Recently, finance minister, Arun Jaitely in a veiled statement raised a question mark over the desirability of the government continuing to run Air India [AI] with a meager 14% share when private sector occupies an overwhelming 86% of the space.
The statement lends credence to a possibility that the recommendation of Niti Aayog for privatization of AI could be taken on board. But, the ministry of civil aviation does not appear to be too enthusiastic about privatization. It has mooted bringing in a ‘strategic’ partner even while retaining majority control. It believes that the government on its own, is capable of turning around if only the airline is unshackled from its huge debt [currently, over Rs 50,000 crores].
Within a few months, the country will know which way things will move. But, it is important to analyze as to what led the Maharaja [as the airlines is known in common parlance] to its present state. That will also help in looking for the right solutions.
At the outset, it is worth taking note of the ‘generic’ factors applicable to any government undertaking – those are generally responsible for its downfall. These are lack of autonomy to the management in taking decisions, constant interference by political establishment not only in policy matters but also day-to-day functioning, load of operating airlines in financially un-viable areas [e.g. north-east, hilly], excessive manpower and inflated overhead cost [for AI, this includes the cost of generous freebies granted to the political class].
In this case however, there was an additional factor that overshadowed all the aforementioned causes. This one relates to a seriously flawed decision by the then political establishment – about a decade ago – to procure 111 aircrafts [for Rs 70,000 crores] which was around 4 times the requirement of only 28. This by itself was bound to give a crippling blow to the financials of the airlines.
When, a company creates a huge liability [aircraft purchases were funded by borrowings from a consortium of banks] with no matching business to put the assets to use, it inevitably leads to an unsustainable situation. The cash generation is bound to be too little vis-à-vis the requirement to amortize the loans. The irony is that then government did nothing to boost utilization of the aircrafts. Far from that, it gave away excessive bilateral seats and profitable routes to foreign/private airlines thereby ensuring that most of these aircrafts sit idle.
The other flawed decision was merger of Indian Airlines with Air India [2007]. Even as there was little to gain by way of synergies [mergers are normally driven by this logic], the vast differences in the work culture/ethos, compensation packages, age profile of employees of the two entities led to operational inefficiencies thereby compounding losses and increasing debt of the combined entity.
The outcome of all this is pathetic as the airlines is saddled with a debt of about Rs 52,000 crores; this includes Rs 20,000 crores due to acquisition of aircrafts and Rs 32,000 crores as working capital loan. This is despite the erstwhile UPA – dispensation sanctioning a bail-out package of Rs 30,000 crores in 2012; of this, about Rs 24,000 crores has already been given [most of it has been used to fund operational losses even as mountain of debt remains intact].
What is the way forward? Broadly, there are three approaches to address the woes of AI viz. (i) continue the status quo but with more ‘efficient’ and ‘transparent’ governance a la Modi – style; (ii) retain majority control [>50%] with government but induct a ‘strategic’ partner [domestic or foreign who is already in airline business] and (iii) shed majority control – either 100% upfront or keeping some residual shares [e.g. on the lines of divestment in Maruti Udyog Limited].
The first is clearly unworkable. Modi’s dictum of ‘minimum government and maximum governance’ may be good administrative reforms and has indeed delivered in terms of efficient services and no corruption. But, this won’t work in the context of a commercial enterprise. The proof of pudding is in eating. Already, three years under his regime, we have not seen any significant improvement except that AI’s losses have come down somewhat.
Second, carries an instinctive appeal as divestment of a good chunk of shares say, 26% to a ‘strategic’ partner will bring in new technologies, innovations and management practices besides help in extinguishing a portion of debt. But, why would he give so much when the government continues to be in driver’s seat? Add to this accountability to and continuous surveillance by statutory bodies such as Comptroller and Auditor General [CAG], Central Vigilance Commissioner [CVC], Central Bureau of Investigation [CBI] etc. All of this is sufficient ammunition to scare him away.
Third, is a good option. While, divesting majority control to a private player, the government may keep some residual shares to keep a tab on how new owner will be driving things [those may be offloaded at an opportune time to fetch a good price]. Being in the driver’s seat and free from surveillance by watchdogs [CAG/CVC/CBI etc], a private player will have strong incentive to buy and the airline will get all that is needed to give it the required boost.
There is a view that government should sell the airline only after it has erased the debt from its books. This is a bad idea. AI has huge assets including land and real estate [most of it in prime locations] and intangibles such as bilateral and landing rights which command huge premium. Besides, one cannot ignore the value of aircrafts. In short, all assets with right valuations should more than pay for the debt plus generate good value for the buyer.
Hopefully, Team Modi will fully leverage inherent strength of the Maharaja while negotiating a deal and not get carried away by numbers on the balance sheet per se.