Air India’s sale hinges on how its gigantic debt is managed

Can Air India get a good offer?
Can Air India get a good offer?
Image: Reuters/Regis Duvignau
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The Narendra Modi government is lining up Air India for privatisation, but there’s a four-letter word that could stall the national carrier’s takeoff: debt.

EY, the firm appointed to advise the government on the transaction, is expected to work out its total debt by February, and the liabilities may be larger than so far estimated.

“The ballpark debt that is being talked about, around Rs52,000 crore (over $8 billion), is last year’s figure. The overall debt is likely to be larger,” a senior government official involved in the disinvestment process told Quartz, requesting anonymity. “They have been given time till February.”

Bureaucrats in the civil aviation and finance ministries are also working around the clock to figure out just how much liability the carrier is saddled with because, unless that number is settled, the government will be unable to move ahead with negotiations.

If Air India’s debt is significantly higher than estimated, the government may also have to alter its strategy and take on a large percentage of the carrier’s financial obligation to ensure it remains an attractive deal. Meanwhile, authorities are working out a reasonable amount of debt that can be sold along with the units.

“It was never the government’s intention that the entire debt would have to be bought anyway. But a reasonable amount has to be packaged to be sold off,” the official said.

Preparing for take-off

Discussions around Air India’s privatisation have been on since Atal Bihari Vajpayee’s National Democratic Alliance years in the early 2000s. The move picked up steam in October, 2016 when the government think tank, NITI Aayog,  identified a list of public sector companies identified for strategic disinvestment.

When Air India does go on the block, it appears the airline will be split into four parts. Air India and Air India Express may be sold as one unit, while its regional arm, ground handling, and engineering operations would be sold separately, minister of state for civil aviation Jayant Sinha said earlier this month during an interview with Bloomberg.

In June, Interglobe Aviation, which manages IndiGo, was the first to formally express interest in buying at least parts of Air India—primarily the domestic airlines and Air India Express. Within six months of the government showing its intent to sell the Maharaja, the Tata group, Ajay Singh-led SpiceJet, and Qatar Airlines are also understood to have thrown their hats in the ring.

There is no clarity on Air India’s exact financial situation. Its total revenue from operations stood at Rs23,638.6 crore, according to the latest annual report for financial year 2016 (pdf). Losses after tax stood at Rs4,310.6 crore. The airline’s total debt (provisional), as of March 2017, stood at Rs48,876 crore, Sinha said in a parliamentary response in July 2017. He added that Air India has received Rs6,000 crore in financial assistance from the government in 2015-16.

There are opposing views on how Air India should be turned around. According to some reports, a parliamentary panel on tourism, transport, and culture initially recommended postponing the stake sale by five years, but subsequently several members sought to withdraw the submitted report.

Debt treatment

However, despite apprehensions, the Modi government seems to be going ahead. EY has been tasked with finding a feasible solution for the airlines’ debt problem. The preparation of the document inviting expressions of interest is already underway, the government official said.

“Distinctions are being made in the outstanding dues—debt backed by assets or not backed by assets. There’s also the aspect of working capital debt,” the official said. “For instance, many leases have been taken on government guarantee, where do you count that? These things are being decided.”

Sinha told Bloomberg that the government is likely to retain most of the airline’s debt linked to non-core assets, while debt owed by the core operations of Air India may be attached to the unit on offer. The unsustainable debt of the airline will be hived off in a special purpose vehicle, Sinha added.

However, the airlines’ debt, accumulated from years of bad business decisions, cannot be wished away so easily, said Probir Sen, chairman of Air India between 1995 and 1998.

“The problems began with the merger of Air India and Indian Airlines in 2007. Till then both airlines were profitable. Thereafter, the situation was exacerbated with the purchase of aircraft (111 bought from Boeing and Airbus) not required, and the arbitrary transfer of routes,” Sen said. “The problem has worsened; it cannot be undone easily.”

Sale itinerary

A ministerial panel led by finance minister Arun Jaitley to oversee Air India’s privatisation will take a final call on the matter, but the official Quartz spoke to indicated that selling the airlines in parts seems to be the most feasible option right now. In a bid to attract a wide gamut of buyers, the Modi government also tweaked investment regulations in January, allowing international airlines to join the action.

“All these policy changes and permutations make it look like a distress sale,” said Mark Martin, CEO of aviation consulting firm Martin Consulting. “Instead, the government would be better off restructuring the airline and listing it on the exchanges at the right time.”

“You (the government) want to de-merge (Air India’s units) individually. This shows that the government is desperate for buyers…and is moving towards a garage sale, which should not be done. You’re devaluing the transaction itself. Air India should be restructured and made profitable,” Martin said. “I firmly believe Air India should be privatised by means of an initial public offering.”

As interested buyers gear up to rule over the Maharaja, the devil will be in the detail—and the debt.