Air India is finally going to a new owner, here's why

It seems that the government has made up its mind to sell the national carrier this time. The home minister Amit Shah-led group of ministers (GoM) has approved the sale of Air India. The panel approved the expression of interest (EoI) after gauging the interest of potential buyers and reportedly making a significant decision on Air India's debt which stood at Rs 58,351 crore at the end of March 2019.

After transferring a part of this debt - Rs 29,464 crore - to a special purpose vehicle (SPV) Air India Assets Holding Ltd, the panel has reportedly approved to shift more debt of over Rs 10,000 crore to this SPV. That leaves the flag carrier with about Rs 18,500 crore of debt which is an aircraft-related loan.

That's a huge discount. As per the last EoI, the buyer had to take over Rs 33,392 crore of debt and liabilities of AI and Air India Express as part of debt reallocation. Typically, in a sale offer where the debt is backed by an asset, which is aircraft in this case, the response tends to be good. Who would not want to take on debt which has actual underlying value? It all depends on how the new buyer can utilize those planes to extract the maximum value.

The other pain point in the previous disinvestment attempt (last year) was the one-year lock-in period for employees. While it's still unknown that this condition will be included in the upcoming EoI, but experts say that it's the not going to be a big problem for the new buyer. Why?

The national carrier has reduced its workforce significantly over the past few years. The total workforce of Air India and Air India Express (which was put on sale last time) stood at 12,163 in 2017/18 which is nearly half of its staff strength of 22,556 in 2014/15. What's more? The airline's per aircraft staff ratio is one of the best in the sector - even better than its private rivals like IndiGo and SpiceJet.

For instance, Air India and Air India Express had 145 aircraft at the end of 2017/18 - translating into per aircraft staff ratio of 84. The corresponding figures for IndiGo and SpiceJet stood at 114 and 142, respectively. Despite being a PSU, it's a known fact that Air India has highly-trained employees, especially on the operations and engineering sides, which are sought after by the private rivals.

With two major pain points being resolved, who would not want an airline which has lion's share in the international segment, and owns some of the prized slots in domestic and international markets. As per aviation regulator Directorate General of Civil Aviation's (DGCA) data for April-June 2019, the share of Air India in the international segment is about 34 per cent among domestic carriers, and 11.62 per cent among all carriers (international and domestic) flying in and out of India.

After the fall of Jet Airways, Air India is the only full-service domestic carrier serving to long-haul destinations in the US and Europe. Its slots - about 6,200 - in key cities like Delhi, Mumbai, New York, London, Tokyo and Amsterdam are of immense value as they cannot be acquired overnight by other airlines. For example, airlines like IndiGo, Vistara and SpiceJet have applied for slots at the Heathrow airport but have been denied several times.

Also, unlike the previous time when the government had put out 76 per cent stake on sale - a dampener that raised concerns among investors of the constant involvement from bureaucracy in the operations of the airline - the aviation minister Hardeep Singh Puri has already said that 100 per cent stake will be put on the block.

The other big pull factor for a new buyer would be the improving financial condition. Air India is in much better shape now than last year. As per civil aviation ministry estimates, the airline registered 12.92 per cent growth in revenues in eight months to November 2019 over the corresponding period last year. The airline posted operating profits of Rs 177.2 crore during April-November 2019, which is significantly higher than 535.9 crore of operational losses in the corresponding period last year. Its net losses, which the airline has incurred due to huge interest cost, have come down from Rs 5,149 crore to Rs 2,857 crore in the same period. So while Air India continues to be susceptible to volatility in ATF (aviation turbine fuel) prices and geopolitical issues, but that is also the case with all global carriers.

Last month, it was reported that the roadshows conducted in Mumbai, Singapore received a tepid response. But it seems that those involved in the roadshows, including EY advisors and Air India CMD Ashwani Lohani, could understand the pain points, and have tried to address them. All said and done, the government might still not be able to sell Air India before March 2020 - a statement made by finance minister Nirmala Sitharaman last year. But at last, there's a big hope that sale would come to fruition.

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