By Satyendra Pandey

The year 2019 saw repeated proclamations on Air India disinvestment. Statements were made on the quality of the asset and that there would be several parties interested in acquiring the airline. The message seems to have changed now, failing privatisation a shutdown of the airline is inevitable.

Ironically, Air India is positioned in fastest growing aviation market globally and has a well-defined traffic niche. With a 13% domestic marketshare and a 19% international marketshare, it has a valuable slot and traffic rights portfolio along with an institutional expertise which it has gained over decades. Add to that membership in the Star Alliance. Yet, it has failed to leverage these advantages and has reached a stage where a turnaround simply cannot be effected.

Alarm bells should have been sounded after the failure to attract bidders in the first round. This did not happen. Rather there were new route announcements and arguments that “buyers must see beyond the balance sheet.” The debt restructuring also did not quite help. While debt has indeed been halved by moving the balance to a special purpose vehicle (SPV) it is far too large to attract potential buyers. Add to this the contingent liabilities and the parties lined up to file Public Interest Litigations (PILs) will most certainly delay the integration or rationalisation of the asset.

While analysing past mistakes and fixing accountability is certainly warranted, it does nothing for investors. Because financial investors look for future claims on cash-flow while strategic investors will look for control. In the present scenario, neither is available.

As expected, investor interest has been muted and, thus, the process of attracting bids is being done all over again with no clear strategy or back-up plans in case privatisation does not go through. This while the fleet still has aircraft sitting idle for want of parts; where cash-losses are increasing; and where the overall morale continues to be low.

A standalone restructuring at this time has become unviable. Because it will consume cash. To give an idea of just how much, balance sheet restructuring at this point will require anywhere between Rs 10,000 to Rs 14,000 crore, annually. This does not include the additional investment in fleet, product and network estimated conservatively at about Rs 700 crore. Alongside this investment, to compete, Air India will further need to cut its costs by Rs 10,000 crore annually.

And if the numbers weren’t challenging enough, the airline requires motivation, management and cessation of control which has simply not happened. In terms of optics, a restructuring at this point will essentially indicate that the government has failed to privatise the entity. Going by the political atmosphere it will be yet another point that is taken up and amplified ten-fold. Which also begs the question, why such announcements are being made in the first place?

If one adheres to the narrative that failing privatisation the only other option is to shut down Air India, a restructuring does not seem to be on the cards. It does not help that there is a slowdown in growth. Consumption is on the decline, the rupee has depreciated at a compound annual rate of 5% over the last decade and the government is staring at a gross fiscal deficit as tax revenues are unable to cover planned expenditures. Against this backdrop, Air India continues to bleed with the the civil aviation minister himself indicating that losses are in the range of Rs 20-26 crore a day.

A once prized asset sees itself at crossroads. It is calling out for white-knight investor with access to large amounts of patient capital and the wherewithal to swallow an acquisition of this size and complexity. An investor that balances political and social expectations with financial feasibility. Failing that a shutdown of Air India is indeed inevitable.

Former head of strategy at GoAir. Views are personal.

Source: Financial Express

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