Air India for sale, no takers for the national carrier?

  • Overview of the segments for the sell-off
  • Shortcomings and challenges of disinvestment


Air India, which is India’s premier airline and is run by the government has been facing a financial and operational crisis for the past several years. The performance-related inefficiencies and a continuous loss-making made the operations unsustainable. While the talks for privatisation were doing the rounds for several years, it was only recently that the Indian government decided to sell its majority stake in the company. The bids were invited from the domestic and international airlines. The government plans to hive off Air India and other sister concerns into four units.

What were the core issues which led the government to arrive at a decision and whether it might still be a good bet to invest or not?

According to a press release from the Indian government, the sale was proposed by hiving off Air India (including domestic and international operations) into four segments as mentioned above.

The key highlights of the planned segments are: 

1. Air India and Air India Express

The core airline business comprising Air India and Air India Express (the low-cost overseas arm) is expected to be offered as a single entity. The airline has a large fleet size consisting of both wide-bodied and narrow-bodied aircraft. This provides a buyer with a large fleet and operations.

Moreover, for an airline to operate and provide its services in another country, it requires a treaty-level agreement with the destination country, this is also known as bilateral air service agreements. These treaties are detailed provisions on traffic rights, number of flights, ownership and control. Air India is ahead of other Indian airlines in this regard. The airline has access to approximately 43 international destinations (excluding code shares and JVs [Joint Ventures] with nearly 14 foreign airlines across multiple destinations globally) and around 70 domestic destinations. Furthermore, the airline has coveted peak hour airport slots across most of the world’s busiest airports. Hence, with the purchase of the stake, all these bilateral routes and agreements between Air India and carriers of other countries will be accessible to the investor and the airport slots will be included. 

The airline also has a huge customer base with an impressive loyalty program and is also a member of the Star Alliance. The airline command a business share of 13.3% in the domestic market (2017) in terms of passengers carried by scheduled domestic airlines.

Additionally, as far as the international market share is concerned out of around 89 international airline carriers operating in India (besides the 5 Indian carriers: Air India, Air India Express, Indigo, Jet Airways and Spice Jet), Air India and Air India Express command close to 16% of the market share (2017).


 2. Air India Engineering Services Limited

In the upcoming 20 years, the Indian companies are projected to buy 2,100 new planes and the Indian Maintenance Repair and Overhaul (MRO) market is projected to be pegged at $5.2 billion by 2036 (Source: IBEF and KPMG), the Air India Engineering Services Limited (AIESL) expect a major growth prospect. The AIESL came into existence in 2013 and has one of the most robust and largest facility for aircraft repair and maintenance in India. It maintains 135 aircraft for Air India and conducts business with the defence sector in India (Air Force and Navy). Its clients include both domestic and international airline companies and firms in the defence sector. AIESL has 6 MRO facilities in India. These facilities can maintain up to 50 wide and narrow body aircraft engines.

 3. Air India Air Transport Services Ltd.

According to the Centre for Asia Pacific Aviation (CAPA), India is currently the 9th largest aviation market in the global aviation industry by seat capacity, the nation is expected to be the 3rd largest by 2025. Air India Air Transport Services Ltd. (AIATSL) is India’s leading ground-handling operator and almost enjoy a monopoly in the country. AIATSL provides airport ground handling services including passenger handling, ramp handling, security handling and cargo handling. It offers ground handling services at 65 airports. In addition, from handling the flights of Air India and its subsidiaries, it also provides ground handling services to 24 foreign schedule airlines, 4 domestic schedule airlines, 3 regional airlines, 16 seasonal charter airlines, 23 foreign airlines availing perishable cargo handling. The ground handling is provided to approx. 119,218 flights.

4. Alliance Air

This is the regional arm of the company (Air India) which currently has 11 aircraft, these operate 196 flights per week across 29 domestic stations. Further, with the new UDAN scheme, an initiative by the government (2017) to make air travel to India’s Tier II and Tier III cities affordable by providing financial stimulus to the airline is an added advantage. The growth in Tier II and Tier III cities is still largely untapped and is projected to witness a strong rise, wherein Alliance Air can also have an initial mover advantage.

