Lenders must push for a strong promoter; while bidders’ identities are not known, the Tata Group seems a solid bet
As the sale of Air India moves into the last stages with the bids having come in, it is important the transaction goes through without any further load on the country’s lenders. Thanks to the ill-conceived plan to provide regulatory forbearance to the Air India account, banks have lost a lot of money over the years. The airline, which had accumulated losses to the tune of Rs 71,000 crore at the end of March 2020, must move to a strong promoter, capable of taking over the liabilities without further burdening the banks. Given the crores of rupees that have been pumped into the debt-laden carrier—much of it being taxpayer money—the state-owned lenders must not back weak promoters. While identities of all bidders are not known, the Tata Group appears to be best placed to take over the airline. The government recently added a sweetener when the CBDT said buyers of the company would be allowed to carry forward losses—for eight years—and claim a tax rebate of up to 30% annually. This tax-break is important because Air India has reported a loss in every year since 2007-08—when Indian Airlines was merged with it.
The losses are believed to have hit Rs 10,000 crore in FY21, from around Rs 8,000 crore in the previous year and around Rs 8,550 crore in FY19. The government is believed to have accepted a demand from Air India’s employees to bear the losses occurring from the transfers of their savings to the EPFO from trusts—which have incurred significant losses—the inclusion of employees in the central government health scheme and encashment of leave.
The sale should have been completed more than a decade ago, or even earlier, when it was becoming apparent the airline was losing money hand over fist, and would not be able to compete with niftier low-cost carriers. In fact, tentative plans to offer a partial equity stake in Air India surfaced in September 2000, when NDA-1 was in power, and some major global airlines—British Airways and Singapore Airlines—did show interest. However, thereafter, the UPA government failed to follow up. Again, when the privatisation process was initiated in 2017-18—under the watch of the then civil aviation minister Jayant Sinha—the terms for potential buyers were onerous, even unreasonable. To begin with, the government wanted to retain a 24% stake until the IPO, and it was also expecting buyers to take on a significant portion of the debt of roughly Rs 60,000 crore. Worst of all, it expected the buyers to retain a big chunk of the staff for some period. Allowing potential buyers to bid on the basis of the enterprise value, rather than asking them to take on a debt of Rs 23,000 crore is a good idea.
Analysts estimate the debt on AI’s books is around Rs 25,000-30,000 crore. However, it is possible buyers will bid amounts of sub-Rs 20,000 crore. The government must take what it gets even if the price does not meet its expectations. Air India has been a millstone around its neck; holding on to it will be a continuing drain on the exchequer. Air India will turn 90 in October next year. It started out as Tata Airlines, a scheduled mail service in 1932 with JRD Tata flying a DH Puss Moth carrying the postal mail of Imperial Airways from Karachi to Juhu, Mumbai, via Ahmedabad. The house of Tatas would be a befitting place for the carrier to move to on the next leg of its journey.