New Delhi: When Colin Marsh Marshall arrived at British Airways Plc (BA) in 1983, he saw a bloated airline with a demoralized crew, flown for its bosses and sinking in its losses.

Those were the heydays of privatization in Margaret Thatcher’s Britain. The sale of British Petroleum was under way, and British Telecom would be privatized in 1984. John King, chairman of BA, had hired Marshall as chief executive, and the brief was clear.

King fired around 22,000 BA workers, setting the path for Marshall. Over the next four years, Marshall overhauled the airline, changing its focus from staff to customers, raising productivity, cutting costs and checking losses. In 1987, the year it was privatized, BA made $284 million in profit. It remains one of the crown jewels of the success of privatization.

Thirty years hence and halfway across the globe flies Air India, another state-run airline deep in debt, backed by bailouts and beholden to bureaucrats, awaiting its Marshall Plan. After shovelling thousands of crores of rupees into the Air India black hole, the government seems to have finally made up its mind. It doesn’t want to run the airline any more.

For India’s flag carrier, this is the BA moment.

Second-time lucky?

This won’t be the first time, though. An attempt to privatize Air India was made in 2001. That was when Atal Behari Vajpayee was prime minister. But a wave of privatizations in the early 2000s failed to touch the airline. Since then, Air India has been through a messy merger with Indian Airlines, racked up debt and seen aggressive challengers emerge. Even though there is political backing for the sale of Air India now, there is scepticism over whether it would make economic sense for a buyer.

“I can see a political deal being done, but the economic case has limited merit without significant restructuring and leeway for an investor to radically transform the company," said Vikram Krishnan, associate partner at Oliver Wyman, a San Francisco-based consulting firm, “It will be interesting to see if they can find an investor."

Since 2001 when the privatization plan was first mooted, Air India has been through a messy merger with Indian Airlines, racked up debt and seen aggressive challengers emerge

In a interview aired on 27 May by state-run broadcaster Doordarshan, finance minister Arun Jaitley said Air India, with a mere 14% market share, had debt of Rs50,000 crore. “Now, there are private airlines that are flying—IndiGo, GoAir, SpiceJet, Jet Airways—there you don’t invest money. But to run Air India, you have invested Rs50,000 crore. That money is government’s money, that’s your money. It could have been used for school education. And if 86% of flying can be handled by private sector, so it can also handle 100%," said Jaitley— the clearest signal that the government wants Air India off its back.

Air India may have some suitors, said an international investor who invests in airlines. asking not to be named.

“The reason investors might look at it is because it is there," said this investor, noting that the airline has revenue-earning operations, aircraft, passengers and an established network.

I can see a political deal being done, but the economic case has limited merit without significant restructuring and leeway for an investor to radically transform the company- Vikram Krishnan, associate partner at Oliver Wyman, a San Francisco-based consulting firm

“Your theory would be a) I am a brave investor; b) I would acquire an existing revenue stream and I can see a path to profitability through the following defined 10 things to do (whatever those are); c) I like India and this is a major player in the market, hard to replicate its size and network unless considerable capital is deployed over time," said this person.

To be sure, Air India’s massive infrastructure of engineering and ground-handling subsidiaries would make any airline envious.

Rich in assets

The airline has 140 planes including 43 owned Airbus A320s and 15 owned Boeing 777s that can fly non-stop to the US and Europe. It also has nearly two dozen brand new Boeing 787 Dreamliner planes on what one Air India official, who did not want to be named, described as “great sale and lease-back terms".

Air India has nearly 2,000 pilots, and many more trained engineers and cabin crew. Its $150 million aircraft maintenance and repair unit in Nagpur is the only such in the country. It’s the only airline in India that performs major aircraft checks including for rivals like Jet Airways Ltd. It has 33 hangars, compared with rival Jet Airways’ two.

Air India has its own training centre in Hyderabad and a multimillion-dollar aircraft simulator for Boeing 777 and 787 Dreamliners.