Although prima facie, the overall options and the proposal provided by the government were expected to get multiple bids from domestic as well as international players. However, despite the nearing of the deadline for submission of bids (14th May 2018), not even a single corporate entity has officially submitted a bid. Televisory believe that the major problem is an overhang of the high loss-making domestic operations of Air India, the high debt burden of the firm and tight conditions set by the government, especially related to Air India and Air India Express is holding the bidders.

In retrospect, the Air India operations, financials and issues pertaining to the airline are not new and date back to more than a decade when the airline was merged (Indian Airlines was combined with Air India in 2007). The merger was planned and was implemented to enhance the operating performance by utilising the strength of these two operators pertaining to maintenance and ground operations, play on volume with regard to the airline ticketing options and to provide better deal to consumers along with leveraging the pool of resources related to employees, airport infrastructure assets and aircraft amongst others. Significantly, both the airlines were making losses when these were merged. 

The Indian government tried to restructure the company wherein it approved the Turnaround Plan (TAP) and Financial Restructuring Plan (FRP) in April 2012. The government will infuse 302,310 million till 2020-21 to bail out Air India under the plan. However, several inconsistencies, mismanagement, underperformance by the airline in terms of aircraft utilisation, excessive and unproductive workforce, route planning and other factors such as failure to invest in the IT integration and upgradation made this aid inefficient. These internal issues along with Air India’s undertaking to proceed with the order of 111 new aircraft led to a cumulative cost burden of around 700,000 million in total (divided in different years depending on the purchase and delivery structure) and inflicted the debt burden on the company. Additionally, the external factors such as high crude oil prices during 2012-14, entry and expansion of major private players in India and intense competition in the international airline industry weighed down Air India’s smoothening plans. According to the latest reports, the company is weighed down with a debt of over 500,000 million and its market share has fallen almost 29% (2007) to 13.3% (2017) in the domestic market. 

The latest reports published by the Ministry of Civil Aviation cite that Air India generated a revenue of Rs221,777 million (FY 2016-17) and registered a net loss of Rs57,652 million. The EBITDA stood at Rs8,633 million, this is lower than Rs20,960 million (FY 2015-16). The decrease in the EBITDA was mainly due to the increase in fuel cost (as crude oil prices have recorded an upward trend in the past 6 to 8 quarters) and aircraft lease rentals. The increase in the total losses during 2016-17 was contributed mostly due to the outstanding financial costs (includes interest on debentures, aircraft loans and other borrowing costs) of Rs42,359 million. The Ministry of Civil Aviation separately stated that the major reason for the losses incurred by the airline includes; high fuel prices, increased competition from the low-cost airlines, high-interest rate burden plus the weakening of the Indian rupee.

Thus, despite all the shortcomings, the silver lining is the fact that an investor can gain massive operational access, immediately utilise the airline’s wider domestic and international reach as well as collaborations and gain mileage out of its superior backend infrastructure related to ground handling and maintenance operations. Nevertheless, as per the latest reports, Indigo which was interested in the airline’s international operations, particularly the Air India Express has backed out of the bid stating that its interest is solely for Air India’s international operations and not the entire operations inclusive of Air India domestic. Jet Airways too refused to participate in the bid after reviewing the information on the memorandum of the bid, while a few international players which were earlier interested in investing also retreated.

There are multiple reasons that are affecting the bidders besides a huge debt, the 76% stake and its management control. The government plans to sell its (76%) stake in Air India and 100% stake in Air India Express and 50% of the ground handling unit AISATS (Air India SATS) together. The buyer will have to take the majority (~61%) of the Rs540,000 million worth of the debt burden. There are other conditions as well, wherein the buyer would be required to stay invested in the airline for at least three years. The buyer cannot merge the airline with its existing business as long as the government is a stakeholder. The buyer will also have to compulsorily list Air India wherein the terms and period of listing are kept under discussion. The rigid structure of the deal; not to split the domestic and international businesses and a high debt of the airline are few of the major concerns for the bidders as it was in the case of Indigo. There are other grey areas as well like no clear guidelines on handling the large employee strength of Air India which comprises over 20,000 permanent and contractual employees.

Therefore, with all the challenges in the sell-off structure and bid norms, it seems that the government will have to relax the terms and conditions of sale to make it more attractive for buyers. While few days are left for the bidding process to end, one will have to wait and watch whether the government extend the deadline for the investment, add certain conditions to sweeten the deal or there will be a surprise entry of a corporate player to buy the debt-laden ‘Maharaja’.

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