If disinvestment has to proceed in any meaningful manner, the government must take a significant haircut

New Delhi: The government may consider writing off a significant portion of Air India’s debt pile, in a bid to make the airline attractive for prospective suitors. The total debt on the airline’s books is Rs 48,887 crore as on 31 March this year, which is bigger than India’s health budget this fiscal. Should the government be writing off such a large amount, when this money and the separate equity infusion into this loss-making airline could have instead been used for larger public good? Well, one view is that such a one-time write-off will stave off future investments into the bleeding airline.

Another, and a diametrically opposite point of view, is: Why should the airline be privatised if the government has already decided to swallow the bitter pill and write off a significant portion of the debt? Shouldn’t induction of professionals on the airline’s board help turn it around, instead of the government ceding control through disinvestment?

Not just a large hair cut, the government may also have to hive off real estate and other land assets besides loss-making subsidiaries into a separate entity - not every investor would be interested in these. Also, operations like the ground handling subsidiary may not be of interest to an airline bidder. These assets would have to be set off against the aircraft-related debt to unlock value .

Anyway, fresh data presented in Parliament this month showed Air India’s annual debt servicing obligations alone come to about Rs 6,000 crore, which is 50 percent more than previously thought. This translates to about Rs 500 crore each month in interest payments or about Rs 16.5 crore each day of the year. IndiGo, which has already expressed interest in bidding for the overseas operations of Air India, has said it does not plan to take on the airline’s debt. One doubts if other serious bidders would, either.

That debt is killing Air India is evident also from an analysis done by ICICI Securities' Anshuman Deb, who said in a note to clients some days back that the operational cost structure of Air India (ex-debt servicing and depreciation) has already seen a turnaround. He based his observations on lower fuel costs in the fiscal year ending March 2017.

From 43 percent of the total cost in FY15, fuel expenses fell to just 23 percent of the total cost structure of Air India in FY17. Or to put this in perspective, from nearly half the cost structure comprising fuel expenses, Air India’s fuel costs were around just a fourth of the total cost structure in FY17. This single factor has helped the airline generate an earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of anywhere between 15-20 percent in FY17 versus a measly 2 percent in FY15. But since the debt pile refuses has not been reduced at all during this period, the interest portion continues to bog down Air India.

Of the total debt, about Rs 32,000 crore is due to working capital requirements. This is specifically the portion aviation analysts have said needs to be written off before any serious buyers will come forward for the loss-laden Air India.

Remember, Air India had piled up losses totaling Rs 41,380.45 crore by March end last year, according to the government’s own figures. So should even the working capital part of the Air India debt pile should be written off? If the government does this, wouldn’t this set a precedent for future disinvestment of loss-making PSUs? Why should the tax payer first pump money into the loss-making Air India and then also fund a one-time write-off of debt which was anyway a consequence of poor management and piling losses of the national carrier?

It seems buyers – not many have evinced interest openly till now – may not find the airline particularly lucrative if the entire working capital portion or a significant part of it is waived off. The debt write-off seems to be virtually a pre-condition to the sale of the airline. If disinvestment has to proceed in any meaningful manner, the government must take a significant haircut.

“Except Air India Express, all other subsidiaries and non-aircraft assets should be taken out of the Air India balance sheet. Land and real estate assets need to be dealt with separately, given challenges and risks associated including legal,’ said global aviation consultancy CAPA’s CEO-India & Middle East, Kapil Kaul.

Air India comprises the main airline company and five subsidiaries. Along with debt write-off, the government must also bundle the profit-making subsidiaries to make the sale more attractive, seems to be the collective view. IndiGo, India’s largest airline by passengers, has already said it would be interested in the main airline and just one of its subsidiaries – Air India Express. Even here, IndiGo’s interest would perhaps be limited to the combined international operations of AI and AI Express.

Will the government actually carve out the lucrative international operations of AI and AI Express for the convenience of just one potential bidder? This remains to be seen. But IndiGo’s pick of the lot is interesting, since these are the only two parts of the whole Air India pie which have reported improved financial performance last fiscal. Air India’s subsidiaries are Air India Express, Alliance Air, Hotel Corporation of India, AIATSL and AIESL. Only Air India and Air India Express reported improved financial performance last fiscal – the other subsidiaries remained mired in red ink.

According to a written reply in Lok Sabha last week, while Air India could show a nominal operational profit and a narrower net loss compared to the previous fiscal, Air India Express could also show a net profit though lower than what was reported in 2015-16. Hotel Corporation of India, AI Engineering Services, Alliance Air remained loss-making in 2016-17.

A senior Air India official said the figures given in Lok Sabha on Monday were provisional and the accounts had not yet been finalised. According to these figures, Air India’s operating profit last fiscal may be Rs 215 crore and the airline could report a narrower net loss at Rs 3,728 crore versus Rs 3,836 crore in 2015-16. That still translates to over Rs 10 crore net loss each day!

Air India Express could report a net profit of Rs 297 crore for FY17 versus Rs 362 crore last fiscal. The remaining subsidiaries continue to report losses. Hotel Corporation of India could report a net loss of Rs 42 crore in 2016-17 against Rs 57.75 crore in the previous fiscal, an improvement but still a net loss. HCI owns and operates the Centaur Hotels at Delhi and Srinagar besides flight catering units.

Alliance Air is expected to report a net loss of Rs 200 crore last fiscal against Rs 198.75 crore. Alliance Air operates in smaller, tier II and tier III cities, acting as a feeder for Air India and Air India Express.

For the engineering (AIESL) subsidiary, the net loss has widened to Rs 652.78 crore from Rs 558.62 crore in the previous fiscal. For the ground handling (AITSL) subsidiary, likely operational profit figure is Rs 105 crore, similar to the previous fiscal. These numbers clearly show that not only will the government have to write-off a significant portion of the airline’s debt, it will also have to sell off the loss-making subsidiaries separately or at least house them in another company while offering potential buyers the airline business of Air India and Air India Express.