Air India Is Up For Sale Again. Here’s What’s Different This Time
Having failed to draw buyers for India’s most ambitious privatisation effort in 2018, the Modi administration sweetened the terms in its fresh bid to sell debt-laden Air India by easing eligibility criteria and allowing sale and leaseback of aircraft.
The government offers to divest its entire holding in the unprofitable carrier along with its entire interest in its low-cost arm and 50 percent in the ground handling unit, according to a document uploaded on the website of Department of Investment and Public Asset Management. But the biggest change from the last time is that it has lowered the amount of debt a prospective buyer will have to take on. Along with sale and leaseback of planes to generate cash flows, the move is aimed at making the deal palatable.
It comes more than a year after not even a single buyer bid for Air India, the nation’s third-largest carrier by market share, that has nearly $8 billion in debt. Interested investors have to submit their interest by March 17 and EY is the transaction adviser.
WATCH | Aviation Minister Hardeep Singh Puri speak to BloombergQuint on Air India stake sale.
Here’s how the government has changed the terms from the last time:
In 2018, the government had invited bids to sell only 76 percent stake in the national carrier. InterGlobe Aviation Ltd.—which operates India’s largest domestic carrier IndiGo—had then shown interest in buying the government’s entire stake in Air India but later backed out. A joint venture or a joint ownership with the government is at best “a very very difficult proposition and we would not go down that path”, IndiGo co-founder Rakesh Gangwal then said.
To make Air India more lucrative this time, the government has invited bids for its entire stake in Air India, including a 100 percent ownership in overseas budget carrier Air India Express Ltd. and a 50 percent stake in ground handling unit Air India SATS Airport Services Pvt. Ltd.
Lower Debt Transfer
The government has also reduced the fixed debt amount. The buyer will have to take on a fixed debt of Rs 23,286.5 crore along with certain identified current and non-current liabilities that would be equal to current and non-current assets when the deal is closed, the document said. What that means is that the net working capital will be zero.
In 2018, the buyer was supposed to take on a debt worth Rs 33,392 crore.
Sale And Leaseback Allowed
The government will allow the sale and leaseback of 82 aircraft owned by Air India and Air India Express, the document said. This will not only generate cash flow but also give the airline fleet flexibility and could help the buyer to reduce debt.
Buyer Eligibility Criteria Eased
The government has also eased the eligibility criteria for prospective bidders. Earlier, a bidder needed to have a net worth of Rs 5,000 crore. This has now been reduced to Rs 3,500 crore.
The 2018 expression of interest required an interested bidder had to be profitable in at least three years of the previous five years. This condition has been scrapped.
The minimum shareholding requirement, too, has eased. Earlier, the lead member in a consortium needed to own at least 51 percent and the threshold for other members was 20 percent. This has been lowered to 26 percent for the lead member and 10 percent for others.
No Foreign Control Condition Stays
The government said it would follow the existing foreign direct investment rules for Air India divestment. As of now, foreign carriers are allowed to invest up to 49 percent in a carrier. Indian shareholders will hold more than 50 percent in Air India.
Even if the government relaxes FDI norms, the buyer would look to keep Indian shareholding more than 50 percent to avail the bilateral benefits. That’s because to retain bilateral benefits for an airline with overseas operations, it needs to be owned by an Indian national, according to the Substantial Ownership and Effective Control guidelines. Bilateral arrangements are agreed upon between governments of two countries.
What A Buyer Gets
Air India along with Air India Express has increased its market share on international and domestic routes since 2018. As of September 2019, it had a 50.6 percent share on international routes among domestic airlines, and 12.7 percent on domestic routes.
The national carrier, over the last two years, also increased its fleet size, and its primary and secondary network coverage—through codeshare agreements.
A prospective buyer will also get close to Rs 76,000 crore of carried-forward losses and “unabsorbed depreciation”, according to EoI. That may provide “benefit of reduced tax liability going forward”. This was increased from Rs 64,000 crore two years earlier.
Unabsorbed depreciation is what couldn’t be claimed as expenditure in profit and loss account due to lack of income. It can be carried forward for any number of years. The company buying stake in Air India can offset its profits against the unabsorbed depreciation, reducing the tax liability. The benefit will be available as long as Air India stays as a separate entity.
Air India’s losses continued to mount due to higher non-fuel costs even as the airline earned more revenue. Yield, average fare per passenger per kilometre, increased in financial year 2018-19 largely due to shutdown of Jet Airways (India) Ltd.
Air India Express remained profitable even as its profits as lease rentals and employee expenses rose 33 percent and 22 percent year-on-year, in 2018-19.
Profit of the ground handling unit—Air India SATS—also fell in FY19 as its other expenses rose 14 percent year-on-year and interest cost jumped 42 percent.