21 November, 2018

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India’s Failed Bid To Disinvest Air India; Lessons For Owners Of SriLankan Airlines 

By Rajeewa Jayaweera

Rajeewa Jayaweera

It is no secret, state-owned airlines in Bangladesh, India, Nepal, Pakistan and Sri Lanka, Biman Bangladesh Airlines, Air India, Nepal Airlines, Pakistan International Airlines and SriLankan Airlines are all loss-making airlines and an unbearable burden to the national treasuries of the respective countries. Nevertheless, governments and average citizens in the said countries continue to insist in carrying on with the now outdated and meaningless ‘National / Flag Carrier’ concept. 

The government in India (GoI), in an unprecedented move, in March, decided on strategic disinvestment of Air India (AI) by transfer of management control and sale of a 76% stake of its equity in the carrier’s share capital. A global invitation for Expression of Interest (EoI) was uploaded in government’s websites. Earnest and Young were appointed transaction advisor to the government for disinvestment process. It was decided, an open competitive bidding process was to be adopted for the privatization process.

AI and its subsidiaries currently operate 156 Boeing and Airbus aircraft to 94 domestic and international destinations including New York, London, Paris, and Tokyo. It also has eight grounded aircraft.

Politicians and government servants enjoy free and rebated travel with the carrier. Many routes operated for political rather than commercial reasons are unprofitable. 

The airline’s books carry a brought forward loss of USD 8 billion. The Indian government had hoped to pass USD 5 billion thereof to the prospective investor.

The decision also included disinvestment of 50 percent of its stake in Air India Sats Airport Services.

Despite initial interest shown by several foreign and local carriers, no firm EoI was received resulting in GoI extending the deadline till May 31, 2018. The result was no different.

A report filed by Bloomberg/Delhi stated, according to Economic Affairs Secretary Subhash Chandra Garg of the Ministry of Finance, the Modi administration is ready to ‘re-examine’ the entire process including the clause requiring a minority share for GoI in the airline. “There’s no fixed objective that government should have 24%. It can be re-examined.”

Garg has further stated, the government stake considered by policymakers as a “confidence-building exercise” has been cited as one of the reasons for the lack of bids. 

The desperate need to privatize AI seems to have evaporated in less than four months. Civil Aviation Minister Suresh Prabhu, on Tuesday, stated privatization will be revisited at a later date as “now was not the right time.” A successful sale of AI could have been used to its advantage by the ruling BJP government in the forthcoming parliamentary elections in 2019. On the other hand, lowering the sale priced due to lack of bidders would expose the Modi government to accusations of disposing of a national asset cheaply. Retrenchment of staff in such a scenario would have further aggravated matters for the governing party.

Celebi, a Turkish Ground Handling firm, while expressing interest in the Indian national carrier’s airport handling subsidiary Air India Air Transport Services Limited (AIATSL) has stated, the bid value of Air India will fall if the government asks buyers to keep the airline’s employees on the payroll. “If they (the government) are asking maximum price (for Air India), but asking us to keep the old personnel, then it will not match. The value of the bid will be lowered. Not just keeping the personnel, but also their indemnity is an issue,” Celebi’s Board member Cana Celebioglu said in a media interaction recently.

According to Sydney based Centre for Aviation (CAPA), the state stake issue has also left open the “prospect of political interference on strategic and day-to-day matters.”

Unless privatized, AI will continue its uncontrolled hemorrhage. The estimated cost to the Indian Treasury in such an eventuality amounts to USD 2 billion over next two years. 

Meanwhile, AI is urgently seeking short-term borrowings of USD 150 million to meet day to day expenses and pay salaries.   

GoI’s failure to attract an investor for its much larger national carrier comes shortly after GoSL’s inability to attract an investor for its relatively small national carrier, SriLankan Airlines (UL).

GoSL that assumed office in January 2015 called for EoIs in July 2016 after making a feeble, half-hearted attempt at restructuring the airline in preparation for privatization which only resulted in delaying the process. It had hoped to finalize the process by year-end. 

A 49% stake was on offer while GoSL was to retain 51%, a reason sufficient to keep away prospective bidders. 

The airline’s owner failed to clarify its position on the carried forward losses of almost USD 1 billion. No efforts were made in reducing the nearly 7,000 staff in the carrier’s payroll. 

