Air India- A tale of horror in the skies

There was once a passionate Industrialist in India who was regarded as the bellwether of India’s Private Sector. Of all the businesses under his conglomerate, he took a particular liking to his Airline business. The private airline business (then called Tata Airlines) was snatched away from this Industrialist so that Airplanes in India can wait on the tarmac for a long time while Minister-Saheb and his relatives arrived. Courtesy -  In a hurry to achieve its dream of a controlled society, the first government of independent India only found it logical to nationalize the industry as a whole, so that the fate of the nation’s economy can comfortably rest in the hands of a select few in New Delhi.

Fast forward 66 years, the same airline today carries a total debt of USD 7.75 bn (₹ 55,000 Cr) and accumulated losses to the tune of another ~$7.5 bn (₹ 53,000 Cr). If the numbers don’t make any sense, then consider this.

The airline’s overall accumulated losses are approximately 1/2 the size of the world’s third largest domestic civil aviation market (India). Without bombarding the post with more numbers, I decided to take my signature dig at the decision. The nationalization of all the Airline companies in 1953 never gave any thrust to the domestic aviation market. Air India + Indian Airlines neither encouraged passengers to travel (what can we expect from a monopoly) nor provided quality services. All they managed to do is thrive on this Monopolistic pleasure prior to 1994 when the aviation market was opened for private carriers (thanks to reforms). Even today, Air India holds few key international routes and certain key landing slots while private carriers have to go through a few ridiculous rules like 5/20 rule (5 years of operational experience and a fleet size of 20) to even fly global.

Traditionally Airline Industry has been famous for its sensitivity across the globe. Many Airline companies shut their shops over the last few decades mainly due to rising crude prices, dynamism in business model, High leverage and cut throat competition. The whole idea of a monopoly in a democracy has been a mis-fit and the epitome of this anomaly has been and will remain Air India. The Airline also turned into an epicenter for VIP culture, with flights commonly delayed for important people, with no due respect for ordinary passengers who paid thousands (INR). Adding to the insult, VIPs and their families got to travel for free just because it’s a National carrier (who cares).

The Result?

The airline saw the rise of another Sarkari (wollow in self-pity) work force headed by bureaucrats. Like every other State run enterprise, the Airline can’t hire and fire, as performance is in no way a benchmark and is the last criteria. Business-sense is alien to it like every other Public Sick Unit. While the global average for airline companies is 121 employees per Aircraft, the now combined entity of Indian Airlines and Air India has been maintaining 256 employees per aircraft.

Common business sense dictates that when the Net Worth of a company gets eroded, there should be a complete divestment of non-core assets or closure of divisions dragging the business down. But NO. Air India received complete tax payer support and the entity itself was run at the mercy of few Netas. No one likes to book a loss on their investment, even an ideal socialist doesn’t like to donate to a cause that yields no positive result. Having said that, common tax payers must delve into what they have been funding and why they have been funding? The answer for this lies with the successive governments which ran the white elephant just so that votes are secured and the government can carry further its socialist tag (stigmatized capitalism). UPA-1 even shelved the idea of privatization (proposed by the then NDA government) of both the entities (AI and IA) and went on a fleet modernization spree so that it can keep the LEFT wing from leaving the ruling coalition.

Adding to the woes, the company has been left at the mercy of Civil Servants with no prior experience to run an airline (even prior experience of running a simple business). Decisions like spending USD 6Bn in late 2000’s to buy a new fleet of 111 A320’s (knowing very well that further Capex will only drive the airline into the ground) and merger of Air India and Indian Airlines only projects the business acumen of these “Babus of India”.

Cash-burn:

Air India started bleeding profusely since 2006 and to top it all, in 2012 the UPA-2 government cleared a bailout package of approximately ~USD 4.2bn (₹ 30,000 cr) over a period of 10 years. As part of this package, the current government continues to spill another round of USD 211 Mn (₹1500 cr) in the coming week out of its USD 340 Mn (₹2,300 Cr) of supplementary grant.

Reason? Lack of political will to divest the enterprise as the cascading effect of any attempt to privatize the airline may influence the poll results directly.

Previous attempts:

The current NDA government made a failed attempt to divest the airline with little thought on how to market the whole deal. They had multiple rounds of discussions with major domestic carriers during early 2018 like Jet Airways (ya right!), Indigo and Tata Group as well. The reasons quoted for declinature by these companies are no-brainers. The government expected these airlines to take substantial amount of debt while Jet and Indigo were only keen on the International routes and the low cost Air India express. But that would mean government swallowed a large chunk of debt with little or no cash churning operations to avoid further bailout.

India’s domestic carriers themselves have been suffering due to fluctuating crude prices and there is an imminent danger of a Private Airline as large as Jet Airways crashing into Bankruptcy courts. In this scenario, there is no resolution in sight and government would also not want to be tagged another UPA in making.

First Positive Step?:

The current government very recently started taking baby steps towards structuring the deal and making it more investor friendly. As a start, the government transferred $4.2 bn debt into a Special Purpose Vehicle which will also have non core assets like The ground handling services, AI Express, the Real Estate assets etc. If this SPV gets sold at a fair price, Air India can expect to wipe-out some amount of debt in its main entity. But would that be enough? Who can dare to touch Air India’s core operations without burning their hands? The answer is foreign airline companies with deep pockets. But we still have a very protective and uncertain regulatory environment that endangers the sector as a whole.

There are quite a few steps that the current government can take in the remaining 3 months of its tenure:

a. Increase FDI in civil aviation to 74% under automatic route,

b. Abolition of few stringent rules like 5/25, so new foreign airline companies can enter India and take up international routes immediately,

c. Sell few prime international routes to hungry domestic airlines which have starved themselves just so that government could keep Air India alive,

d. Sell the profitable (plus few non profitable businesses) of the group, non core assets and real estate assets at a fair value by hiring professional investment bankers (in-order to negotiate and offload as much debt as possible along with healthy assets),

e. Stomach the remaining debt as the government and take a one-time hit,

Government might have survived the Jet fiasco (thanks to Etihad) but the scenario is unlikely to change in the future, but Air India remains a ticking time bomb ready to unleash horror in the skies.

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