TravelBiz Monitor

View Point

Tuesday, 10 September, 2019, 14 : 54 PM [IST]
Introspect on privatisation of Air India: CAPA

The CAPA (Centre for Aviation) has welcomed the Government of India’s decision to revisit the privatisation of Air India, with the intention to conclude the transaction before the end of the current financial year, FY2020.

The privatisation of Air India is a critical aviation reform in its own right, but importantly, it will also signal a positive intent towards pursuing key structural reforms in the industry. The Government of India’s decision that it no longer wishes to use taxpayer funds to compete with private capital is very welcome.

CAPA has expected that the privatisation process will be fast-tracked. However, if serious bidders are to be attracted, they should be given sufficient time to conduct appropriate due diligence. Assuming that the tender is launched in the month of August, it should be feasible to select the successful bidder by the end of Dec-2019.

The divestment process has the potential to be a distraction for Air India executives. It is critical that the Ministry allows Air India’s senior management to remain focused on optimising the carrier’s commercial, operational and financial performance. A separate team may need to be established to handle divestment-related issues.

CAPA has long maintained that the Indian market can only sustain two full service carriers, and that the operation of three such airlines – Air India, Jet Airways and Vistara – was not sustainable. The suspension of operations by Jet Airways since Apr-2019 has removed the largest full- service competitor to Air India, increasing the chances of a successful divestment this time around. Nevertheless, bidders will be conscious of the possibility – although remote – of the revival of Jet Airways.

At this time, we believe that it is worth revisiting the key success factors that we had released in Oct-2017, as they continue to remain relevant.

Clean-up the balance sheet: The core divestment should consist of the airline operations only, namely Air India, Air India Express and optionally Air India Regional. They should be sold along with aircraft-related debt and reasonable working capital loans.

Special business units: SBUs such as MRO (Air India Engineering), catering (Chefair), ground handling (both Air India Air Transport Services and AISATS) and Centaur Hotels - should be sold off separately to raise capital that can be used to retire debt. Property and other non-core assets should be placed in a separate Special Purpose Vehicle.

Divest 100% of the airline: The government should exit Air India completely. Any level of equity retention will deter investors due to concerns about the prospect of continued government interference post-privatisation.

Allow foreign airlines to participate: Global carriers should be permitted to invest up to 49% as per the FDI norms for the sector. Allowing foreign airlines to participate will increase the number of interested bidders and the valuation.

Permit flexibility on staffing and the brand: The new investors should have reasonable flexibility to take commercial decisions on employee numbers and productivity over time, particularly for non-core roles, ideally by not replacing retirements.

Offer a single integrated network: The domestic and international operations should be offered in one line. Air India is also part of a global system as a result of its membership of Star Alliance. Separation of domestic and international operations will result in reduced interest.

Establish a special task force on continued improvement until handover: A task force should be established to focus on continued improvement in operations, financials and staff motivation until the time of handover.

Ensure reasonable timelines for the tender process: Air India represents a complex opportunity. Prospective bidders will need sufficient time to assess the offer, conduct due diligence and arrive at a valuation, and should not be rushed through this process.

Provide comprehensive disclosures: The data room should include detailed information on Air India’s finances and labour contracts (including any ongoing negotiations) as these are two of the most sensitive issues that will impact interest and valuations.