Air India sale saga: will the government get rid of a debt-ailing airline?
Air India, the national carrier of India, was founded by the entrepreneur and chairman of Tata Group, Jehangir Ratanji Dadabhoy Tata as Tata Airlines in 1932. The airline started its operations in 1946 and was nationalized after India’s independence in 1948.
The airline now counts 74 years in the Indian aviation industry. Currently owned by Air India Limited, the government agency created to merge the two main state-owned airlines in the country, Air India has been on sale since 2017. However, its sale is yet to be finalized.
How to get rid of a debt-ailing airline
In 2007, Air India (AI) and Indian Airlines, one of the two state-owned air carriers with a primary focus on domestic routes and some international services to Asia, were merged under Air India Limited. Since then, the company has been unprofitable.
But even prior to the merger, the Indian government attempted to sell off a part of the airline. Back in 2001, the government planned to raise more money through the privatization of AI and had hoped that by getting rid of some state-owned companies, the Indian industrial base would become more efficient and capable to compete on a global scale.
This willingness to privatize AI immediately caught the attention of two bidders at the time, a joint venture between Singapore Airlines (SIA1) (SINGY) and Tata Group, and the UK-based Hinduja business group. The government planned to raise approximately $2.5 billion by offering to bid for a 40% stake in AI and 26% in its domestic counterpart, Indian Airlines. The plan nearly succeeded, and AI could be partly sold to the Singapore Airlines (SIA1) (SINGY)-Tata Group venture. But Singapore Airlines (SIA1) (SINGY) backed out of the deal at the last minute.
It was after this unsuccessful sale attempt that the merger between Air India and Indian Airlines was implemented, and the two companies were rebranded as Air India Limited. The merger continued to be headquartered in Mumbai, India with a fleet consisting of 130 jets. The process was finalized in February 2011 but had already encountered major financial challenges.
In FY11-12, Air India’s loss had already exceeded $1 billion (Rs75 billion). Over the next four years, the company continued to make significant losses. After the FY15-16, the airline’s loss totaled more than $513 million (Rs38.4 billion), the National Institution for Transforming India (NITI Aayog) proposed that the Ministry of Civil Aviation should carry out the divestment of Air India. Then in 2017, 10 years after the merger and when AI was running on a bailout fund of around $3.97 billion (Rs 300 billion), the government gave the go-ahead for a second attempt at selling the airline.
Debt and disagreements
The government opted for the strategic disinvestment of AI and initiated the transfer of management control alongside the sale of 76% equity share capital of the state-owned air carrier. While the previous government attempts to fund the company’s turnaround plan by infusing capital at one time did not provide the required result, the proposal to sell AI should provide much-needed financial stability. Government spending was allocated under an uncertain schedule and each tranche of investment was used to cover salary payments and other overdue expenses, rather than being used to implement turnaround initiatives.
As of March 2018, there were at least free potential bidders, including joint ventures of Tata and Singapore Airlines (SIA1) (SINGY), IndiGo and Qatar as well as a venture between Jet, Air France KLM (AFRAF) and Delta.
The Indian low-cost carrier IndiGO was one of the first bidders, which formally showed interest in buying a stake of AI in 2018. The airline was also attracted to the prospect of obtaining the foreign operations of AI and its subsidiary, AI Express. At the time, AI boasted 44% of the global passenger traffic among the national air carriers, while IndiGO only held 9%. So, the purchase of AI would allow IndiGO to expand its domestic and international services and increase its total market share to 53%.
Another bidder was the joint venture between Tata Group and Singapore Airlines (SIA1) (SINGY), which, in 2001, had already attempted to purchase a stake in AI. Since the proposed sale of AI was announced, it was alleged that Tata Group was informally negotiating its interest and government officials saw a prospect for its subsidiary, Tata Sons joint venture Vistara, to begin operating international flights after the purchase. Meanwhile, Singapore Airlines (SIA1) (SINGY) was under pressure while competing with Emirates, Cathay Pacific and Thai Airways with its major fleet of Airbus A380 jets. Under Emirates’ agreement with Qantas, travelers who were heading to Europe from Australia were able to fly through Emirates Hub in Dubai while skipping Singapore. The acquisition of AI could help Singapore Airlines (SIA1) (SINGY) to redirect the passenger traffic through India for services to the UK, the US and Europe. As a result, the airline could fill its wide-body jet seats and strengthen its position in the foreign markets.
However, the attempt to sell AI failed because the bidders disagreed on the governmental requirement to take over the entire AI debt, which exceeded $10 billion (Rs 50,000 crore) at the time.
A sweetened deal
By 2017, significant bidder interest had waned. So, the government decided to improve its offer by allowing potential purchasers to determine what part of the debt they were willing to acquire as part of the AI capital transaction deal.
In January 2020, the government repeatedly initiated the sale of AI equity. This time the potential bidders were offered to purchase 100% of AI shares with an initial deadline for submitting bids in March 2020. However, due to the ongoing COVID-19 pandemic, the deadline was extended several times and bidding only came to a close in December 2020.
Potential bidders were offered full control of the 4,400 domestic and 1,800 international landing and parking slots at the domestic airports currently served by AI, plus 900 slots at foreign airports. The government also sweetened the deal by proposing full control of Air India's subsidiary, Air India Express, alongside 50% of the AI cargo and ground-handling services.
Multiple entities submitted preliminary proposals for the debt-ailing airline, but the government officially shortened the list and named Tata Group and Ajay Singh, the Chairman of the Indian low-cost carrier, SpiceJet, as the final bidders. Initial submitters included a group of more than 200 Air India employees, led by its Commercial Director, Meenakshi Mali, and the US-based fund Interups (ITUP).
However, on the last day for submissions, ITUP withdrew its bid, arguing that, as per bidding rules, no two interested bidders, either individually or as a member of a consortium, is entitled to take the benefit of the financial strength of the same affiliate for the purpose of participating in the proposed transaction either directly or indirectly.
The 200 Air India employees attempted to purchase the controlling stake (51%) in the airline, while ITUP expected to hold the remaining 49%. While AI employees were not able to cooperate with any private company, they were allowed to create a partnership with a bank or financial institution. But the bidder exited the deal due to undisclosed reasons.
The final official bid came from Tata Sons. Initially, the conglomerate attempted to negotiate with Singapore Airlines (SIA1) (SINGY) through their joint venture, Vistara, offering to rule out a non-compete clause and join the proposed bid for Air India. However, SIA denied taking part in the initial stages of the bid. Then, the company decided to bid through AirAsia India, its joint venture with AirAsia Group, where it holds an 84% stake.
Now, the potential new owners of AI must state the specifics of the airline debt that they plan to assume. They will also be required to arrange upfront payment for the asset.
Meanwhile, the Indian government has postponed the closure of Air India and moved this to the next financial year (2022). Bidders were only given access to the virtual data room (VDR) in January 2021, which suggests that the transaction of shares and the privatization process might be concluded in the new fiscal year.
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