It's official: Government bids Tata to Air India

Tata had placed a bid for Rs 18,000 crore and is set to absorb Rs 15,300 crore of Air India's debt

It's official: Government bids Tata to Air India
An Air India Boeing 787-8 Dreamliner. Image courtesy: Wikimedia Commons/lasta29

Air India has flown back to reunite with the Tata family 68 years after being separated from it, the government has announced. The heavily debt-ridden and loss-making national carrier was sold to India's largest conglomerate Tata for Rs 18,000 crore. With it, the salt-to-steel behemoth also gained possession of Air India's airline subsidiary Air India Express and ground handling unit AISATS.   

The next step entails issuing the Letter of Intent (LoI) and then signing the Share Purchase Agreement, following which, the conditions precedent would need to be satisfied by the successful bidder, the company and government. The entire transaction process is expected to be completed by December 2021.

Media outlets had unanimously reported at the start of this month that the Tata group, which had founded the airline 15 years before independence, had won the bid to bag Air India. However, the government had downplayed the reports at that time as an official announcement was yet to be made. That announcement came on October 8 with Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management (DIPAM) tweeting: "Government approves the winning bid of M/s Tata Sons’ SPV (M/s Talace Pvt Ltd) for Air India disinvestment at an enterprise value of Rs 18,000 crore."

The airlines in the Tata stable: (L-R) Air India, Air India Express, AirAsia India and Vistara. Image courtesy: Flickr/ Karandikar/Meandkancil2020/Venkat Mangudi

The Cabinet Committee of Economic Affairs (CCEA)-empowered Air India Specific Alternative Mechanism (AISAM) comprising Union Minister for Home Affairs and Cooperation Amit Shah, Union Minister for Finance and Corporate Affairs Nirmala Sitharaman, Union Minister for Commerce and Industry Piyush Goyal and Union Civil Aviation Minister Jyotiraditya Scindia approved the highest bid placed by the Tata Special Purpose Vehicle (SPV) Talace Private Limited. Tata defeated the Rs 15,100 crore bid by the consortium led by SpiceJet Chairman and Managing Director (CMD) Ajay Singh. The reserve price that was set was Rs 12,906 crore.

"The Tata group winning the bid for Air India is great news! While admittedly it will take considerable effort to rebuild Air India, it will hopefully provide a very strong market opportunity to the Tata group's presence in the aviation industry," said Tata group patriarch Ratan Tata. 

"On an emotional note, Air India, under the leadership of Mr JRD Tata had, at one time, gained the reputation of being one of the most prestigious airlines in the world. Tatas will have the opportunity of regaining the image and reputation it enjoyed in earlier years. Mr JRD Tata would have been overjoyed if he was in our midst today. We also need to recognise and thank the government for its recent policy of opening select industries to the private sector. Welcome back Air India!" Ratan Tata added. 

"I congratulate the Tata Group on winning the bid for Air India and wish them all the success. It was my honour and privilege to be shortlisted for bidding for Air India. I am confident that the Tata Group will restore the glory of Air India and make all of India proud," Ajay Singh said in a statement. 

The revised disinvestment offer required the shortlisted entities to bid on the airline's enterprise value (EV), which means that instead of having to take on a pre-fixed amount of debt, they were given the option to quote an EV based on their estimate of the airline's combined debt and equity. Essentially, the bidders had to state the amount of debt they were willing to absorb. The bidder quoting the highest EV was to be declared as the winner. At least 15% of this value is to be paid in cash, while the rest can be taken on as debt.  

Also read -- Tata buys Air India back, revival of airline's fortunes expected: Reports      

Accordingly, out of the total bid of Rs 18,000 crore, Rs 15,300 crore would go to cover the airline's debt and Rs 2,700 crore would be paid to the government in cash. This means that the Tata group would absorb over one-fourth of Air India's total debt, and retain at least 51% stake for a year. The conglomerate would also have to retain the 12,085 (8,084 permanent and 4,001 contractual) employees of Air India and 1,434 employees of Air India Express for a year, The Economic Times reported. After that, if these employees are retrenched, it has to be through the voluntary retirement scheme. Significantly, around 5,000 employees would automatically retire in the next five years. Employees, however, can be sacked on the basis of performance parameters or as a part of disciplinary action.  

