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Who will buy Air India? Five reasons why stake sale may not take off soon

Air India has amassed a debt of Rs 50,000 crore over the years, of which Rs 25,000 crore are on account of aircraft valuation.

business Updated: Jun 08, 2017 10:35 IST
Raj Kumar Ray and Suchetana Ray
An Air India Airlines Boeing 787 dreamliner.
An Air India Airlines Boeing 787 dreamliner.(Reuters photo)

While finance minister Arun Jaitley was bold enough to announce that the government may look at a strategic stake sale in national carrier Air India, the question is who is going to buy the debt-laden airline.

Air India has amassed a debt of Rs 50,000 crore over the years, half of which is on account of buying costly aircraft beyond its means.

Air India, which has fleet size of 114, mostly Boeings and Airbuses, is estimated to have booked operating profit of Rs 300 crore in 2016-17, almost three times the Rs 106 crore recorded in 2015-16.

The government will infuse Rs 1,800 crore from the 2017-18 Union budget, after pumping in close to Rs 24,000 crore between April 2012 and March 2016, from taxpayers’ money.

But it will take ages for the “Maharaja”, which is the mascot of Air India, to make net profits and cleanse its balance sheet.

Here are the five reasons why it will be difficult for the government to go for a possible stake sale in Air India:

1) Restructuring plan fails to cut debt

In 2012, the government approved a Turnaround Plan (TAP) and Financial Restructuring Plan (FRP) for Air India, promising to infuse Rs 30,231 crore till 2021.

The government infused Rs 6,750 crore worth of equity in 2011-12, apart from offering equity for cash deficit support of Rs 4,552 crore till 2017-18, equity for guaranteed aircraft loan of Rs 18,929 crore till 2021.

Yet, Air India’s debt has piled up to nearly Rs 50,000 crore, according to Jaitley. Of the total debt, around Rs 25,000 crore are related to aircraft valuation, he said.

Banks have recently turned down a request to convert close to Rs 9,000 crore of debt into equity.

If a company acquires Air India, it has to repay the debt or face liquidation action from lenders.

2) Not a profitable venture

High debt coupled with expensive operating costs, including for staff, have prevented Air India to book net profit for more than a decade now.

As per provisional figures for 2016-17, the airline is projected an operating profit of Rs 300 crore and net loss Rs 3,643 crore.

Last fiscal, Air India had an operating profit of Rs 105 crore and a net loss after tax of Rs 3,836.77 crore.

According to the civil aviation ministry, Air India’s losses has come down significantly in recent years from Rs 6,865.17 crore in 2010-11, Rs 7,559.74 in 2011-12, Rs 5,490.16 crore in 2012-13, Rs 6,279.60 crore in 2013-14 and Rs 5,859.91 crore in 2014-15.

Air India is trying to shore up revenues through streamlining routes, phasing out of old fleet and consequential reduction in maintenance cost and closure of some overseas offices.

3) Falling market share

Since the entry of private airliners from early 1990s, Air India’s market share has fallen every passing month.

Latest government data show Indigo, which started operations in 2006, dominates the Indian sky with a market share 41.4% as of April 2017.

SpiceJet has cornered 12.9% of the pie in the last 12 years, while Go Air has 8.1%.

Jet Airways has a market share of 15.2% while its low cost arm Jet Lite has 2.4%.

New entrants Vistara now has 3.2% of the market share while Air Asia 3.3%.

4) Competition from road and railways

Over the decades, air travel has become relatively cheaper but the competition from road and rail transporters remains intense.

Air India is offering lower fares to match Rajdhani second and first class fares in select sectors.

Low-cost private players have curtailed Air India’s efforts by lowering their fares to lure customers.

5) Valuation

The government will face problems in justifying the valuation of Air India as and when it opts for a strategic sale.

Interglobe Aviation Ltd, which operates Indigo Airlines and posted a net profit of Rs 1,659 crore in 2016-17, trades at a little less than 1,100 a piece and has a market capitalisation of over Rs 39,000 crore.

Air India will be valued much less considering its market share of about a third of Indigo and carrying a legacy of mammoth debt burden and losses.

However, Air India has property at prime locations across the country.

Whichever one looks at it, the valuation process may raise eyebrows from political parties, audit bodies and lawmakers’ committees in Parliament.