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 Nevertheless, governments and average citizens in the said countries continue to insist in carrying on with the now outdated and meaningless ‘National / Flag Carrier’ concept.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.