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[Insights into Editorials] – Making Air India’s disinvestment work

[Insights into Editorials] – Making Air India’s disinvestment work

air india disinvestment detailsIn News:

The once-iconic Air India has, in the last four decades, witnessed a calamitous fall.

The diminution had been gradual when it operated in a near-monopoly environment but the pace of descent intensified when it faced competition.

In the late 1990s, the government recognised the gradual decline in the airline’s service standards and referred it to the newly set up Disinvestment Commission of India, which recommended dilution of government ownership to 40%.

Earlier, Finance Minister has announced that the government plans to wrap up sale of ailing Air India and Bharat Petroleum Corporation Limited (BPCL) by March 2020.

The government has raised the disinvestment target for 2019-20 to Rs 1.05 lakh crore from Rs 90,000 crore in the interim budget presented in February.

The government is focused on divesting the two state-run companies by the end of the financial year.

This will form a crucial chunk of the government’s plan to raise Rs 1 lakh crore in the current fiscal as India continues to tackle a steep demand slowdown.

 

Reason of Failure: Lack of strategic direction:

Air India’s precarious financial situation was first made public in June 2009.

But the government, instead of tackling the core problem the lack of a strategic and operational direction within the airline decided to focus on a financial package.

This was like applying a fresh coat of paint to a crumbling house. The bailout package of over Rs.30,000 crore, which is being infused over an eight-year span ending 2021, has not helped Air India evolve into a robust carrier.

The reality is that the airline’s survival depends on several factors, most notably the induction of a professional management with an effective leadership, a sound financial package that does not come with political interference in its day-to-day operations, and unions allowing changes in work conditions and pay packages.

In 2017, NITI Aayog recommended disinvestment but the government, in its wisdom, decided to not only retain 24% equity, it also wanted the acquirer to absorb a major chunk of the non-aircraft related debt.

The simple logic that a proposal for sale has to suit the acquirer as much as the seller was conveniently overlooked and the offer found no takers.

 

About Disinvestment:

Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).

The concept of disinvestment follows the dictum: The government has no business to be in business.

Thus, the government continues to disinvest in sectors where private companies are already the dominant players.

 

Govt to divest 100% stake in Air India:

The Centre has decided to divest its entire stake in Air India Ltd and its no-frill subsidiary Air India Express, a year after it failed to attract bids for a partial stake sale in the cash-strapped national carrier.

Air India Specific Alternative Mechanism (AISAM) has approved the 100 percent sale of Government of India’s stake in Air India, along with Air India Express, and government’s stake in AISATS for the re-initiated strategic divestment of Air India.

The government owns 100% stake in Air India, and its subsidiary Air India Express.

AISATS is a joint venture partnership between Air India and Singapore Airport Terminal Services (SATS) Limited, which provides ground and cargo handling services.

 

Air India strength and Disinvestment process must be in simultaneous:

Besides playing to its strengths, the government ought to if it is sincere about making the exercise a success ensure that it exits totally, giving freedom to the potential acquirer to transform it into a successful player.

The cost of further infusion of funds if the exercise is allowed to fail mustn’t be overlooked.

To evoke interest in a product that still commands a sizeable market share and has an extensive global network that no other Indian carrier can match, the government also needs marketing skills.

It is time that divestment is not seen as an option to cover for short-term fiscal gains.

Instead, it should be part of a strategic plan to improve the production of goods and services in India. 

 

Conclusion:

The government announced that they are moving on both Air India and Bharat Petroleum with the expectation that we can complete them this year. The ground realities will play out.

One sincerely hopes that the disinvestment exercise this time is thought of wisely, pursued with determination, and is successful, because with it is linked the prospect of transforming Air India into a robust carrier that we all can justifiably be proud of once again.

The stakes are high because failure will mean doom through further marginalisation.

In view of current macroeconomic parameters, the government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more CPSEs for strategic participation by the private sector.

Had the disinvestment efforts succeeded, Air India would have today been a professionally managed successful airline.