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Explained | Will the Tatas be able to turn around Air India?
How does the company plan to revive the debt-laden carrier? What are the challenges and advantages?
The story so far: On October 8, the Department of Investment and Public Asset Management (DIPAM) secretary Tuhin Kanta Pandey announced at a press conference that the Tata Sons subsidiary, Talace Pvt. Ltd., had won the bid for the national carrier, Air India. He said that after the setting of a reserve price of ₹12,906 crore, the Tata Sons subsidiary had emerged the winner, quoting a figure of ₹18,000 crore. The other shortlisted bidder, Ajay Singh of SpiceJet, had quoted ₹15,100 crore. Within minutes, Ratan N. Tata, Chairman Emeritus, Tata Sons and Chairman, Tata Trusts, put out a tweet, “Welcome back, Air India!”
What will Tata Sons get?
The Air India group is made up of these components: Air India; Air India Express, Air India Engineering Services Limited (AIESL), Air India Air Transport Services Limited (AIATSL; ground handling services to the Air India group and other airlines), Airline Allied Services Limited, or AASL (Alliance Air); the Hotel Corporation of India (Centaur hotels and the Chefair flight kitchens) and Air India SATS Airport Services Private Limited (AISATS is a 50:50 joint venture between Air India Limited and Singapore Airport Terminal Services Limited (SATS) .
The Air India sale this time is the third attempt by the Government of India (incidentally, all under the National Democratic Alliance), the earlier bids having been in the early 2000s and 2017-2018. This time round, the Government offered management control and sale of 100% equity share capital, each, of Air India and Air India Express and a 50% equity share capital of Air India SATS Airport Services Private Limited — which the Tatas have won.
It was the mountain of dues and deep losses that were the catalyst for the sale. How will the debt be cleared?
The airline’s total debt at the end of August this year was ₹61,562 crore. Of this, Tata Sons (its holding company Talace Pvt. Ltd.) would be taking over ₹15,300 crore, with a cash payment of ₹2,700 crore. The rest, an estimated ₹46,262 crore, will be moved to Air India Assets Holding Ltd (AIAHL), a special purpose vehicle formed by the Government to handle the debt and non-core assets of Air India such as land and buildings.
Much of the debt is related to the merger between Air India and the other state-owned carrier, Indian Airlines, which was cleared by the Cabinet on March 1, 2007 to form the National Aviation Company of India Limited (NACIL). Preceding this development — i.e. of the merger — the then United Progressive Alliance government, had in 2005, approved the purchase of 68 aircraft by Air India (from Boeing) — and also the largest commercial aircraft deal in India’s civil aviation history — and a year later, 43 planes for Indian Airlines (from the Airbus 320 family, for $2.2 billion). The Boeing deal was for 23 777s, 27 787s and 18 737s (for low cost carrier Air India Express). Boeing has also built and transferred a state-of-the-art maintenance, repair and overhaul (MRO) facility at Nagpur. Following mounting losses, there was an investigation into allegations about the nearly ₹70,000 crore deal that had caused a financial loss to the “already stressed national carrier”. It also inducted A320Ns on lease from the ALAFCO Aviation Lease and Finance Company in 2017.
As far as debt clearance is concerned, the Government is to also transfer to the AIAHL about ₹16,000 crore of unpaid fuel bills and other pending dues that Air India owes to airports and vendors. In short, it will hold about 75% of the airline’s debt that the Tata Group is not taking over. An aviation consultant said the Tatas could also take over an additional and estimated ₹9,000 crore worth of lease obligations for over 40 Air India jets. The non-core assets including land and buildings that are estimated to be valued at ₹14,718 crore are being transferred to the AIAHL. There are reports that the Government is planning to add the feeder/regional airline, Alliance Air (the second wholly owned Air India subsidiary) to this mix, with an eye to selling it. If this happens, the Government will completely exit the airline business.
According to Mr. Pandey, the airline loses ₹20 crore a day. And, from 2009-10 to date, the Government has infused over ₹1,10,276 crore into the airline; ₹54,584 crore as cash support and ₹55,692 crore as loan guarantees. The sale deal is expected to be wrapped up by December-end (though some experts say it could go on till March). The four Air India subsidiaries, AIATSL, AASL, AIESL, the Hotel Corporation of India Ltd., and non-core assets, that also include the fabled collection of art work, paintings and artefacts, and other non-operational assets have been transferred to the IAHL.
Do the Tatas have a business model ready?
Air India, the Ministry of Civil Aviation and Tata Sons did not respond to queries from The Hindu on the subject. However, aviation experts have tried to piece things together. The contours cover human resources, fleet management, flight scheduling and technology services. The Tatas already have two airlines in the stable, which are still in poor financial health: Vistara (a joint venture with Singapore Airlines Limited as a 51:49% stake partnership) and Air Asia India, a low-cost service, where the Tatas now have a nearly 84% stake. An aviation analyst said that going by data from the Directorate General of Civil Aviation (DGCA), the Tatas could now have a 26% share of the domestic aviation market that would put them behind market leader IndiGo with its estimated 57% market share. Opinion is that there could be mergers and synergy between the four airlines.
