Air India sale: Sweeteners galore for the bidders in govt's new EoI

After a failed bid to sell off India’s national airline Air India in 2018, the Modi government has issued a new expression of interest (EoI) on January 27, 2020. The new terms inviting bids are considerably lenient than the previous ones and have caused consternation in various circles. The Bharatiya Janata Party (BJP)'s Subramanium Swamy has likened the new terms as an attempt “to sell the family silver” and has threatened to challenge the new EoI legally.

The Modi government wants to sell Air India, Air India Express and Air India SATS (AISATS). This time the government has proposed to sell the entire airline which is completely owned by it. In 2018, it had proposed to sell a 76 per cent stake. Like before, it would sell a 100 per cent stake in Air India Express and its entire stake of 50 per cent in AISATS, which it jointly owns with Singapore's Changi Airport.  

While this may sweeten the deal for prospective bidders, a lot more carrots have been dangled this time to make Air India’s strategic sale even more enticing. In 2018, the government hadn’t received any bids for Air India with many bidders wary of its intention to hold a minority stake in the national carrier. There has been a considerable relaxation of net worth norms for sole bidders and consortiums. Under the new EoI, the minimum net worth required to be eligible for bidding has been reduced to Rs 3,500 crore from Rs 5,000 crore in the previous round. Now companies can also bid on the basis of the net worth of their affiliates, which was non-existent earlier. The provision to bid on the strength of the net worth of affiliate companies is allowed only for foreign entities and not to Indian scheduled airline operators.

It isn't just sole bidders, but also consortiums which have been given more leeway this time around by the Modi government. In 2018, each member of a consortium was required to hold a 20 per cent stake in it. This time, the minimum shareholding in a consortium for a member has been reduced to 10 per cent which could potentially lead to bigger and financially stronger consortiums to enter the fray. What could further strengthen the participation of bigger consortiums is reduction of minimum shareholding of the lead member in the consortium from 51 per cent to 26 per cent. These measures along with relaxation of net-worth requirements from Rs 5,000 crore to Rs 3,500 crore, could provide consortiums a bigger advantage over lone bidders once the selection process kicks off on March 17 following receipt of all EoIs.

The eligibility norms have also been tweaked given the doldrums in which India’s aviation industry and its economy finds itself in. Now the prospective buyers can sell off Air India after one year of buying it, as compared to a lock-in period of three years earlier. Stakes can still be sold within a year with permission of the central government. Moreover, the government seems to have completely done away with the profitability clause in the 2020 EoI. Earlier, bidders were required to clock profits in at least three of the preceding five financial years from the time of bidding for Air India.

A cherry on the cake for Air India’s employees is the new requirement to give three per cent of the stake in the airlines to permanent employees – a clause that was missing in 2018. There could be some impact of this employee stock ownership plan (ESOP) on prospective bidders given the huge number of permanent employees on Air India’s rolls. There were 9,426 permanent employees in Air India in 2019, down by almost 1,800 employees over the last two years. A third of these permanent employees would be retiring by 2024, which could potentially mean attractive benefits in form of ESOPs for some of them. Almost a third of Air India’s employees are pilots, co-pilots and cabin crew. There were over 13,000 employees, including permanent and contractual on the national carrier’s rolls. While Air India’s permanent employee strength declined, those of its subsidiary, Air India Express, increased from 96 to 191. Permanent employees of Air India Express, which flies to Middle East and South East Asian destinations, consist primarily of its pilots and co-pilots. All other personnel including its cabin crew are contractual workers. There are no permanent employees in AISATS, the airline’s cargo and baggage handling arm. In effect, much of the three per cent stake for permanent employees may go to Air India staff instead of the other subsidiaries which have been put on sale.    

Between these two attempts at selling Air India, the airline has marginally improved its operating parameters which could also make it more attractive to prospective buyers. Its fleet strength has marginally increased by six planes to touch 121 aircraft. It flies to two more domestic destinations in 2019 than it did in 2017. Both its domestic and international routes and departures have grown. Among Indian carriers flying internationally, it commanded a market share of 43 per cent in 2017. In 2019, it lorded over half of it. Even when foreign airlines are included, Air India has improved its international market share even as its domestic market share has literally stagnated. The airline has expanded its international slots in Europe including at crucial airports like Heathrow. Official statistics show that it has also expanded its slots in the Middle East including adding new ones at Doha and Al Najaf which will be part of sale package. Air India’s debt, which stood at Rs 58,283 crore in 2018-19 has already been hived off into a special purpose vehicle with the buyer not required to service the same.

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