New Delhi: The deadline for submitting bids for Air India privatisation is ending by the end of the month among speculation that even the $3 billion debt still on the books of the airline may be becoming an impediment to the sale of the national carrier.
No airline or corporate group has publicly shown interest in bidding yet except US-based fund Interups Inc, which has said it is interested and is a strong bidder for Air India.
The government has been trying to sell Air India for the past few years. According to a report by financial services house, HSBC, previously, when the government tried to sell Air India, the terms and the shape in which the government wanted to sell Air India were not sufficiently attractive to any of the potential buyers. Hence the government has sweetened the deal this time and has decided to be more flexible with the terms.
First of all, the government is ready to sell 100 per cent stake in Air India (previously, it was selling only 76 per cent, which was a sticking point for potential buyers as the fear of continuous government intervention deterred many potential buyers). In addition, the government has shifted almost 60 per cent of the total debt to a special purpose vehicle (SPV).
The total debt on Air India’s balance sheet stood at $8 billon, but the government has transferred $5 billion of debt to an SPV and the buyer will have to absorb $3 billion of debt, most of which is aircraft related.
HSBC said the government is also trying to trim Air India’s work force to attract buyers although its employee cost to revenue ratio stands at around 11 per cent, which is broadly at par with IndiGo.
Reports suggest that the government is open to revisiting and refining the terms of the sales based on suggestions from the investors.
The remaining debt of $3 billion has become a sticking point with potential bidders and investors, who are now asking for the deal to be sweetened further.
The deadline for the bids ends on October 30. It was earlier extended on August 31 in the light of the Covid pandemic.
Interups Inc has talked about a bid for Air India. Laxmi Prasad, Chairman, Interups, said, “Getting ready to propose for Air India – valuation and financial structuring is almost complete. Will completely domesticate the investment including from NRIs that is now treated as domestic investment for Air India in exception. I am sure we will certainly please the government and the people of India by retaining Maharaja as our pride Indian carrier.”
Prasad had told IANS earlier that Interups Inc will be submitting its bid for Air India.
Prasad had said, “We carry 27,000 plus NRI retirement asset accounts and a group of very ultra-rich billionaire group and we are dead serious on our fight to have this airline piece not miss our hands. It shall be an acquisition for the people and by the people and participation is 100 per cent NRI and domestic Indian investor base.
“We have been seriously into Air India divestment since the opening of the interest, met the government several times and we have not dropped out of the race because of any pandemic affect. We are and we will be a very serious contender for acquiring Air India.”
While the Tata group was seen as a bidder for Air India, it is not clear whether it is still interested or will be putting in a bid.
“Air India fits very well with Tata group in our opinion. Although we believe it would take a few years for Tata group to turn around Air India, given the fact that Vistara (51 per cent owned by Tata, 49 per cent by Singapore Airlines) and Singapore Airlines both have strong expertise, it might not be as difficult as it may sound,” HSBC had said in a September report.
“Moreover, we believe the acquisition of Air India would help Vistara to be more competitive. At the moment, Vistara is a much smaller airline (6.5 per cent market share in domestic market during January 2020) and, due to that, it has not been able to make a profit (its cost structure has been less efficient in the absence of economies of scale, and it has not been able to grab corporate market share which is important in order for a flag carrier to be profitable),” the report said.
“We believe Vistara needs to increase its size to be competitive, to improve its cost structure and to grab corporate market share which could help it to be profitable in the medium to long term. However, if it grows organically, it might face significant challenges.
“First of all, it might take a long time for Vistara to grow to a reasonable size. However, the bigger challenge would be to get all the required infrastructure (slots at key airports, skilled manpower – although it is not currently difficult to get skilled manpower, and good slots at domestic and international airports),” the report added.
However, if Tata group buys Air India and merges it with Vistara, it would get readymade infrastructure which Air India has built over the recent years.
“Moreover, it fits very well with the strategic objective of Singapore Airlines in our view. We believe that the reason for Singapore Airlines investing in Vistara was to get access to the Indian market,” it added.
The report said, “However, with the current shape and small size of Vistara Airlines, Singapore’s access might be limited. The acquisition of Air India would not only give required access to Indian market, it would also strengthen Vistara and Singapore Airlines’ position in the Gulf market where Air India Express holds a very strong position. At the moment, Singapore Airlines doesn’t have much presence in the Gulf market.”