{"id":5987,"date":"2018-04-11T16:54:42","date_gmt":"2018-04-11T11:24:42","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=5987"},"modified":"2018-04-11T16:54:42","modified_gmt":"2018-04-11T11:24:42","slug":"under-current-terms-only-lic-is-likely-to-buy-air-india","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2018\/04\/11\/under-current-terms-only-lic-is-likely-to-buy-air-india\/","title":{"rendered":"Under Current Terms Only LIC is Likely to Buy Air India"},"content":{"rendered":"
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India’s three main airlines, IndiGo, Jet Airways and SpiceJet, have made it clear that they are not interested in buying Air India, in the current form it is being offered in. (As I finished writing this column, a Reuters journalist tweeted to suggest that the Tatas are also unlikely to bid for Air India, as well. Guess, nostalgia, doesn’t always work). The government of India wants to:<\/p>\n
A)<\/strong>\u00a0Sell 76% of Air India.<\/p>\n B)<\/strong>\u00a0100% of Air India Express, the low-cost arm of Air India.<\/p>\n C)<\/strong>\u00a050% of SATS, a gateway solution and food services provider. Against this sale, the government, wants the buyer:<\/p>\n a)<\/strong>\u00a0To take on two-thirds of the debt of Air India. As on March 31, 2017, the total debt of the company was at Rs 48,447.37 crore. Two-thirds of this works out to Rs 32,298 crore.<\/p>\n b)<\/strong>\u00a0The buyer also needs to give a guarantee that none of the permanent employees of the airline will be sacked for a year. After that the buyer can offer them a voluntary retirement scheme.<\/p>\n In return, the buyer, along with the aircrafts of Air India,\u00a0will also get 2,543 international landing slots<\/a>\u00a0negotiated with many countries, over the years. The landing slots is for what any airline will want to buy Air India. The real estate of Air India, which includes the famous Air India building in Nariman Point, will continue to remain with the government.<\/p>\n What also works for the prospective buyer is that Air India has 12% market share in the domestic market in India. While, this has fallen from a 100% market share once upon a time, when private airlines were not allowed to operate in India, it needs to be taken into account that only 3% of Indians have travelled by air. Hence, the potential is immense. India is one of the last big airline markets that remains untapped.<\/p>\n Also, the airline has a 17% share in flights in and out of India.<\/p>\n All these factors work for the buyer. But there are other factors which don’t. As mentioned earlier, the airline had a debt of close to Rs 48,447 crore as on March 31, 2017. Two-thirds of this debt has to be picked up by the buyer.<\/p>\n The working capital loans constitute Rs 31,088 crore of this debt. This is a little lower than the amount of debt that the government wants the prospective buyer of Air India to pick up. It is worth asking how has this debt accumulated over the years? The airline loses money every year and in order to continue operating it needs to borrow.<\/p>\n The banks lend money to the airline because it is ultimately deemed to be lending to the government and a government doesn’t usually default. A private enterprise in the place of Air India, would have had to shut down by now.<\/p>\n The larger point is that by asking a prospective buyer to take on two-thirds of the debt, the government basically wants the buyer to take on the overall accumulated inefficiency of the airline.<\/p>\n Rs 33,298 crore is a lot of money and is basically a deal breaker as far as the sale of Air India is concerned. This kind of debt it could even bring down the airline that decides to buy Air India. (In fact, we had said the same thing\u00a0in a column<\/a>\u00a0which appeared on January 15, earlier this year).<\/p>\n Other than the working capital loans of Rs 31,088 crore, the remaining Rs 17,360 crore is basically loans that have been taken for buying aircrafts. If this portion of the loan is passed on to the buyer, there is at least some justification given that there are airplanes that were bought using the loan.<\/p>\n Also, any prospective buyer will adjust for these loans before deciding on the price it wants to buy for Air India. But on the whole, the debt will drive away most prospective buyers.<\/p>\n Further, it is worth remembering that airline has lost a lot of money over the years and it continues to lose money. The airline lost Rs 41,657 crore between 2010-2011 and 2016-2017. These losses have continued in 2017-2018 (for the period between April to December 2017). Take a look at Table 1.<\/p>\n Table 1:<\/p>\n