Tata would have full freedom to operate Air India but would have to be bound by a business continuity clause for three years. It would also have to retain the Air India brand for five years. After that it can sell the airline, but not to a foreign player.     

The national carrier has been struggling in a financial mess for a long time. It had not made profits since its controversial merger with Indian Airlines in 2007. Air India's total accumulated losses as of March-end 2021 was Rs 70,820 crore, The Economic Times reported. As of August 31, 2021, Air India was sitting on a mammoth debt pile of Rs 61,562 crore, primarily raised on sovereign guarantees to fund its losses.   

Following the disinvestment deal, the government would take up Rs 46,262 crore of the airline's debt and Rs 14,718 worth of assets, including real estate. All of these would be transferred to an SPV called Air India Asset Holding Limited (AIAHL). The debt that the government is absorbing would be retired. Lenders would not be disadvantaged, as the debts are protected by sovereign guarantees that assure the lenders that the government would settle the loans if the company cannot. The assets that the government takes up would eventually be monetised. 

The airline has been surviving on taxpayer money for the past decade or so. Pandey pointed out that the government support to the airline since 2009-10 was to the tune of Rs 1,10,276 crore. This support was in the form of equity and sovereign guarantees.    

The airline's debilitating financial problems was the reason that former Aviation Minister Hardeep Singh Puri mentioned on more than one occasion that the option before the government was to either privatise the airline or shut it down. Former Union Finance Minister Arun Jaitley told Live Mint a few years back, "To run Air India, you have invested Rs 50,000 crore. That money is the government's money, that’s your money. It could have been used for school education. And if 86% of flying can be handled by the private sector, then it can also handle 100%."  

The government would bear the airline's losses till Tata takes over the ownership of the company, The Economic Times reported. The airline currently loses Rs 20 crore per day. 

The Air India success now makes Tata the biggest airline operator in India, and the pioneer of aviation in India has now ended up with four major airlines -- full-service carriers (FSCs) Air India and Vistara, and low-cost carriers (LCCs) Air India Express and AirAsia India. According to The Economic Times, the Tata group plans to merge AirAsia India with Air India and integrate the network with Vistara. The Tata group holds an 83.67% share in AirAsia India, having bought a chunk of equity from Malaysia's AirAsia Berhad last year. Tata still has a call option on the remaining 16.33% and the AirAsia group had hinted that it would exit the Indian market by March 2022. Vistara, on the other hand, is a 51:49 joint venture between Tata and Singapore Airlines. 

An Air India Boeing 777-300ER on its way to land at the London Heathrow Airport. Image courtesy: Wikimedia Commons/Charlie

Acquiring Air India would mean that Tata, which had gone long-haul with Vistara lately, is now set to own the airline with the biggest long-haul footprint. Add to that Air India Express's significant presence in the Gulf and Southeast Asian markets and Tata is set to have the largest international footprint among Indian aviation companies as well. According to the Directorate General of Civil Aviation (DGCA) data for October-December 2019, which was the last pre-pandemic quarter, Air India and Air India Express had the biggest international market share among Indian airlines, with a combined share of 18.8%. 

The Air India privatisation brings the curtains down on an arduous process with the government being third time lucky. The first disinvestment attempt in 2000 was stymied by political opposition. In 2018, the government made a second attempt to sell the airline after an in-principle nod by the CCEA for the strategic disinvestment of Air India and its five subsidiaries, offering to part with 76% of its stake in Air India, 100% stake in Air India Express and 50% stake in AISATS. The winning bidder was to take over nearly 70% of the airline's debts, which amounted to Rs 33,392 crore at that time. However, the offer fell flat, with no bidders coming forward.   

