Air India, the flag carrier of the country and its largest international airline, is facing headwinds when it comes to attracting buyers, as the Indian government seeks bidders for the troubled company during the most challenging period in history for the global aviation sector, analysts say.
Debt-laden Air India had been facing difficulties for several years amid fierce competition in the country's aviation industry. The burden of the airline to the treasury prompted the government to decide to sell off the airline, but an earlier attempt to sell a majority stake in 2018 failed to attract a single bidder. In January, the government announced it would sweeten the deal by offering a 100 per cent stake in the carrier and cut its debt burden.
A March deadline was originally set for bidders to express interest, which has now been extended until the end of August. But the pandemic, which has pushed several airlines globally towards bankruptcy and has brought most international flights to a halt in India, makes the sale a much more difficult task. The deadline also approaches after the crash of an Air India Express plane this month, which skidded off the runway amid bad weather at Kozhikode International Airport in Kerala, as it repatriated Indians from Dubai. The crash killed 18 people on board. Air India Express is a subsidiary of Air India.
Analysts say the pandemic remains the biggest deterrent for investors, though.
"All airlines have been badly impacted financially," says Jitender Bhargava, a former executive director of Air India and author of a book titled The Descent of Air India. "There could have been more interest if the market conditions were not bad because of the pandemic."
Speaking at a press conference in July, India's aviation minister Hardeep Singh Puri said the government does not “have a choice” other than privatisation of the national carrier.
“It will be done with a view to making Air India ... more efficient, most cost-effective,” he said.
The carrier's net loss in the financial year to March 2019 has been estimated at more than 85 billion rupees ($1.13bn/Dh4.17bn) by the aviation ministry.
So far, Indian conglomerate Tata Sons is the only known party to have reportedly shown serious interest in bidding for the airline. Tata has a strong presence in India's aviation sector and a joint partnership with Singapore Airlines in the Indian carrier Vistara and with Malaysia's Air Asia in the low-cost carrier Air Asia India. Tata and Air India did not respond to requests for comment.
Given the circumstances, aviation analysts say the lack of interest in unsurprising.
The International Air Transport Association (Iata) at the end of July said that a recovery in global air passenger traffic will take longer than expected, forecasting that air travel will not return to pre-Covid-19 levels until 2024.
In India, commercial air flights are still largely restricted to repatriation flights in a bid to curb the spread of the coronavirus – although India has opened “air bubbles” to allow some passenger flights to and from countries including the UAE, UK and Germany.
With the industry currently struggling to generate business because of restrictions and lower consumer confidence, Mr Bhargava said many investors will be reluctant to take on Air India, despite some attractive benefits – including coveted landing slots.
Air India has 127 aircraft and as of December 2019, flew to more than 100 domestic and international destinations.
“Air India may not be primed for an all-out acquisition at this time, especially because of the Covid-19 impact,” says Samudra Sarangi, a partner at Panag & Babu Law Offices. “Considering the impact to the aviation industry because of Covid-19 in general, the potential bidders may also be suffering liquidity constraints. Therefore, even if there was a bid, it may not be the as high as one should ideally expect for an entity with the assets of Air India.”
Indian airlines will lose $3bn to $4bn (Dh11bn-Dh14.7bn) in the current financial year to the end of March 2021, according to the Capa Centre for Aviation consultancy.
“This would be by far the largest loss in Indian aviation history,” Capa said, warning that “market exits are inevitable” and “strategic consolidation may result in India being a two-to-three airline” nation.
Any buyer would have to turn around Air India's already weak financial position in a tough operating environment, with buyers expected to take on about $3bn of the airline's debt. In recent years, the airline has been losing both money and market share as fierce competition with budget carriers such as IndiGo triggered price wars in the sector.
A weaker rupee and high taxes have only added to airlines' woes. All of these factors contributed to India's Jet Airways ceasing operations last year as it went bankrupt. Air India, which is also a full-service carrier competing with budget airlines, has struggled in these conditions.
Data from India's Directorate General of Civil Aviation reveals that Air India's market share in the domestic air passenger market in the financial year from April 2018 to March 2019 fell to 11 per cent, compared to 16.9 per cent four years earlier.
“There are systemic weaknesses in the airline,” says Mr Bhargava, explaining that other airlines in India have been able to expand their fleets at a faster pace, while Air India has been saddled with debt and government attempts to privatise the carrier have limited scope for expansion. He says privatising the airline would help to improve its efficiency and financial performance.
The Indian government has attempted to make Air India more attractive to investors by absorbing a large part of the airline's debt for the current bidding process. A buyer would have to absorb 230bn rupees ($3.07bn) of Air India's debt, but the government would write a much bigger portion off. The carrier's total debt stood at more than $8bn as of March 31, 2019. The government has also said it will allow non-resident Indians to buy 100 per cent of the airline. Foreign investors can only hold up to 49 per cent, though.
Experts say it is difficult for the government to continue spending taxpayers' money on keeping the flag carrier afloat – particularly given that there are other priority areas to address.
“The financial position of the airline is very weak,” says Niraj Bora, the founder of Surmount Business Advisers, based in Mumbai. “The government can support it as long as it wants, but I think it’s not in the country’s interest to spend tens of millions of rupees to keep it [afloat]. Rather, privatise it and use that money for healthcare and other priorities. Post-Covid, the value of airlines have again dropped and it can take a while to get [a] good price. But the earlier it’s done, the better.”
Mr Sarangi at Panag & Babu says the fact that Jet Airways did not successfully manage to attract an investor last year does not bode well for Air India.
There are other possible hurdles to a sale, he adds, such as Air India's unions that have already protested against a possible privatisation.
“When you're dealing with a public sector undertaking, a lot of variables come in,” Mr Sarangi says.
If Tata were to proceed with a purchase, things could move full circle. Air India was in fact founded by JRD Tata, the group's former chairman, in the 1930s when it was known as Tata Airlines before nationalisation more than 20 years later.
Looking at the longer term horizon, there could be benefits for a buyer that has the capability to sit tight and navigate the airline through the crisis.
“They get a a readymade international airline on a platter,” says Mr Bhargava. “It's a very good buy as far as the international aspect of the market is concerned.”
A bid from the likes of Tata could be exactly what Air India needs.
“This way, Air India will have a future,” he says.
