Air India privatisation will need to be backed by a hefty 'dowry' to buyer

Air India is on the block, finally. With accumulated losses of over Rs 50,000 crore, a debt overhang of around Rs 55,000 crore, and an annual interest burden of Rs 4,500 crore which chews up more than a fifth of its revenues, this decision should ordinarily have been a no-brainer. But it has taken the Modi government three long years to come to this conclusion.

The decision could have been taken with fewer tears a decade ago, when the airline under Civil Aviation Minister Praful Patel induced Air India to order a humongous number of aircraft from Boeing that it could ill-afford. This business blunder was compounded by the shotgun wedding of Air India and Indian Airlines, which then struggled with high manpower and salary adjustment issues for years. It has not recovered from either of these twin blows even today. Hence the sudden talk of selling off the airline.

Today, despite the Rs 30,000 crore bailout offered by the UPA in 2012, any talk of privatisation means little. Even if the airline is “sold” lock, stock and barrel, it will essentially have to be “gifted” to the buyer, who additionally will have to be given a hefty “dowry” to take the airline off the taxpayer’s bleeding books.

So, when we call it privatisation, what we really mean is that the government is paying the buyer a huge cash incentive to take a white elephant off its hands. The only question to ask is the size of the payment accompanying the gift of the airline. Privatisation in the case of Air India means talking about the cost of offloading the company in order to avoid further costs in future.

Some rough numbers will tell us what is really at stake.

The other day, while daintily hinting that a sale of Air India could be thought of, Finance Minister Arun Jaitley offered two ballpark figures: he said the aircraft owned by Air India were worth around Rs 25,000 crore, while its debts exceeded Rs 50,000 crore. The Economic Times says that the debts are in the region of Rs 55,000 crore.

The size of the “dowry” payable to potential buyers – with due apologies to women who find the term dowry insensitive or offensive - will be anywhere between Rs 25,000-30,000 crore, less the assets of Air India that can be monetised before the sale. This is the amount of debt the government will have to take on its books before Air India can be privatised. The true cost of privatisation is thus an increase in public debt.

Among the assets that can theoretically be monetised are the Air India brand name (though this is debatable), the land and properties owned by Air India in various cities, including the landmark tower in Mumbai’s Nariman Point, its various landing slots and airport counters, and its code-sharing agreements with other airlines.

However, its liabilities include not only its debts, but a significant chunk of its employees. A panel under Justice DM Dharmadhikari, which went into the HR aspects of the Air India-Indian Airlines merger in 2012, called for a voluntary retirement scheme (VRS) for the airline’s then staff strength of over 28,000. The idea was to offer VRS to around 7,000 staff, so as to bring down the staff-to-aircraft ratio, which was probably among the worst in the world at that time. In India, while Indigo operates with around 110 employees per aircraft, Air India had more than 262 at that time. Though this ratio has since been bought down to around 108 (with headcount down to just over 19,000 employees), this was achieved by hiving off key manpower-intensive units like ground handling, engineering and MRO services. The VRS plan was abandoned in 2014 in favour of natural attrition, when the government balked at the idea of shelling out Rs 10,000 crore to offer 5,000 employees a golden handshake.

The short point is this: since Air India’s employee numbers are being pared only slowly, and some of those retiring from vital positions will still need replacing, it is safe to assume that the airline still has more staff than required for an efficient operation. To arrive at the true ratio of staff to aircraft, we need to add back the staff hived off into the engineering and ground handling services units.

Encashing the other assets, land, property, etc, will also not be easy, for property sales need permissions from multiple authorities, including state governments, the airports authority, and various airports. This report in DNA notes that despite efforts to raise money from property sales, practically nothing has been achieved.

The bottomline is this: to get Air India off its hands, the government may have to take nearly Rs 30,000 crore of debts on its books, minus the estimated value of properties that go along with the airline to whoever “buys” it.

A private party – unrestrained by ethics and the need to avoid corruption – will probably find it easier to get permissions for property sales than a government-run airline.

The larger truth is this: white elephants can never be sold or privatised. They can only be gifted – accompanied by other monetary inducements.