How to acquire the maharaja

How to acquire the maharaja

What should Air India's seller, Government of India, and any future buyer do to make the deal fly?
On June 28, the Cabinet Committee on Economic Affairs gave its ‘in principle’ approval for considering the strategic disinvestment of Air India (AI) and five of its subsidiaries. After the announcement, many pundits recommended the immediate sale of GoI's entire stake in the enterprise. But hastiness in the disinvestment can cause losses not only to the exchequer (राजकोष) but also to all other stakeholders in the process. For instance, government-owned Air New Zealand was privatised in 1979. But the company went on to suffer massive losses and almost became bankrupt (दिवालिया) . Finally, in 2001, the government decided to renationalise the airline. British Airways took as long as seven years to finalise its plan to privatise.
First, a prospective (भावी) new owner would benefit from an assessment of AI's strengths and weaknesses. The airline is often wrongly criticised as being ‘un-modern’. A closer look suggests this perception may not be accurate. For instance, the average age of AI's fleet is 8.5 years, and that of the fleet of its subsidiary, Air India Express, is 7.2 years. Many US airlines with twice the fleet age of AI happen to be profit-making enterprises. Overstaffing, too, is not an issue with AI anymore. In 2015-16, AI's employee to-aircraft ratio was only 106 for a fleet size of 136. IndiGo, the only large consistent profit-making carrier, operated at a higher employee-to aircraft ratio of 116 and a lower fleet size of 106. IndiGo also had a lower number of maintenance-and-overhaul (जीर्णोद्धार करना) personnel compared to AI. The national carrier has its own maintenance and repair centre, which gives it cost advantage over other players.
AI's passenger load factor -used for measuring the capacity utilisation of an airline -has improved consistently (अनुरूपता से) over the years and has equalled the worldwide average for the airline industry. But it is still slightly below the level of other major players in the Indian airline Industry. Air India Express reported a net profit of Rs. 296.7 crore in 2016-17. AI's attractiveness also lies in its large asset base, international flying rights, membership of the Star Alliance, three profit-making subsidiaries and valuable slots at big international airports.
On the flip side, the airline has been facing unending financial woes. While the aviation industry all over the world operates at meagre profits, AI's debt (with annual interest payments of Rs. 4,500 crore, which amount to 21% of its turnover) seems irrecoverable. This state of financial distress (संकट) can be traced back to the 2007 merger between Indian Airlines and AI, and unplanned bulk purchases of aircraft. The airline never quite recovered after that.Even if one assumes that GoI will partially restructure the company's debt, there are other problems facing the airline, the most serious of these being mismanagement. The airline's funds from operations have been negative. The inefficiency and operational delays have impacted the image of the company severely.
The Comptroller and Auditor General (CAG) had noted that even though the airline had high passenger load factor, it could not boost passenger revenue because of inefficiencies such as low utilisation of human resources. This is also the main cause for a massive reduction in its market share over the years. AI also flies on many unprofitable routes. It would be its new owner's prerogative (विशेषाधिकार) to avoid these. AI's next owner can take some cues from the way IndiGo has constructed its brand. The major reasons for IndiGo's success have been its employees' professionalism, regular on-time flights, short travel times and customer-centric policies. Creating that work environment in AI will be of utmost importance.
The new owner must take on board the concerns of AI's current employees. The Air India Employees' Union is certain to demand job security before the disinvestment. Properly handling of the situation will be crucial. The experience with disinvestment in companies, such as Balco and Jessop, shows that labour issues can make balance-sheets bleed.
Modalities (प्रकार) of disinvestment would have large implications for the outcome of the process. Keeping political contingencies (आकस्मिक) in mind, it is likely that foreign firms may not be allowed, and only existing market players will participate in the process. If it is going to be a merger of two existing airlines of the country, the new owner should be careful before merging with AI.Across the world, larger fleets mean larger problems. Operational inefficiencies rise, and the task to keep seats filled and sustain profitability becomes more difficult. Many will attribute GoAir's profitability to its small fleet, which simplifies management concerns. If positive synergies (सहयोग) are not generated, then the 2007 disaster of the Indian Airlines and AI merger will be repeated.