Air India going the Tata way after nearly 70 years?

The Tatas have bid for Air India through AirAsia India, according to reports

Air India going the Tata way after nearly 70 years?
Air India witnessed bids for its privatisation on December 14. Image courtesy: Facebook/Air India

India's largest conglomerate Tata Group is believed to have placed a bid for the struggling national carrier Air India on Monday (December 14), media reports said. 

The Tatas, who own a $113 billion business empire, is said to have bid through AirAsia India, in which Tata Sons is a significant majority stakeholder, according to report in The Times of India. 

In August itself, the Tata Group had said that it was mulling a bid to take over the national carrier, according to ET Now. Then it was reported last month by The Economic Times that the Tatas were in talks with Singapore Airlines, its joint venture partner in full-service carrier Vistara, to bid for the national carrier together. 

The Tata Group reportedly was trying to get SIA to abandon a non-compete clause and join it in the bid but was ready to even go it alone if the SIA did not accede. That would breach the terms of pact with SIA, as according to them, only Vistara can be a full-service carrier within the overall aviation business of the Tata Group. So even Tata's solo bid would require a waiver from SIA, not to forget Temasek, which owns 55% stake in SIA.

According to TOI sources, since AirAsia India was formed before Vistara, the former's charter allows it to enter into full-service business. Reportedly, SIA was not keen on the Air India bid as the distressed airline would only add to the financial burden of Vistara and SIA itself.

An Air India Boeing B747. Image courtesy: Facebook/Air India

SIA had recorded its biggest quarterly loss due to slackening travel demand in the wake of the Covid-19 pandemic and is in the process of raising liquidity. Air India's debt-cum-liabilities amount to almost Rs 90,000 crore, the TOI pointed out. According to Air India Chairman and Managing Director Rajiv Bansal, the airline could end up making a loss of around Rs 8,000 crore this fiscal.

Tata Sons recently increased its stake in AirAsia India from 51%, as its Malaysian joint venture partner AirAsia was unable to infuse fresh funds into the airline. AirAsia had indicated that it wanted to exit its India business, with the airline's president Bo Lingam stating on November 17 that its businesses in Japan and India have been “draining cash, causing the group much financial stress”. 

According to a Business Standard report, Tata Sons plans to raise the stake in AirAsia India to over 76% by the end of 2020-21. Tatas increasing stake in the airline would give an exit route to AirAsia Berhad.

The Tatas' affinity towards Air India is natural. Air India essentially had emerged out of Tata Airlines. Tata Airlines started as Tata Air Services with an investment of Rs 2 lakh from Tata Sons and two second-hand de Havilland Puss Moth aircraft. 

Also read: Why is Tata so keen to buy national carrier Air India?

In April 1932, Tata was given a contract to carry mail for Imperial Airways of Britain. On October 15, 1932, JRD Tata himself flew a tiny single-engine de Havilland Puss Moth from Karachi's (currently in Pakistan) Drigh Road aerodrome to Bombay's (currently Mumbai) Juhu aerodrome via Ahmedabad, carrying 25kg of airmail. This was the first flight of the Tata Airlines, and indeed of the country.
Since then, the airline went on expanding. In 1946, Tata Airlines became a public limited company and was renamed as Air India. After independence, the Government of India took up 49% of the airline. That happened in 1948. Then in 1953, the government of India bought a majority stake in Air India from Tata Airlines, though JRD Tata continued as its chairman till 1977. After nationalisation, the carrier was renamed as Air India International Limited, with focus on foreign operations. 

India started to allow private airlines in the early 1990s, and the Tatas' interest in aviation was still intact. In 1994, the Tatas came up with a plan to start an airline again, this time with the help of Singapore Airlines and with 100 planes, a Bloomberg Quint report pointed out. But the idea had to be scrapped as the government was not willing to allow a foreign player. 

At the turn of the millennium, efforts were made to re-privatise Air India, and the Tatas again tried to regain control of the airline that went out of its hands a few years after independence. The Tatas partnered with Singapore Airlines again, but the plan had to be dropped after political opposition.

Air India has jumped to the call of national duty whenever needed. Image courtesy: Twitter/@airindiain

Air India has been dogged over the years with terrible financial problems, employee unrest, allegations of mismanagement, contravention of safety protocols, shoddy training and woeful customer care. It has, however, scored heavily in jumping to the call of national duty whenever needed.

Air India has not only anchored the Vande Bharat Mission, bilateral air bubble pacts and Lifeline Udan programmes during the Covid-19 times, even at the cost of considerable hardships for its employees, but it has also had a rich history of national service, be it taking an active part in evacuations from the Gulf in 1990 after Iraq invaded Kuwait that led to the First Gulf War, or evacuations from strife-torn Yemen in 2015, among others.

Also read: Air India employees believe 'nobody can run airline better', prepare takeover bid

All these have given the Air India brand a lot of buoyancy. Air India and Air India Express together currently have over 150 planes and connect numerous domestic and foreign destinations. Air India boasts of wide-bodied aircraft and long-haul routes.

The government had offered to offload management control of the carrier and its entire stake in the airline, plus its 100% shareholding in the budget carrier Air India Express and its 50% stake in the ground-handling arm Air India SATS Airport Services. This came after a failed attempt in 2018 when the government wanted to offload 76% equity share capital in Air India and give up management control, but the offer found no takers.  

the airline was put on the block on January 27 and the initial deadline for submission of bids was March 31. It was first extended to June 30 and then to August 31. It was again extended to October 30 in view of the situation arising out of the Covid-19 pandemic before the final deadline was set as December 14.   

According to the EoI floated by Department of Investment and Public Asset Management (DIPAM) in January, the buyer would have to absorb Rs 23,286.5 crore, or more than one-third of the airline's total debt, while the rest would be transferred to the Air India Assets Holding Ltd (AIAHL) -- a special purpose vehicle.

However, further sweetening the deal to attract bidders, the government announced that the bidding would take place on the enterprise value, instead of the equity value, of the airline. While the enterprise value of a company includes its equity value, debt and cash with the company, its equity value is the value of the company’s shares. What that means is that the investors would have the flexibility to absorb the amount of debt they want. 

Also read -- Covid-hit AirAsia Berhad mulls India exit: Another airline shutdown coming?

Out of whatever the enterprise amount that the bidder quotes, 15% would have to be given to the government as the price of Air India and 85% would be debt that the winning bidder would absorb, civil aviation secretary Pradeep Singh Kharola was quoted as saying by PTI. The willing bidder would have to pay 15% of the quote as upfront cash payment, disinvestment secretary Tuhin Kanta Pandey said, according to a Business Standard report.   

According to the DIPAM's replies to clarifications sought by interested bidders on the PIM, on the date of closing of the transaction, the debt, which is lower among 1) the outstanding debt of Air India and Air India Express combined, and 2) 85% (or lower) of the enterprise value quoted by the financial bidder would be debt retained. The remaining debt would be allocated to the AIAHL. 

A consortium of over 200 Air India employees has bid for the airline with the help of a private equity fund. According to a highly-placed source with knowledge about the matter, the plan is that at least 51% stake would rest with the Air India employees if they succeed in their bid.

Budget carrier SpiceJet is also reportedly eyeing the national carrier. Civil aviation minister Hardeep Singh Puri said that the Air India sale is a confidential affair and the DIPAM would comment at the appropriate time. He had earlier stated that the choice before the government was either to shut Air India down or privatise it.