What are the positive and negatives of working with Air India?
The Air India deal catapults the conglomerate into the big league, making it the largest player from India on international routes.
First, the positives. The brand, Air India, has an instant connect. According to a Tata datasheet, there will be a fleet strength of 141 aircraft (117 from Air India and 24 from Air India Express), and a widespread domestic and international footprint (over 7,000 slots and also code share agreements) with a significant share of the revenue from international operations. Its non-stop long haul flights from India to the United States are a high point. There is also a repository of bilateral rights, which experts say could be used to expand flights in a big way to Europe, Africa and South America, for example. The Air India frequent flyer programme has nearly three million members. The airline has experienced crew, ground staff and engineers. It is also a member of the 26-member global aviation grouping, Star Alliance.
In terms of the crucial aviation operating metrics, among Indian carriers, it has a high Available Seat Passenger Kilometre (ASKM) and Revenue Passenger Kilometre (RPKM). It has also cleared recognised safety audits and won international awards for its environmental performance. The airline also has a few firsts and records to its name.
According to an aviation expert, the negatives would be linked to the structure of its finance lease/bridge loans and operating leases for a part of its fleet, the poor state of the cabins, seats and inflight amenities on most of its aircraft fleet, staff strength in certain administrative functions, the cost contracts for some of its subsidiaries, and the training at and safety record of Air India Express. Part of the fleet has also been grounded for a long time for want of crucial spares and engine parts.
Not having Alliance Air as a part of the group could be a setback as it “operates flights to Tier-2 and Tier-3 cities or those which link these cities to the metro hubs”. Thus, what would have been inhouse and seamless regional passenger feed to the main flights (international and domestic) could now be hampered.
The total number of permanent and contractual employees of Air India and Air India Express is 13,500. According to Mr. Pandey, there cannot be retrenchment of staff for the first year. Gratuity and provident fund benefits will be according to the law and post-retirement medical benefits (for retired staff and staff to retire) will be provided by the Government.
Another aviation expert said a Tata team had visited all the Air India facilities and “sought every possible document”. These may have also been to examine details of agreements and contracts with third parties; liabilities and commitments; available licences and approvals and internal and third party audit reports.
According to Captain Mohan Ranganathan, a retired airline instructor pilot, aviation safety expert and an industry watcher, “The Tatas have got just the airline, aircraft, routes and landing slots. The hangars and engineering belong to the AIESL, and will all be sold off separately. If the Tatas want them, they have to bid and pay! The training centres in Mumbai and Hyderabad are also in that category. The Air India employees in the housing colonies have been given six months notice or sale of the land, whichever is earlier. The Tatas will have to spend a huge amount getting the aircraft refurbished and fitted to their standards.
“The biggest problem is the integration of Air Asia India and Air India Express. Their style of operations is completely different. The integration is not easy and will be time consuming. The Government has also sold out to the Gulf carriers with bilaterals in their favour. Whether the Government will rework them now, is the question,” he said.
How soon will it be profitable?
Former Executive Director, Air India, Jitender Bhargava, in a commentary, has said, “The question of how rapidly the Tatas can make the airline profitable needs to be viewed in the context of the impact of the pandemic, additional domestic factors such as price sensitivity of Indian passengers and high operational costs.
“Air India also has very limited non-aeronautical revenues. Monetising every customer-interfacing object, as most airlines do, will add to revenues. The real gains will emerge once the initial phases of cost reduction and enhancing revenues are over and the Tatas move to the next phase of fleet expansion, which should be a priority,” he said.
“The new owners will be able to operate additional flights without having the need to induct more operating crew or aircraft maintenance engineers because rationalisation of manpower and higher productivity through reengineered work practices will generate surplus manpower to meet future needs.
“Once Air India’s current inherent weaknesses largely stemming from Government ownership, inability to exploit full potential due to inertia, adverse impact on the morale of employees due to frequent changes of leadership are made a thing of the past on the Tatas taking control, positive all-round results will be there for all to see. Turning around Air India by making it profitable once again after several years will be a daunting but achievable task. It will also be a long-haul flight for the Tatas and one should make no mistake about it by being over ptimistic because the ground realities of the Indian market cannot be simply wished away,” Mr. Bhargava said.
Another aviation industry expert said it is most certain that Tata Sons will tap the capabilities of its group companies such as Tata Consultancy Services (TCS) to formulate the digital and technological transformation of Air India. This would be to run the airline’s technology services end-to-end, enabling automation to analytics-enabled decision-making. The end result is to have “intelligent airline operations”. TCS is no stranger to the aviation and airline business and has clients such as Singapore Airlines and Virgin Atlantic.
An aviation expert said that while the new owner may have several and efficient business strategies, it would benefit from the legacy of experience of today’s Air Indians.