Meanwhile, media was awash with reports of Airport Handling, an invaluable revenue stream of the airline was to be parceled out to Airport Operator AASL. 

Such were the follies committed during the run-up for the search of an investor for SriLankan Airlines.        

The caliber of responders was less than satisfactory. U.S. private equity firm TPG, Sri Lanka-based Peace Air and a Maldivian company were shortlisted. TPG tasked Dublin based professional services firm and global management consultants Accenture to carry out a Due Diligence of the airline but abandoned the exercise after a short time. TPG informed, “allocating the human and financial resources to make the airline profitable will not realize sufficient returns, compared to the many other investment opportunities that are available in the region.”

The failure of both governments in Sri Lanka and India to disinvest their respective national carriers is a clear signal, what is on offer is insufficient to attract serious investors. Other factors keeping investors away may be; equity participation by the state even as a minority shareholder as investors are wary of state actors; Clarity in carried forward debts; Reluctance to invest in overstaffed airlines with militant trade unions used to having their way with owners more concerned of electoral gains than commercial viability of the airline. 

Parceling off UL’s revenue streams such as airport handling operations, catering, and engineering, as mooted by some pundits is a non-starter. Given its small size, disposal would have to be on all or nothing basis. 

AI on the other hand has a massive structure and bidders are desirous of investing in parts of the carrier such as overseas operations, and its ground handling subsidiary, which is not acceptable to GoI. It would be prudent to negotiate on all or nothing basis to avoid being left with untenable subsidiaries.  

The bottom line is, investors have choices and will seek opportunities to realize sufficient returns for their investment. Their decisions are solely dependent on a satisfactory ROI, unhindered by state interference and other local irritants.

The choice for owners of AI, UL and similar loss-making carriers is abundantly clear. 

These airlines have been loss-making ventures for decades with little or no possibility of turning them around. Owners need to make disinvestment packages attractive and investor friendly, the light at the end of the tunnel being the end of massive state subsidies. 

The alternative would be to continue the airlines with the state subsidizing regular losses with billions/millions of dollars, funds better spent on development work.

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Latest comments

  • 3
    2

    The Bangladesh airline Biman is running at a profit and not making losses, please check your sources

    • 2
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      Concerned citizen
      *
      You are right from a narrow perspective. Bangladesh Biman (BG) has declared profits of BDT 3.24 billion in 2014-15, BDT 2.35 billion in 2015-16 and BDT 470 million in 2016/17.
      *
      BG commenced operations on February 4, 1972, broke even in 1977–78 and made a profit the following year for the first time in 1978/79. Thereafter, it was downhill.
      *
      BG was made a PLC in 2007 by then Caretaker Govt. At the time, man to plane ratio was 367 to each plane. It continued to make losses. 2010 BDT 8.3 billion (USD 120 mil) and 2011 BT 7 billion (USD 100 million). As of December 2013, BG owed BDT 15.60 billion to different sources including BDT 3.6 billion to Civil Aviation and BDT 8.50 billion to fuel supplier Padma Oil Company
      *
      Profitability trend commenced shortly after first foreign CEO took over the reins. Kevin John Steele (a Brit and first foreign EO) was MD/CEO in 2013 for one year followed by another Brit Kyle Haywood from 2015 who resigned in 2016. These are early days. BG’s has a history of 36 years of losses and four years of profit, albeit a diminishing trend.
      *
      SriLankan too made profits during some years of Emirates management, thanks to some innovating financial reporting.

  • 2
    1

    Mr. Jayaweera. YOu selelcted anothe rvery corrupt country for comparision. but, India occasionally had good politicians though who were truely nationalsit and Indian Railway is one such. there are so many better examples. Why di dnot you take the sameple EMirate AIR LINES making Srilankan air line profitable evenwith ONLY 40% stake for them. HOw do you explain it.
    It looks you have got money from some one in the Ari line. Otherwise how can One justify the one who eposed the corruption in ASL now is saying the best option is run it as a money losing air line with the subsidies from the govt.
    why don’t you think the govt is very incompetatn business wise. Inthis case Ranil wickramasinghe. He di dnot correct any wrong doings by the previous govt I heard they are still payin gthe salaries of some people via contract firm in Singapore. that is gotabaya Rajapakse’s friends hired to it. Then the lease contracts had not been handled. this is what I read in papers. Then the 7000 employees all UNPO card holders. Then the incompetant management. Salaries are the most important. IF you do not cut in the salaries department, they never win. Sri lanka is extremely politicized. So, nothing happens until the elections are over. Even after that, Rajapkses may send their people or Trade unions have to go and talk to them. It is same theft over and over again.