A third attempt was made in January 2020, with easier norms. Out of the airline's total debt of Rs 60,074 crore as of March 31, 2019, the winning bidder had to absorb Rs 23,286.5 crore. The terms of the deal were further relaxed in October 2020 and the potential buyers were given the option to choose the amount of debt they were actually willing to take up. 

Also read: Tata confirms Air India bid, airline may change hands by FY22 end

The Air India sale received "multiple expressions of interest" in December 2020, and seven EOIs were received. Five of the bidders, however, had to be disqualified as they could not meet the requirements set out in the Preliminary Information Memorandum (PIM). The Request for Proposal (RFP) and draft Share Purchase Agreement (SPA) was issued on March 30, 2021. Air India provided comprehensive information through the Virtual Data Room to the qualified bidders, who were also provided access to inspect the assets and facilities being offered as a part of the transaction. A large number of queries from bidders were responded to. The airline received financial bids on September 15, 2021. 

By acquiring Air India, Tata would get 4,400 domestic and 1,800 international landing and parking slots at Indian airports and 900 slots at foreign airports too. The Tata group would now get close to 150 aircraft (Air India and Air India Express combined), including a wide array of widebodies like the B787-8 Dreamliner, B777-300ER, B777-200LR and B747-400 and narrowbodies like A319, A320, A320Neo, A321 and B737-800. Tata also co-owns Vistara and AirAsia India at present and has a combined fleet of 79 aircraft, including the B787-9 Dreamliner widebody and A320, A320Neo, A321Neo and B737-800 narrowbodies.

The Tata group is being widely regarded as best placed to revive the fortunes of Air India and return it to its heydays that it enjoyed under JRD Tata. However, things are easier said than done. The conglomerate's due diligence in Air India's operations threw up major shortcomings like aircraft needing upgrades to there being nearly 4,500 to 5,000 excess employees. A large number of free air tickets are being given away to the Air India employees, which is adding to the company's financial woes. The airline has also suffered from delayed payment of employees, industrial disputes and strikes, mismanagement, lax safety procedures among other things.      

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 given by a reluctant Dorabjee Tata, the then Chairman of Tata Sons, and two second-hand de Havilland Puss Moth aircraft. 

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 Tata Airlines, and indeed of the country.

Since then, the airline went on expanding. The first full year of operations of Tata Airlines was in 1933. That year, the airline flew 1.6 lakh miles (2,57,495.04 km), carrying 155 passengers and 10.71 tonnes of mail.

In 1946, Tata Airlines became a public limited company and was renamed 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 Air India International Limited, with a focus on foreign operations. 

The domestic business was transferred to the Indian Airlines Corporation, which was formed by a merger of Deccan Airways, Airways India, Bharat Airways, Himalayan Aviation, Kalinga Airlines, Indian National Airways and Air Services of India and the domestic wing of Air India.

JRD Tata continued as its chairman till 1977 and made the airline one of the finest that the world has ever seen. In fact, airline companies sought Air India's expertise during their early days, and many of them have become global giants.

Air India, on the other hand, went on a free fall, losing money and credibility, and has faced a plethora of controversies ranging from mismanagement, industrial disputes and even allegations of shoddy safety procedures. JRD Tata was removed from his beloved airline by the Janata Party government, which was a body blow for Air India.

The Narendra Modi government had set an ambitious target of Rs 1.75 lakh crore from disinvestments in FY22. With the Air India sale being successful, it would go a long way in contributing towards the government's disinvestment target. Apart from Air India, the government's target includes Bharat Petroleum Corporation Limited (BPCL), IDBI Bank, Shipping Corporation of India and Neelanchal Ispat Nigam apart from a mega Initial Public Offering (IPO) in Life Insurance Corporation of India.

(Cover image courtesy Wikimedia Commons/lasta29)