Disinvestment of Air India

The context
  • The Union Cabinet on June 28, 2017 gave its ‘in-principle’ nod to divest stakes in Air India.
  • At present, Air India is a wholly owned government airline.
The cabinet decision
  • The Cabinet approved Air India’s strategic disinvestment.
  • The Cabinet also approved strategic disinvestment in five of Air India’s subsidiaries.
  • Under this, the government will sell a substantial portion of its stake and hand over the management of Air India to the private sector investor.
The background
  • Air India’s privatisation was first proposed in 2000 when the previous National Democratic Alliance (NDA) government decided to sell 51% of equity of the erstwhile domestic airline Indian Airlines, with 26% stake to a strategic partner. It also decided to allow disinvestment of 60% of Air India, which was running international operations, with 26% foreign entity stake. The move was dropped after opposition from the then Civil Aviation Minister.
  • The previous governments favoured turning- around of the airline. As a matter of fact, the Central government has already invested ₹23,993 crore out of ₹30,231 crore slated to be pumped as equity into Air India till 2020-21 as part of the airline’s turnaround plan approved by the previous government. However, these measures have not worked.
  • NITI Aayog’s recent recommendation on strategic disinvestment of Central public sector units, including Air India, was the immediate trigger for its stake sale. In its report earlier this year, the NITI Aayog recommended an outright sale of Air India.
Why disinvestment?
  • The government’s efforts to turn around the finances of Air India have failed.
  • Air India now faces:
  1. Eroding market share: Air India’s market share has eroded rapidly over the years due to competition from private players — from 19.4% in 2013 to around 13.3% in May 2017.
  2. Continuous losses: Air India has not registered profit since over a decade after the merger of the erstwhile Indian Airlines (domestic operations) with Air India (international operations) in 2007.
  3. A mountain of debts: The primary reason for Air India’s disinvestment is the government’s inability to cope with its debt of ₹52,000 crore. Around ₹22,000 crore of the total debt accounts for aircraft acquisition loan and the rest is related to debt for meeting its daily and operational expenses. The Government is of the view that around ₹50,000 crore could be invested in social welfare sectors instead of financing Air India’s debt.
The road ahead
  • Several existing players might be interested in buying stakes in Air India. Soon after the government announcing its plan to divest its stake in Air India, India’s largest low-cost airline IndiGo expressed formal interest to the Civil Aviation Ministry in taking over the international operations of Air India.
  • However, it will take some time for Air India’s disinvestment to take off.
  • The Government has formed a Group of Ministers, headed by the Finance Minister, to decide the modalities of disinvestment and come back with a detailed proposal. The group has to decide:
    • the quantum of stake sale
    • its unsustainable debt
    • whether to allow foreign investors to bid for the national carrier or not
    • if Air India’s operations will be split into domestic and international before sell-off
    • whether Air India’s subsidiaries will be divested simultaneously or separately.