The airline also has vast land holdings, including nearly 32 acres in central Mumbai, besides the iconic headquarters on Marine Drive valued at more than Rs1,600 crore. It also has a 30-acre housing colony in the posh Vasant Vihar locality in south Delhi surrounded by embassies and villas where a single flat could cost about Rs8 crore. It also has properties in London, Hong Kong, Nairobi, Japan and Mauritius. The Centaur hotels in Delhi and Srinagar belong to it. And that’s just a partial listing.

Air India also holds 8% in Air Mauritius, and has shares of telecom firm Orange SA (formerly France Télécom), IT company SITA, Cochin International Airport Ltd and air traffic control firm Aeronautical Radio of Thailand Ltd, according to the airline’s 2014-15 annual report.

Last year, a London Heathrow slot was sold for about $75 million. Air India has four slots at Heathrow alone

It is a part of Star Alliance, the biggest airline grouping, which counts Singapore Airlines, Lufthansa, United Airlines and Thai Airways among its members. Passengers of most of these airlines can fly on a single Air India ticket and earn traveller miles. The entry into Star Alliance itself was an exhaustive exercise that cost €10 million in entry fee and $100 million in investments in IT and other related infrastructure.

The airline flies to 72 Indian and 41 international destinations with prime slots. Last year, a London Heathrow slot was sold for about $75 million. Air India has four slots at Heathrow alone. A slot allows an airline to land and take off from an airport at a particular time.

Air India also has one of the largest collections of modern Indian art. After princely states faded out following independence, Air India became a patron of art. Works by artists such as Anjolie Ela Menon, M.F. Husain and V.S. Gaitonde are a part of its extensive collection. It also has expensive antique furniture, some made of ivory.

Plug-and-play

“It’s a plug-and-play offer. To create this kind of infrastructure, you will take years," said the Air India official cited above. “The Air India brand is still more respected internationally than any other brand from India."

It was Tata Sons Ltd, the holding company of the Tata group, which founded Air India as Tata Airlines in 1932 and operated it till it was nationalized in 1953. Tata Sons has since re-entered aviation with Vistara and AirAsia India. It plans to take Vistara, its joint venture with Singapore Airlines Ltd, international next year and is looking for long-haul planes similar to those in Air India’s fleet.

If Air India goes on the block, could Tata Sons be interested?

A Tata Sons spokesman said it doesn’t comment on such matters, but an official aware of the Tata group’s thinking said one cannot rule out its participation.

It was Tata Sons Ltd, the holding company of the Tata group, which founded Air India as Tata Airlines in 1932 and operated it till it was nationalized in 1953

“The thing with RNT is that he really likes aviation," said this person, referring to chairman emeritus Ratan N. Tata. “So, if the government takes a haircut (on its debt) one could see some interest."

Valuing intangibles will be a challenge for the government, said a former Air India chairman who did not want to be named.

When privatizing, the key questions for the government will be the following: How will it protect Air India’s employees from job losses? Will the bilateral rights of the airline be valued in a potential deal? Will the brand equity of Air India be valued?

And finally, if Air India is privatized, who will evacuate stranded Indians from war-torn countries, transport people in crisis zones and operate the Boeing 747 jumbos that fly the Prime Minister?

The descent

Air India clocked a small profit of Rs16.29 crore in 2005-06, while Indian Airlines posted a Rs49.50 crore profit. Both had a paltry equity base of about Rs105 crore and Rs153 crore, respectively. They had combined debt of about Rs5,000 crore and there was no financial support from the government.

Then, in 2007, the Congress-led United Progressive Alliance (UPA) government decided to merge the two airlines and ordered planes worth more than Rs50,000 crore. The airline took on heavy debt to purchase these planes while employees agitated over wage disparities. Air India never recovered from the chaos. Federal investigating agency Central Bureau of Investigation on 31 May said it had started inquiring into the plane order and the merger.

Till 2010, the airline kept paying for these planes, many of which it did not even need as the national auditor pointed out in 2011, from its internal resources and loans.

