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On the Market Yet Again, Chances of Selling Cash-guzzling Air India May be Hit as Govt Restricts Foreign Airlines

New Delhi: One of the anthems of the Modi government in its second term has been to disinvest the cash guzzling airline Air India (AI).

The government has almost turned this proposed disinvestment into a war cry, asserting at every opportunity that it intends to sell off the airline and that this signals its commitment to bold reforms.

It is another matter that the first such attempt at AI selloff in the same government’s first term had bombed — not a single bidder had evinced any interest in buying AI then.

The eagerness to show government’s firm intent to disinvest Air India probably led Civil Aviation minister Hardeep Puri to assert in Parliament recently that Air India will be shut down if not sold earlier, causing widespread unease.

Since then, many stakeholders (including employees and the management) have been fighting rumours of a shutdown and have been assuring creditors and others that the airline is still operational.

The enthusiasm of the government functionaries over AI sale is welcome, of course, even when it is sometimes over the top. But the contradictions inherent to the process of yet another attempt at disinvestment are of little help.

The latest flip flop comes in the form of intransigence of the civil aviation ministry over relaxing the 49% cap for foreign airlines to invest in Indian carriers.

According to media reports, the ministry has declined to amend the FDI rules, which mandate that a foreign carrier wanting to invest in an Indian airline can pick up no more than 49% equity stake and must also comply with the substantial ownership and effective control norms.

These norms mandate that not only should the airline being acquired by the foreign carrier continue to operate from India, its key personnel should be Indians and Indians should hold majority equity.

Industry watchers and some people associated with the AI sale process say such continuing restrictions on foreign carriers mean any interested ones wouldn’t get majority control of Air India and this single fact would severely limit the options for the government, once the sale process starts.

“The government is sending contradictory signals. Only an airline company will likely be interested to invest in an Indian airline. And if this potential investor has to make a robust business of the acquired airline, then this investor would like to own majority stake in Air India. There are airlines in other countries where the nationals do not hold majority so relaxation of FDI cap for foreign airlines wouldn’t be a first anyway,” said a former bureaucrat associated with civil aviation policy.

It is interesting to see that during the Budget speech last year, Finance Minister Nirmala Sitharaman had asserted that FDI norms would be relaxed in the civil aviation sector and this had led many to believe that the FDI cap on foreign airlines may be relaxed.

Several times since that Budget speech, unnamed senior government functionaries have been saying that such a relaxation could be considered.

So the latest indication of no rethink on foreign airline investment makes it clear that either the government is willing to go through the motions of another sale without being particularly concerned of its success or it has already identified a buyer for Air India.

Dhiraj Mathur, former partner at PwC, said any such relaxation would require “changes in the FDI policy as well as relevant CARs (civil aviation requirements).

But without those changes, the government will have limited options in Indian companies that have the deep pockets to become a 51% Indian partner to a foreign airline for bidding for Air India”.

Take for example the recent reports of Gulf carrier Etihad being interested in bidding for AI. If the airline was to place a bid, it would now have to mandatorily rope in an Indian partner and agree to the majority ownership and control by that Indian partner in Air India.

But Kapil Kaul, CEO & Director of CAPA South Asia, does not think raising FDI limit beyond 49% is either feasible or permissible “because of the SOEC clause. Hence, this is an unnecessary debate. India can have 100% FDI only in domestic (operations) like Australia but airlines would need to have separate AOPs (air operator permits) for domestic and International. This will also require a separate policy and legal framework”.

CAPA had earlier urged the government to allow foreign airlines to participate in Air India disinvestment, saying “Global carriers should be permitted to invest up to 49% as per the FDI norms for the sector.

“No major Indian corporation from outside of aviation will invest in such a complex project without an experienced strategic partner. Allowing foreign airlines to participate will increase the number of interested bidders and the valuation.”

Why the government’s flip-flop over easing restrictions on foreign carriers assumes significance can also be seen in the context of Air India’s financial situation on date.

It has been desperately short of cash for much of this fiscal as the government has been reluctant to pump more money into this loss-making behemoth. But severe cash shortage has impacted the airline’s operations.

CAPA said earlier that cash shortage at Air India has meant “up to 26 of its aircraft are currently grounded (which at one stage had reached 32 aircraft). The government needs to provide Air India with $300-400 million (Rs 2100 to 2800 crore) of funds to ensure that all of its fleet continues to fly, which will improve its financial performance”.

Some funding has since come in but the airline is still struggling to meet its expenses. An airline source had earlier said that dues to vendors and creditors till now this fiscal have already crossed the Rs 8000 crore mark.

Not only is day-to-day operation a struggle, Air India’s finances seem to only worsen with each year.

In 2018-19 (the latest available financial data), AI reported an increase of over Rs 3,000 crore in annual losses to post its highest ever net loss of Rs 8,474.8 crore. This meant AI lost almost Rs 23 crore each day of FY 19 — this is the highest loss since the two erstwhile airlines were merged to form the present entity in 2007.

The net loss for FY18 was Rs 5,348 crore. Also, according to the airline’s auditors, the accumulated losses now stand at a whopping Rs 62,694 crore. AI’s current liabilities exceeded its current assets by Rs 65,245.87 crore as on March 31 this year. Total debt on its books on that date was Rs 58,255.9 crore.

And not only is the airline sinking deeper into losses, its subsidiaries are also not in the pink of health.

As of March this year, Air India had five subsidiaries: AI Express, Alliance Air (domestic low cost), Hotel Corporation of India, Air India Air Transport Services (wholly owned ground handling arm), Air India Engineering Services and AISATS (ground handling joint venture with SATS of Singapore). During 2018-19, four of these six subsidiaries also reported losses; small profits accrued only from the two ground handling arms.

With such precarious finances of Air India, reluctance of large Indian business houses to come forward and the government’s intransigence over foreign airline restrictions, any sale of Air India may become a tough call again.

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Source: News18