Falling market share

Since the entry of private airliners from early 1990s, Air India’s market share has fallen every

passing month.

Latest government data show Indigo, which started operations in 2006, dominates the Indian sky

with a market share 41.4% as of April 2017.

SpiceJet has cornered 12.9% of the pie in the last 12 years, while Go Air has 8.1%.

Jet Airways has a market share of 15.2% while its low cost arm Jet Lite has 2.4%.

New entrants Vistara now has 3.2% of the market share while Air Asia 3.3%.

4) Competition from road and railways

Over the decades, air travel has become relatively cheaper but the competition from road and rail

transporters remains intense.

Air India is offering lower fares to match Rajdhani second and first class fares in select sectors.

Low-cost private players have curtailed Air India’s efforts by lowering their fares to lure

customers.

5) Valuation
The government will face problems in justifying the valuation of Air India as and when it opts

for a strategic sale.

Interglobe Aviation Ltd, which operates Indigo Airlines and posted a net profit of Rs 1,659 crore

in 2016-17, trades at a little less than 1,100 a piece and has a market capitalisation of over Rs

39,000 crore.

Air India will be valued much less considering its market share of about a third of Indigo and

carrying a legacy of mammoth debt burden and losses.

However, Air India has property at prime locations across the country.