An aircraft operated by Air India Ltd. taxis at an airport in Mexico City, Mexico (Photographer: Susana Gonzalez/Bloomberg)

Air India Needs A Plan B: Downsizing

Within two weeks of releasing an expression of interest for Air India, the most likely suitors for buying the sinking airline have already begun backing off.

Other suitors, mostly from overseas, may come but will most likely turn back because of the fracas the privatisation process is turning into.

To recap, the deal is as follows: The government wants to sell 76 percent in Air India, along with 100 percent in low-cost international carrier Air India Express and 50 percent in Air India SATS Airport Services, a joint venture. It does not want to sell individual operations of the company.

Domestic airlines IndiGo, Jet Airways and the Tata Group have all begged off the deal. And SpiceJet’s Ajay Singh said his airline is too small to bid for Air India.

There could be many reasons the potential suitors are shying away. Foremost is financial.

Air-India is sitting on debt of Rs 48,447 crore and accumulated losses of Rs 46,256 crore.

Even in the last recorded six months up to December 2017, Air India bled another Rs 4,599 crore.

But the government wants potential buyers to absorb two-thirds of the debt. This might change but whichever way a deal is structured, it cannot be wished away. And any haircut will lead to howls of protest.

Which in some ways is now the larger issue.

The headwinds on this deal are increasing on a near-daily basis. Many of the 18,000 employees have quite predictably begun protesting the privatisation. Reports say the airline’s 11 (yes 11) unions have begun to stir and are now even using social media to air their opposition.

The politicians (Congress and Trinamool) have jumped into the fray as well.

Some of them are asking if we would be okay with a British Airways (of the British Empire) running an Air India today and what that would mean to those who fought for freedom against the British.

Another politician, Subramanian Swamy, a Member of Parliament belonging to the ruling Bharatiya Janata Party has said he would oppose the deal because selling Air India would be like selling family silver, a term used often in the context of a potential divestment or sale of any state-owned asset.

Therein lies the further rub.

If you look at the history of privatisation in India, deals often get heavily politicised, face stiff internal resistance and get delayed.

Also Read: Air India Should Only Be Run By An Indian Firm, Says RSS Chief

Arun Shourie, then India’s minister of disinvestment,  is seen during a panel discussion at the World Economic Forum in Davos, Switzerland, January 24, 2004. (Photographer: Axel Seidemann/Bloomberg News)
Arun Shourie, then India’s minister of disinvestment, is seen during a panel discussion at the World Economic Forum in Davos, Switzerland, January 24, 2004. (Photographer: Axel Seidemann/Bloomberg News)

Also Read: Daring Gamble to Sell Air India Hits Turbulence

Moreover, a deal done with the best of intentions will still attract legal and a maze of other complications later on, as it happened when the government sold Mumbai’s Centaur Hotel, incidentally a part of Air India.

Some entrepreneurs, like Anil Agarwal—founder of Sterlite Industries (now Vedanta Resources)—which bought Bharat Alumunium (Balco) in 2001 succeeded in the process despite the protests. He also had the vigour to take on subsequent criticism and defend his point of view, which also meant defending the government of the day.

But neither Centaur or Balco among other public sector organisations that were divested in the early 2000s were hemorrhaging on the operating table the way Air-India is. And this must stop or slow down drastically.

It’s as much about existing taxpayers as it is about potential buyers.

The government thus needs a Plan B. Which means looking at the organisation as a substantially downsized concern and not a going concern. That is the only way a serious suitor will return to the table.

Equally, it needs a chief financial officer rather than a chief executive officer to take charge at this point. Because no amount of strategy or direction can save the airline from the quagmire it has sunk into.

In any case, its CEOs, bureaucrats who are unqualified to run an entity like an airline, have been rotated at such jet speeds that their existence is not even considered of ceremonial importance.

The good news is that Air India does have assets too.

Air India and Air India Express have 2,798 international slots, including to the United Kingdom, the United States and the Far East, and bilateral rights for 970,389 seats with various countries.

Of the Rs 49,000 crore plus of debt, some Rs 17,360 crore is for loans taken to buy aircraft. Air India and Air India Express have a fleet of around 150 aircraft including 48 wide-bodied aircraft like the Boeing 777 and the 787 Dreamliner.

Also Read: What Air India’s Potential Buyer Will (And Won’t) Get

Planes fly past a Boeing Co. 787 Dreamliner aircraft, operated by Air India. (Photographer: Dhiraj Singh/Bloomberg)
Planes fly past a Boeing Co. 787 Dreamliner aircraft, operated by Air India. (Photographer: Dhiraj Singh/Bloomberg)

Also Read: This Is What A Buyer Will Have To Pay For Air India

The CFO’s options could broadly be as follows:

1. Assets that can be sold right now: These include everything from land and buildings to paintings hanging on the walls of some of the offices. The land and buildings, in any case, would not have been part of the privatisation process.

Essentially, hold only the assets that people really want to buy which are the landing rights, bilaterals, and seats.

2. People: 40 percent of the 18,000 staffers are supposed to retire in 5 years. How can this be accelerated and mixed with a swap operation to bring in more contract labour, as airlines like IndiGo have done? Remember, IndiGo has a little over 12,000 employees with 162 aircraft while Jet has around 16,000 employees with 120 aircraft. Putting a ratio might not be accurate since the aircraft configurations vary.

3. Cease any new services: For example, a Delhi-Tel Aviv non-stop service flying over Saudi Arabia is a diplomatic coup for India but surely adds to the airline’s logistical load. Even if the standalone service makes money.

Similarly, time to start relooking at the roster of daily services and start cutting back and hold only the most profitable routes.

4. Tough talk with employees: In another era, Aviation Minister Ghulam Nabi Azad read the riot act to striking Air India employees when unionism in the airline had hit one its many peaks. The current aviation minister needs to do the same. And explain that this is a no-go now. A more generous voluntary retirement scheme might be called for, but the airline needs to set a target of cutting manpower faster.

Employees of what was then Indian Airlines march past the domestic terminal at Indira Gandhi International Airport in New Delhi, India, on  June 13, 2007. (Photographer: Adam Ferguson/Bloomberg News)
Employees of what was then Indian Airlines march past the domestic terminal at Indira Gandhi International Airport in New Delhi, India, on  June 13, 2007. (Photographer: Adam Ferguson/Bloomberg News)

Also Read: Air India Finally Has a Chance to Lose the Baggage

Finance Minister Arun Jaitley remarked last year that if 86 percent of the country’s aviation was being served by the private sector, then surely it could serve 100 percent of the market. “Why should you put Rs 50,000 crore of your money into running Air India. Government money means your money. It can be used for education,” he famously remarked in May last year.

It’s time Air India’s recalcitrant unions and staffers were educated of the national drain their organisation has become.

Govindraj Ethiraj is the Founder of IndiaSpend and Boom News.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

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