Air India stake sale. A headache for the Government

The Air India deal was pulled off, after some of the potential bidders decided to back out as they found the terms of sale too challenging. The Government terms were that they would retain 24% of the stake and the winning bidder would have to stay invested in the airline for at least three years. Also as long as government has stake the winning bidder cannot merge the airline with its existing business. The terms also included that the bidder should carry the responsibility of the huge workforce that comes with Air India and also it was required to list Air India.

According to Centre for Asia Pacific Aviation (CAPA) India, continuing under government ownership will lead to the closure of the airline that will affect them at a great cost to economy, employees and taxpayers. Delaying the sale till the next government is elected is like taking a big risk. The government should come with new terms and re-launch the sale as it cannot wait.

Let us have a look why Government cannot afford to delay Air India sale:

Marginalisation on international routes:

Air India’s position on international routes will come under severe pressure that too in an environment where most of the largest foreign carriers are mutually controlled. With an aim to support inbound tourism, Government is expected to control the current bilateral policy settings which will further strengthen the competition. It is also been estimated that in the longer term Air India could be marginalised on international as well as domestic routes.

Air India Express will fall:

The financials of Air India Express are expected to further worsen due to expansion of Low Cost Carrier (LCC). The low-cost subsidiary of Air India who a solid performer will now face competition on regional international routes, as for the first time Vistara, GoAir and AirAsia will be launching their overseas services. The main reason behind the fall of Air India Express is that the expansion of LCCs will be done at the airports where Air India Express had most of its presence.

Losses will rise:

It is expected that the Air India will lose total of $1.5-2 billion over the next two years. These loses will be funded by the government with an addition to the $4 billion of public funds which were used to subsidise the airline. The government needs to keep investing money in the airline and also should be prepared to take bold decisions for long term benefit of the public fund.

Debt Burden will grow:

At present the Air India’s debt stands at Rs 50000 crore and is surviving on the Rs 30000 crore bailout package. It is expected that the carries debt burden will further increase.

It won’t remain global leader:

As Indigo Vistara, GoAir are set to launch overseas services for the first time and also Spicejet planning to take wide bodies on lease, evaluating a new aircraft order, expanding overseas etc. Air India will thus lose its role as the largest international operator. This will further strengthen the competition.

Market share will drop:

Air India will lose its market share which is expected to drop below 10%. India’s carriers are expected to take delivery of unique 120-125 aircraft in the next year and planning to get 500 more over next five years. Air India has planned to introduce nine air craft on lease mostly for replacement and not for expansion. This will affect Air India as they will lose their market share.

The Government will have to make a detail plan to sell its non-core assets and reduce its debts if they want Air India to get a good valuation and good deals. By selling Air India’s assets government would be able to reduce its debts and can be in a position to negotiate with the bidders.