The Government has decided to put Air India on sale again after a failed attempt at strategic disinvestment last year.
[ You may also read: Govt. approves strategic disinvestment in 5 PSUs- Explained]
According to the country’s aviation minister, Air India will have to shut down its operations if the renewed attempt to find a buyer for the debt-laden airline fails to materialise.
How did this situation come into being? How bad is the situation currently? Is privatisation the only hope for the airline to take off again?
The article attempts to answer these questions in a simplified manner.
A Series of Bad Decisions
The liberalisation of the economy in 1991 introduced competition in the civil aviation sector which was previously dominated by state-owned airlines. Air India and India Airlines started incurring losses.
In 2003, the NDA government led by Atal Bihari Vajpayee was in favour of the privatisation of both Air India and Indian Airlines.
In 2004, after the UPA-I came to power, the aviation minister Praful Patel pushed for the modernisation of the fleet and acquired 111 aircraft at an expense of 70,000 crores. However, prior to this decision, no passenger survey was carried out. Both Air India and Indian Airlines lacked the infrastructure and manpower to operate these aircraft. A CAG report stated that in the period of 2007-2009, several aircraft were kept on the ground resulting in losses amounting to Rs 840 crores. An FIR by the CBI charged Praful Patel and unnamed officials with a lack of transparency in the entire acquisition process.
Following the 2004 mishap, another controversial decision followed in 2007. The government decided to merge Air India (which controlled international operations) and Indian Airlines (which controlled domestic operations).
The anatomy of the merger is a lesson why a merger should not be done only for the sake of it.
Several factors such as inefficient leadership and increased competition had led the government to this merger.
The merger brought together close to 30,000 employees- 214 per plane. This was way above the global standard of 100 per plane. Thus, Air India had to spend close to 20% of its revenue on salary. Workforce integration was also woefully handled. There was no attempt made to standardise hiring processes. Service and promotion conditions remained different and ground handling teams continued to operate separately.
Following the merger, a single ticket reservation system took 4 years to come up. Air India also continued with two aircraft types in its fleet which led to high maintenance and manpower costs.
In contrast, India’s only profitable airline, Indigo, operates with a single aircraft type. (Airbus)
What was the result of the merger then? In 2002-2003 (before the merger), the combined losses for Air India and Indian Airlines were Rs 63 crores. In 2010-11, it rose to nearly Rs. 7000 crores. The situation, as we note later, only became worse.
The Bailout Package
Owing to the financial mess in 2012, the UPA-II government announced a bailout package for Air India. It announced an infusion of Rs 30,000 crores in the airline till 2020.
At present, close to Rs 28,000 crores have already been devoured by Air India. This has managed to keep Air India afloat despite being in tremendous debt compared to other airlines.
The government, however, had envisaged that the airline would show positive earnings from 2017.
The opposite happened. Air India was unable to service its annual interest payment of about Rs 4500 crores in this period and sunk deeper into debt.
At present, its debt stands at a staggering Rs 58000 crores, most of which have been given by public sector banks, further adding to the taxpayers’ burden.
What has the Government planned?
The government has reiterated the fact that Air India has not made a profit even once since its merger in 2007.
A previous attempt to divest 76% of its stake in Air India had failed in 2018 because the government would have retained a major influence on decision making (with 24 % of the stake.)
The present attempt aims at divesting 100% of its stake in Air India.
This is because in a competitive airline market, infusing more of taxpayers’ funds into the company will not be the best use of the country’s scarce resources.
In order to lure buyers, the government may exclude more than 50% of its debt, specifically the ones which are not backed by assets. At the same time, the government has assured a favourable deal for all the employees who will be affected in the downsizing process.
Thus, there is a strong economic case for Air India privatisation.
Moreover, the sale of Air India is a major opportunity for the government to finance its exchequer and put the country on a road to economic recovery.
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I still believe that the government of a major economy should offer their own transport services along with private players. The Airline industry as a whole has always failed to generate revenues. Focusing on promoting tourism while trying to minimize losses should still be a priority in my opinion.
You are right when you say that the airline industry does not generate much revenue. In fact, as I have mentioned in my article, Indigo is the only airline that posts a profit. But wrt Air India, it has made huge losses in the past few years. The bailout package has kept it afloat. Had it been a private player, it would have shut down a decade ago(like Jet Airways). While it is desirable for the govt to provide its transport services, it cannot be kept on life support endlessly. And the situation does not seem to be improving anytime soon. Infusing taxpayers money is prejudicial to both taxpayers and private airlines.
Indigo has also been posting profit very recently. Over the entire course of their business, they too are in losses. I myself believe the Government should completely exit the commercial passenger domain. Instead, they should focus only on luxury airplanes to select destinations in order to reduce debt incurred.