On Air India, should Centre mull the unthinkable?

The government should look to divest 100 per cent stake in Air India as it would make the offer more attractive for bidders, aviation consultancy CAPA said today. It also suggested that the government should permit strategic partners to integrate the carrier with its existing airline operations. Rather than being dissuaded for its failure to get a bidder, the government should pursue divestment with "even greater determination" because the "alternative could be far worse", the Sydney-based Centre for Asia Pacific Aviation (CAPA) said.

The ailing national carrier could stand to lose USD 1.5 billion to 2 billion over the next two fiscals and its debt-burden could continue to increase further, it added. Air India's domestic market share could also slip below 10 per cent as competition will rise from rivals with the addition of 120-125 aircraft in 2019 fiscal in the domestic sector, the aviation think tank said. The airline could also lose its mantle as the largest international operator as operators like IndiGo, Vistara and SpiceJet plan to induct wide body aircraft and start international operations, it said.

"CAPA therefore supports the divestment process and urges the Government of India to put aside this setback and push ahead with the target of concluding the transaction before the end of FY2019, after taking on board investor feedback to structure a more realistic offer," it said.

It said that after the setback of getting any bidders, it will be particularly difficult to re-energise the airline under government ownership.

The government had on May 31 said no initial bids were received for the proposed strategic stake sale of the debt-laden airlines as the deadline for the submission of expression of interest ended on the day.

It proposed to offload 76 per cent equity share capital as well as transfer the management control to private players.

Civil Aviation Secretary R N Choubey had said the transaction adviser would be finding out what is it that they (potential bidders) still found to be a deterrent. The criticism from a section of the industry has been that the terms set are rigid for the bidder to take interest in the airline.

"Clearly investors concluded that based on the preliminary terms and conditions presented, the risks associated with Air India's weaknesses and challenges far outweigh its positive strategic attributes and potential," CAPA said releasing a five-page report today.

It maintained that the failure to attract even a single EoI is a sad reflection of the state of Air India and its deep structural risks.

Observing that the successful bidder would have had to plough significant funds into enterprise-wide restructuring and wait for 2-3 years for a turnaround, it said that with such a commitment, the bidders "baulked at the offer terms". The successful could have also required capital expenditure in enhanced products and services, as well as fleet expansion.

The present bidding terms, it maintained, exposes the investor to labour risks, limit the opportunities to create synergies with a strategic investor's other airlines and "leave open the prospect of political interference on strategic and day-to-day matters as a result of the government's retention of a 24 per cent share-holding".

"The failure of the divestment process at this juncture is undoubtedly disappointing. And with a general election due in less than a year, the natural inclination may be to shelve the transaction until the next government is formed. In our view, that would be a serious mistake," it said. Meanwhile, sources in the Civil Aviation Ministry said a detailed note is being sent to the Department of Investment and Public Asset Management after the stake sale failed to attract any bidders, without elaborating further.