India's government is pushing towards the privatisation of its debt-laden carrier Air India, which is losing market share amid cut-throat domestic competition, analysts say.
Since last year, the government has been looking at selling off a stake in Air India, which has debts of about $8 billion and lost more than 36bn rupees in the financial year to the end of March 2017.
Jayant Sinha, India's minister of state for civil aviation, last month told parliament there were a number of factors weighing on the carrier that had triggered its hefty losses. These are challenges that will not disappear if an investor steps in.
“The major reasons are … high interest burden, an increase in competition especially from low cost carriers, high airport user charges, adverse impact of exchange rate variation due to weakening of the Indian rupee, liberalised bilaterals to foreign carriers leading to excess capacity in the market.”
With several new carriers having launched in India, Air India's market share has fallen to about 13 per cent compared to 35 per cent just over a decade ago. The airline, which has a fleet of 119 aircraft, plus five on order, at an average of 8.1 years according to Planespotters.net, flies to about 70 domestic destinations and 40 international destinations.
The finance minister Arun Jaitley has said that the money spent on Air India could be better spent on areas such as education and healthcare in the country.
Narendra Modi's government believes it simply does not make sense to continue supporting the airline, after the previous Congress-led government approved a ten-year package worth more than $4 billion for the airline in 2012.
Not everyone is happy about the plans for privatisation altogether. Trade unions are widely opposing the plans. There have been reports in the Indian media, citing unnamed sources, that, with a stake sale, the government will look into absorbing some of the 29,000 employees of the carrier into public sector companies and encourage some to opt for voluntary retirement.
"Handling the employees of Air India, will be the most significant challenge for the government in the run-up to the sale," said says Vivek Kaul, an economic commentator at Equitymaster, a financial research and analysis firm based in Mumbai. "In the past, when government-owned airlines have been sold in other parts of the world, the number of employees working for the airline has come down considerably, for the airline to be viable for the firm buying it."
On its part, the government, which is eager to close a deal, is trying to make the airline a more attractive proposition to investors.
To this end, it is planning to split up the company into four parts and sell of at least 51 per cent in each separate entity, according to Bloomberg News. This would involve carving out Air India and low-cost Air India Express from its engineering, ground handling, and regional operations, the newswire reported. Air India declined to comment on the privatisation plan.
But there are a number of factors that could also be key to the successful privatisation of Air India.
Capa India, an aviation research company, in a recent report highlights that “the most important step” would be to clean up the company's balance sheet.
Breaking it up into four separate companies could help this process, so that the capital raised from the other sections could be used to retire debt, according to Capa.
“The government should exit Air India completely,” Capa says. “Any level of equity retention will deter investors due to concerns about the prospect of continued government interference post-privatisation.”
In addition, it warns that the government must provide “comprehensive disclosures” on Air India's finances and labour contracts, and it should give investors the scope to make significant changes – including to the airline's branding if it thinks it is necessary.
“The new investors should have reasonable flexibility to take commercial decisions on employee numbers and productivity over time, particularly for non-core roles. Similarly with retention of the Air India brand, the government should be open to discussions,” Capa said.
Both foreign investors and Indian companies would be welcome to invest in the airline as far as government is concerned. New Delhi this month announced it would allow foreign airlines to buy a stake of up to 49 per cent in Air India, as it eased regulations for several sectors in an effort to attract more foreign direct investment.
Archit Gupta, the chief executive of Atom Aviation Services, says that the government easing of restrictions for foreign investors and splitting the company into four different divisions is a result of the fact that it had not been able to find an investor.
"Since it's a big entity it's not easy to analyse the company's accounts," says Mr Gupta, adding investors will be looking for the right deal.
"It's a good decision to sell.The process could be complete in one year."
So far, the struggling airline has attracted interest from Tata, the Indian conglomerate which has interests in areas ranging from steel to IT, and owns companies including Jaguar Land Rover and Tetley.
Tata already has a strong presence in India's aviation sector, with its joint partnership with Singapore Airlines in the Indian carrier Vistara and with Malaysia's Air Asia in the low-cost carrier Air Asia India. If Tata were to proceed with buying a stake, it would see things coming 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 it was nationalised more than twenty years later.
Indigo, which is a budget carrier in India and the largest airline by market share in the country, has also been studying the opportunity. Singapore Airlines this month said that it was keeping its “options open”.
The potential of India's aviation sector, however, is huge with rising incomes and a growing number of Indians taking to the skies.
"Also, once Air India is privatised, the chances of the government getting out of many other businesses, will go up dramatically," says Mr Kaul.