SCANNER / Is divestment of Air-India and Indian Airlines heading towards a dead-end?

Kandula Subramaniam

After Balco, the Centre seems all set to face the Opposition’s heat over the divestment of Indian Airlines (IA) and Air-India (A-I). This time round, the Opposition has already started making noises that the Centre is not carrying out the divestment process in a transparent manner and is all set to sell the international air carriers for a song. The early warning signal to the Centre has come from one of the most respected Congress party members, former finance minister Manmohan Singh.

The Centre is drawing flak on account of the active and continuous tinkering being done by the civil aviation ministry in both A-I and IA, especially when divestment is around the corner. For A-I, the Tata-Singapore Airlines combine and the Hindujas have already been shortlisted, while in IA’s case, Videocon and the Hindujas have been shortlisted. With the price bids for both these carriers round the corner, any changes in the terms of purchase of additional aircraft, leasing of aircraft or even of bilateral and code-sharing arrangements is likely to have some impact on the valuation of the airlines. If one were to add to this the content of the proposal that the government has sent forward to the bidders on government control in the airlines, the balance would shift towards an adverse valuation.

Take, for instance, the ministry’s announcement to induct 10 aircraft on dry lease, which include six 50-seater aircraft, four Airbus A-320s to the fleet of IA as well as its proposal for a VRS (voluntary retirement scheme) package for 1,000 IA employees to be financed through debt.

There is no denying that IA is heavily staffed, with close to 23,000 employees including 15,000 non-technical staff. However, if one were to guess what the VRS package could be like, consider this: the lowest-paid employee draws more than Rs 70,000 per year while the highest-paid draws over Rs 5 lakh per month. No wonder, with a stagnant fleet size and very few employees having left the company, the employees per aircraft ratio of 300 ranks among the highest in the world. In fact, according to sources, IA is guilty of re-employing workforce who had quit to join private airlines but came back as they had to work! Some of these employees were actually being paid 30 per cent less than what they were earning in the private airlines. The VRS package, which comes to around Rs 30-70 crore (or on an average Rs 3-7 lakh per employee), once approved by the government, would set a benchmark for the future after the new management takes over. And, if this is not all, under the terms, the new management is not allowed to retrench the already over-manned airlines.

There are two ways of improving the employee-aircraft ratio. One is through VRS and cutting down staff. The other is to increase the fleet size. Any new management is likely to combine both. With the civil aviation ministry having committed to adding aircraft on lease, the new management would lose the bargaining power of getting a better deal as in any case it would have to buy new aircraft. If the government goes in for dry lease, the new management would have to commit itself to a rental of about $2 million per year, which can be lower if a better deal is struck or if more aircraft are bought or leased.

The fear of taking over an ailing airline with these additional strings attached have prompted suggestions that the government should not only bring its stake down to below 50 per cent before the divestment so that IA is taken out of the purview of PSE (public sector enterprise) control but also that this equity should be parked in FIs (financial institutions) which are not controlled by the government or foreign banks. Failing which, this aspect could turn out to be a deal-breaker!

If one looks at A-I, the problems are similar but more pronounced and complicated because of the excessive bilateral agreements that the ministry has signed, with over 60 per cent still unutilised.

Bilaterals are negotiated between two nations which exchange rights that are to be used by the nominated airlines. However, if an airline is unable to utilise its entitlement, it can allow another airline from the same country or a foreign carrier to do so in what is called a code-sharing arrangement. The problem that A-I faces in the divestment process is not the number of bilaterals but the code-sharing. With a fleet of 25 aircraft and the world’s highest employee-to-aircraft ratio of 700, A-I simply does not have the aircraft or the money to acquire new aircraft to operate on new routes acquired through the bilaterals. So what better way to use these bilateral agreements, which would otherwise go unutilised, to earn money through code-sharing agreements with foreign airlines.

Civil aviation minister Sharad Yadav recently said that A-I was not in a position to fly too many destinations because of shortage of planes. He said the ministry was encouraging the airline to enter into code-sharing and seat-sharing arrangements with other airlines that are generating funds. Mr Yadav went on to add that when a new partner comes in, they will find a ready structure to start operations as bilateral air services agreements are signed on a reciprocal basis.

But this is precisely where the problem lies. Over the years, A-I has shown a drastic decline in market share and an alarming shrinkage of network. It has withdrawn from Canada, South Africa, Israel, Australia, Switzerland, Holland, Germany, Italy and London and even Manchester—which have been some of the key money spinners for it in the past. A-I is slowly going out of the mindspace of travellers, which, according to aviation experts, reflects a lack of clear vision. The new management will, therefore, inherit this legacy. Plenty of bilaterals given out on code-sharing basis would leave the new management with no lucrative routes to operate on.

It can always be argued that code-sharing arrangements are for a limited period and could be re-negotiated. But is the information on code-sharing being shared openly? Or, for that matter, is the government being forthright in giving out all the information on both the airlines? Even if the code-sharing arrangement is for a time period, what does the new management do in the mean time? And even if the new management wants to re-negotiate the agreement, it would have to do so with a party which would already have the upper hand.

All these aspects will have an impact on the future cash flow of the new management and could alter the plans of the bidders. It is no surprise, therefore, that bidders for both IA and A-I have indicated that the government should not make any changes in these assets as this could have an impact on the valuation of the companies. Whether the impact is adverse or favourable will be known only after the bids are announced. But is the Centre willing to take such a big risk?