No one seems interested in buying Air India

  • Both Jet Airways and Indigo have said that they won't be submitting bids for the debt-laden national carrier.
  • The deal comprises the purchase of a 76% stake in Air India and also includes ₹334 billion of the company's debt.
  • If the government doesn't receive any bids by May 14th it will have no choice but to revise the terms of the disinvestment.

The Indian government’s plans to privatise Air India have been dealt a huge setback as both Jet Airways and Indigo have said that they will not be submitting bids for the debt-laden national carrier. It’s been close to a fortnight since the government formally kicked off the disinvestment process by inviting expressions of interest for a 76% stake in Air India, but there is still no sign of a guaranteed bid.

Jet Airways, India’s second-largest domestic airline, was reported to be mulling a joint bid with Air-France KLM and Delta but was likely scared away by the high level of debt it would inherit from the purchase as well as additional deal terms. The company, which is dealing with debt problems of its own, would have been unable to submit an individual bid given its negative net worth.

The Indian government has a number of key conditions for the disinvestment process. First, it will retain a 24% stake in Air India. Second, it will offload around ₹334 billion of the carrier’s debt burden of around ₹488 billion (as of March 2017) to the buyer. Third, in order to be eligible, a prospective buyer needs to have a net worth of ₹50 billion and must have reported a net profit thrice in a row in the last five years. If a domestic airline, doesn’t fulfill these requirements it will have to solicit partners for a joint bid and take a stake of 51% or less. Fourth, a prospective buyer has to submit a combined bid for Air India’s domestic and international businesses, its low cost carrier, Air India Express, and a 50% stake in its airport services unit, Air India SATS. Finally, the buyer will not be able to exit its stake for three years, after which it might have to take Air India public through an IPO- a requirement that hinges on a successful turnaround.

“Considering the terms of offer in the information memorandum and based on our review, we are not participating in the process,” Jet Airways’ deputy CEO, Amit Agarwal, told media outlets.

Similarly, Indigo, India’s largest domestic airline, was said to be preparing a bid with Qatar Airways but the former ruled out a bid last week as the government’s terms of the disinvestment would have required it to bid for Air India’s domestic arm. The airline, which operates seven international routes, was primarily interested in Air India’s international operations as well as Air India Express, but would not have been able to bid for them separately. Indigo’s president Aditya Ghosh cut straight to the point when he said that the company did not have the ability to turn Air India’s fortunes around.

So how grim is Air India’s state of affairs?

In addition to its mounting debt, the national airline hasn’t reported a profit since 2007, when the Congress government ordered it to merge with another state-backed carrier, Indian Airlines. It made a net loss of nearly ₹58 billion in fiscal 2017. After commanding a near monopoly in India’s aviation market, its market share has shrunk to 12% of domestic flights and 17% of international flights. Furthermore, the airline’s employees stage strikes at regular intervals over the non-payment of salaries, the ticket booking service on its website is beset with glitches and its flights are routinely delayed or cancelled. After bailing the airline out to the tune of ₹300 billion in 2012 as part of a failed turnaround effort, it is clear that the government is out of options.

However, the airline isn’t a completely lost cause. It has landing rights and space at a number of major international airports such as London’s Heathrow and New York’s JFK as well as prime spots at India’s domestic airports. It flies to 43 international and 54 domestic locations and operates a fleet of 138 aircrafts, 62% of which it owns outright. Two of its subsidiaries, Air India Express and Air India SATS, are profitable and the deal includes 21.5 acres of hangar space and land at the Delhi and Mumbai airports.

So are there any potential bids on the horizon?

Both Swiss Aviation Consulting, an advisory firm, and Singapore Airlines, which operates Vistara with Tata Sons, are said to be interested in purchasing a stake in Air India, the former on a larger client’s behalf. However, this is just hearsay at this point. Also, foreign bidders could steer away altogether from a purchase given the prospect of government interference and a 49% cap on foreign ownership.

The government has earmarked May 14th as the final date for the submission of expressions of interest. It does not plan to extend this deadline. The names of the qualified bidders will be announced on May 28th. The aviation ministry still has its hopes pinned on a bid from Indigo, although that looks highly unlikely.

If the government receives one bid, or worse, none at all, it will have no choice but to revise the terms of the disinvestment. In all probability, it will offer Air India’s businesses for sale on a piecemeal basis and trim down the level of debt that prospective buyers will inherit.

The disinvestment of Air India is a major step in the Modi administration’s drive to reform and/or privatise the country’s public-sector institutions. The government will do its best to ensure a sale goes through. At this point, any deal is better than none at all.
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