Nirbhay Kumar
The government has stated that multiple expressions of interest (EoIs) have been received for Air India and transaction will now move to the second stage of bidding process.
Tata group, little-known Interups Inc and a consortium of 219 employees of the cash-starved national carrier are learnt to have submitted initial bids for 100% stake in the airline.
While Tata group has deep pockets and required management expertise, the other interested parties would have reasons to celebrate if they stand anywhere close to the highest bidder. This suggests Tata group is the only serious bidder in the fray.
In that case, there will be hardly any competition for the Tatas and it will pay pennies to take control of the national carrier. Many top bureaucrats Top Lead India contacted for their view on such possibility said that in view of limited competition government should not go ahead with the sale process as it will raise serious questions.
But most of them noted that the current government hardly cares for any questions or scrutiny by Central Vigilance Commission (CVC) and will most likely go ahead with the sale process. There are reasons to believe that any prospective buyer would make hard bargain given that government is desperate to dispose off the carrier and outlook for aviation, travel and hospitality sector is bleak.
Last year before Jet Airways went bankrupt, its shrewd promoter and aviation industry veteran Naresh Goyal did all he could to bring an investor onboard and save the airline but none came. At that time, macroeconomic indicators were in green and sentiments were bullish in the aviation sector. Now, the future of aviation sector is uncertain due to Coronavirus pandemic. While airlines are allowed to operate 80% of their capacity in domestic market, international flights are nothing compared to pre-Covid level.
Discovery of a new virus strain in the UK is expected to make the situation further grim for airlines. Now the question is if Naresh Goyal could not convince banks or a new investor to put in money to save Jet Airways when hopes were high, how would government manage to sell its entire stake in Air India, its low-cost subsidiary Air India Express and ground-handling joint venture AISATS in current times.
Air India versus Jet Airways
A glance into fleet size, performance parameters and market size shows that Jet Airways (before it shut down) scored no less than the national carrier. In fact, it had better revenue realisation per passenger than Air India (as per preliminary information memorandum for disinvestment).
At the close of FY19, Jet Airways had a fleet of 112 aircraft which included wide-body, narrow-body and regional jets. It carried 27.4 million passengers in FY19 and had Revenue per Available Seat Kilometre (RASK) of Rs 4.24.
In comparison, Air India had an operating fleet of 121 as on November, 2019. It carried 22.1 million passengers in FY19 and reported RASK of Rs 4.10.
To be sure, Air India has prime slots at most domestic and international airports. It has better and bigger infrastructure and traffic rights for international operations. While Air India’s facilities at various airports would be a big plus for any new investor, the Jet episode has shown that slots and traffic rights could be redistributed if an airline stops operation. This could be perhaps a reason for domestic airlines not expressing much interest in Air India.
Before government liberalized aviation sector, slots and traffic rights were considered key valuable assets.
When Jet operations grounded last year, the government had maintained that Jet’s slots were being given to other carriers temporarily but it has to be seen if the grounded carrier gets them back once it resumes operations.
In both domestic and international markets, Jet had strong brand recall and continues to have. Air India certainly scores few notches up by virtue of being the national carrier.
Jet Airways yet to resume flights
Before Jet Airways shut down, the Indian aviation sector was reporting robust growth. It had completed 52 consecutive months of double digit growth by December 2018.
Stuttering for few months in the face of severe liquidity crunch, Jet had suspended all its domestic and international operations on 17 April 2019. The airline was taken by lenders to the bankruptcy court and a resolution plan was approved recently.
As per the resolution plan submitted by UK-based Kalrock Capital and UAE-based entrepreneur Murari Lal Jalan, the grounded airline could be back in skies with far fewer flights in the summer of 2021.
Sans government support, Air India is no better than Jet Airways months before it shut down. Not surprisingly, private parties showed no interest in buying Air India when the Modi government first came with the disinvestment plan in 2018. One of the main reasons cited for the lacklustre private sector response was government offering 76% stake and not the entire holding. Besides putting its entire 100% stake on the block, the government has this time taken away bulk of Air India’s loans offering much more attractive deal.
Additionally, it said in late October that the financial bid criteria for the competitive bidding process for the proposed transaction will be the enterprise value of Air India and its subsidiaries instead of equity value stated earlier. Enterprise value of a company includes the equity value, debt as well as cash held by it. As against this, equity value refers to the value of a company’s shares.
Challenges galore for the Tatas
A few experts believe that government has already convinced Tatas to buy Air India even if it means a losing proposition for them and the group may be compensated for the loss later on in terms of some regulatory or policy support. But that would not be easy given that many opposition leaders are closely watching the sale process. Even ruling BJP’s own powerful MP Subramanian Swamy has expressed his strong objection to selling the “family silver” and has threatened to go to court against it.
Even if Tatas acquire Air India, it may not be easy for the conglomerate to manage the airline. While it already runs two airlines Vistara and Air Asia India with different performance mandates, addition of Air India would bring its own set of challenges.
Tatas are set to have difficult time strategically to deal with three entities. Besides additional investment and cultural issues, they will have to raise productivity, setting new deliverables, improving in-flight services and training the staff. This will not only require fundamental change in attitude, a new breed of people would need to be roped in.
Large investments into Air India at a time travel market faces worst crisis in history would make any sane businessman think twice.