Goodbye Maharaja ?


The government has (finally) formally ventured on the path to divest its stake in Air India. On March 28, the civil aviation ministry came out with the preliminary information memorandum on Air India’s strategic disinvestment. Since then there have been heated debates about the move and a lot of media attention on potential bidders. The government seems to be serious about on selling 76% of its stake in the carrier in the near future.

What are the terms of the deal?

As per the terms of the deal, the government wants to sell 76% of Air India, 100% of Air India Express, and 50% of SATS (solution and services provider). Full management control will be given to the new owner. As an opening demand, the government also wants to the buyer to carry almost half of the company’s debt which works out to roughly Rs 33,392 crore. It is important to note that the company has almost Rs. 50,000 crores of interest bearing debt of which the new owner will have to absorb around Rs. 24,576 crores with the rest being transferred to a holding company which will have the government’s stake. There is also another Rs. 8000 odd crores of current liabilities.

The other conditions of the deal include the 2,543 international landing slots negotiated the US, the UK and Far East, and bilateral rights for 970,389 seats negotiated with numerous countries. While on the domestic front, its market share is limited, Air India has a substantial market share in the international flights market. This huge network makes Air India lucrative and of interest. However, the government plans on retaining some of the real estate assets. All of Air India’s ‘non-core’ real estate will be transferred to the SPV and continue to remain with the government, while the ‘core’ real estate will be handed over to the new buyer. The ‘non-core’ real estate is being separately monetized by the government.
As of now, only an information memorandum has been released. This is the first of the two stages. The government is still discussing various parts of the deal with all the stakeholders and potential buyers. The next step is the invite for Request for Proposal (RFP).

Who are the ones planning to buy?

There has been a lot of media attention on the potential bidder. This has been closely tracked. The first airline to show interest, IndiGo, has backed out. Other domestic players such as Jet Airways have not been very keen. There still is a lot of speculation surrounding Tata group. On the international front, it has been reported that four carriers have shown interest – British Airways, Lufthansa, Singapore Airlines, and an unnamed Gulf carrier.

There are a lot of concerns surrounding the terms of the deal. For starters, the huge debt is a major issue. The fate of the employees hasn’t been decided yet. The government seems to be intent on securing the interests of the employees. There are numerous issues related to past and present employees. There are liabilities and commitments made to past employees such as health. The present employees fear their job security. While the government is absorbing some of these commitments via ESOPs which will be issued from the governments stake, there are uncertainties. With different stakeholders having directly conflicting interests, uncertainty is a given. There is also the issue of the government retaining its stake. The stake is 24 percent. It is estimated to drop below 20 percent once the employees have been given stocks. While the current government may have certain intentions, governments change. This is a reality which cannot be ignored.

There is also a clause that the winning bidder must stay invested in the airline for at least three years. Spinoffs don’t seem to be an option in the near future. There is also a requirement that the winning bidder not merge the airline with existing businesses as long as the government holds a stake, which will make things difficult from a financial and managerial point of view. The government has allowed consortiums to also bid. There are some eligibility norms laid out which are pretty strict. There has been a request made to make these more flexible. The interest shown by foreign players has changed the political narrative.

Eyes are set on the future of this pressing issue as a political angle is brewing with various parties making statements, whether it is the Trinamool Congress calling it the ‘Jewel of our Nation’ or the Congress hurling allegations of mismanagement. The next few months will be interesting as the sale progresses into the final stages.


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