Last month, the government of India announced it would invite bids to sell 76 percent of its stake in Air India, the nation’s wholly government-owned national airline, in an effort to advance its push to privatize loss-making public sector companies. As part of the deal, the government would maintain 24 percent of its share in the company and would absorb a third of Air India’s Rs. 48,781 crore (around $7 billion) outstanding debt. Whatever entity or group of entities wins the bid will win management control of the company, but would also have to take on a burden of debt worth Rs. 33,392 crore (over $5 billion).
Despite the push for privatization, however, the path forward remains uncertain. The government has set an ambitious timeline, stating that it intends to finalize the deal by December 2018. As of writing, no company or group of companies has publicly declared interest in bidding. Rather, a number of companies have already stated that they will not participate in the bidding process, citing the terms of the deal and Air India’s high level of debt.
The government has already extended the deadline for prospective buyers to submit formal bids or “expressions of interest (EoI)” to May 31. The government will then inform qualified interested bidders of next steps by June 15.
Indian Carriers and Conglomerates Pull Out of Bidding
IndiGo, a low-cost domestic carrier and currently India’s largest airline, has ruled out participation in the bidding process. Although the company was one of the first to express interest when the Cabinet approved the sale of Air India 10 months ago, Aditya Ghosh, the president of IndiGo, said the airline’s predominant interest is in buying its international operations and low-cost carrier Air India Express. “However, that option is not available under the government’s current divestiture plans for Air India,” he said, adding, “[W]e do not believe that we have the capability to take on the task of acquiring and successfully turn around all of Air India’s airline operations.”
Jet Airways, another Indian carrier, also announced that it would not participate in the bidding process for the privatization of Air India. Amit Agarwal, the deputy CEO, said, “Considering the terms of offer in the information memorandum and based on our review, we are not participating in the process.” Earlier reports had stated that “a consortium of Jet Airways, Air France-KLM, and Delta Airlines was understood to have expressed interest in the disinvestment of Air India.”
One of India’s largest conglomerates, Tata Group, may also not participate, according to recent reports. Although there has been no definitive public statement from Tata Group yet, a Reuters report cited sources who said Tata is “unlikely to consider a bid for the state-run carrier as the government’s terms are just too onerous.” The report also argued that “a lack of interest from Tata is likely to put pressure on the government to rethink its terms or even the structure of the sale.”
Hurdles Remain for Prospective Buyers
However, despite the lack of participation from Indian companies, foreign airlines, which have previously expressed an interest in acquiring Air India, have not yet ruled out their involvement in the bidding process. Industry sources, including aviation consultant Mark Martin, report that Star Alliance members such as “Lufthansa, Singapore Airlines, Air China, Air Canada, and United Airlines will gain immensely if they were to pick up stake in Air India.” British Airways and Etihad Airways are also expected to be interested in bidding.
However, any foreign company will need to join hands with a local firm before bidding, because government regulations stipulate that control of Air India must remain with an Indian entity. As a result, Etihad has reportedly approached the Reliance Anil Dhirubhai Ambani Group to discuss a partnership. Similarly, private equity firm Warburg Pincus as well as Singapore’s sovereign wealth fund, GIC Private Limited, are also scouting for Indian partners.
Despite their interest in this deal, however, foreign firms still will have to consider the level of debt they would need to absorb. In a note to their clients, Kotak Institutional Equities said that “even if a buyer paid nothing for the equity, Air India still looked expensive versus peers due to its debt and lease obligations alone.” As a result, prospective buyers are unlikely to offer a lucrative price for the “family jewel” of India’s government-owned companies, spelling bad news for the government.
Opposition leaders have already expressed concern over the deal, with West Bengal Chief Minister and Trinamool Congress leader Mamata Banerjee calling for the order to sell the airline to be withdrawn. Indian National Congress leader Ahmed Patel also raised questions about the deal, asking, “Government will sell 76 percent equity but will retain 52 percent of the company’s debt? Isn’t this a complete sell out designed to benefit certain private agents?”
The successful privatization of Air India, in light of all of these complexities and obstacles, would certainly boost Prime Minister Narendra Modi’s image as a reformer, particularly if such a feat is achieved by the December deadline and ahead of the 2019 General Election. However, given the complexities of the deal, and the lack of participation from the likes of IndiGo, Jet Airways, and Tata, concluding such a deal by the end of the year seems impossible.