    • 2
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      Jim softy
      *
      “one who exposed the corruption in ASL now is saying the best option is run it as a money-losing airline with the subsidies from the govt.”
      *
      Please do read the article again.
      *
      What I advocate is summed up in; ‘Owners need to make disinvestment packages attractive and investor friendly, the light at the end of the tunnel being the end of massive state subsidies.’
      *
      Profits during Emirates management had less to do with airline operations and more to do with the sale of assets and some very innovative accounting reporting. Profits of Rs 4 billion in their last FY 2007/8 was derived by sale and leaseback of six A340 aircraft for LKR 5 billion which helped wipe out the loss of LKR 1 billion.
      *
      Be assured, I have no intention of coming out of retirement and joining UL or any other airline!!!

  • 2
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    The IMF has forbidden the GOSL to put anymore money into SriLankan.

    The IMF is running the country in case people haven’t been paying attention.

    If SriLankan hadn’t received a loan from UBS in Singapore they would already be out of money. As far as I can tell when the UBS money has been spent – thats it! Shutdown.

    A new Airline could be started at a fraction of the cost of running SriLankan. They need to keep the GOSL out and no Sri Lankans in any management positions. Then you may get a viable Airline.

  • 0
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    Airline industry was going on restructuring for some times. Many airlines went bankrupt. there are many budget airlines which are competiong. We hear different stories about Srilankan airlines. Jayaweera first tell us Railway, CTB and even banks are running at a loss. Now, instead of state banks there are banks under ministries which and more ministers want such banks established. S.B. dissnayake made the bank under him disappaear (not lost) Rs 6.r billion. and he made a news released saying he would fight any attmept to attach that bank to Central bank. He himself made a complaint to FCID I suppose. Now MANGI wants another bank under him.
    IT definitely looks that you are working for new management. Probably pretty soon you will be their employee. That is why you became a THOPPI PIRATI.

  • 0
    0

    If selling the airline is not feasible then it should be closed and what assets sold or disposed of. This at least will end the horror once and for all.

  • 0
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    Details of what were/are going on under the very nose of SriLankan Airlines Management is seeping out for the first time. Records/accounting seem to be absent.
    Before we decide, we must headhunt a new team. If we cannot assemble a team, it is best to sell SriLankan Airlines without attaching any conditions.
    The country pays the losses but only a tiny tiny privileged use the airlines.

  • 0
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    This comment was removed by a moderator because it didn’t abide by our Comment policy.For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2/

  • 1
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    Sri lankan politician are very dishonest, incomptetant and besides uneducated, they would not let anyone educated or competant any where near them because they are so scared. they do not know how to create more employment. Instead take IMF/world BANK advices and import everything. What ever institutions we have are full of their henchmen and women and also the lazy card holders who do not work because it is our party or because it is not our party in the govt. Probablym there is no periodic evaluation of worekr performance too.

  • 0
    0

    My friend, once Qatar Airway’s CEO said, Sri Lankan Airline needs a very good hair cut. It’s top and bottom has lot of fat. To bring it to profitability one should cut the excess fat all around. The politicians loaded it with excess people. When it’s becomes lean and mean, it could earn well for it’s in region where air travel is shooting up in double digits, and in India, China and across Asia air travel is on tremendous upward curve for long time to come, and SL Airlines could ride this well if they positioned it in a better positions. Also SL tourism profile too on a high note for it take advantage of it.

  • 0
    0

    Sri Lankan Airlines is in a good position to serve trans-asian flights between Africa/ME/Europe and East Asia. It’s problem is that the airport facilities at Colombo are atrocious and there’s too much risk of corruption at the Airport.

    We’ve already started to see several airlines make low cost flights from South-East Asia to Western Europe, I can imagine Eastern Europe and Africa being good transit destinations on the way to East Asia.

    A two-stop flight, from Western Europe to Athens/Mauritius/Reunion to Colombo to East Asia isn’t far-fetched if it’s cheap enough, the airport transit facilities are good enough, with corruption and security being well policed.

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