View Full Image Finance minister Arun Jaitley has sought NITI Aayog’s help to chalk out an Air India revival plan. Photo: Pradeep Gaur/Mint

New wage agreements were signed to improve employee salaries, but all this meant more distractions and more loans to fly in a new environment where private airlines including Jet Airways, Kingfisher Airlines and IndiGo were expanding rapidly. The ministry also gave hundreds of flying rights to foreign airlines that pushed Air India further down the hole—this was again flagged by the auditor.

In 2009, the aviation ministry let lapse a rule which allowed Air India to get annual royalties from foreign airlines, as with its limited fleet it could not match the flights they were bringing into India. This cost the airline Rs400 crore annually, according to the Air India official quoted above.

With the financial burden of 111 aircraft and working capital loans, the airline’s debt ballooned from Rs5,000 crore to Rs50,000 crore in 10 years. In 2011, when the airline reached a point that it could not pay salaries on time, the UPA government agreed to provide Air India about Rs30,000 crore in equity funding, spread over a decade.

A government official aware of the matter explained the sequence of events leading to Jaitley’s statement. He did not want to be identified.

Exploring options

Every month, Air India’s expenses are Rs300-400 crore more than its revenue. To bridge this gap, it borrows routinely. For better terms for loans and equity infusion, it has to go to the finance ministry.

In the past few months, there have been discussions to convert Air India’s debt into equity. But the banks led by State Bank of India, already loaded with bad loans including those given to Kingfisher Airlines, are not convinced.

It was during these discussions with finance minister Jaitley that it was decided to look beyond the current options and the opinion of NITI Aayog, a government think tank, was sought.

In the past few months, there have been discussions to convert Air India’s debt into equity. But the banks led by SBI, already loaded with bad loans including those given to Kingfisher Airlines, are not convinced

“NITI Aayog has given its suggestion to the aviation ministry; now the aviation ministry will have to explore all the possibilities on how to privatize Air India," said Jaitley on 1 June.

In the aviation ministry, there are three different views. Aviation minister Ashok Gajapathi Raju says it cannot be business as usual and some way has to be found to allow the airline to survive.

“Air India is a good airline. Its finances are awful," Raju told Mint in an interview on 1 June, “Finances are more because of legacy issues. Now from day one I have been saying that Air India’s problem has been its finances and it’s a debt trap situation despite the fact that the previous government has given a turnaround plan and a financial reconstruction plan. So taxpayers’ money is also going to Air India and somehow things are not working out. So business as usual is definitely not an option."

NITI Aayog has given its suggestion to the aviation ministry; now the aviation ministry will have to explore all the possibilities on how to privatize Air India- FM Arun Jailtey on 1 June 2017

Another ministry official with a finance background suggested that instead of handing over the airline to one strategic investor, it could be given to several investors, and run like a board-managed company.

Another senior official said a partner could come in as a strategic investor, and that, over time, the government could gradually sell the rest of its stake.

At an event to mark the three years of Prime Minister Narendra Modi’s National Democratic Alliance (NDA) government last week, civil aviation secretary Rajiv Nayan Choubey said employees’ interests will be protected in any move the government makes on Air India.

“That would certainly be taken care of," he said, adding things would become clearer in three months.

The Air India official cited earlier said a proper valuation exercise should be conducted by a reputed international valuer who has helped in a similar airline privatization and understands this space to make sure assets don’t go cheap.

Pain before gain

Former Jet Airways CEO Steve Forte said the government should allow professionals to take over and run the airline.

“It will be very painful at first, with manpower, fleet and route reductions, but then, as the airline will slowly emerge from the darkness, it will have a chance to grow again in a profitable way," he said.

Jitender Bhargava, former Air India executive director, said, “The UPA government took the airline into this debt trap; now the NDA government should make sure it is not remembered for selling the flag carrier cheap. A special committee of retired and serving Air Indians should negotiate best terms and keep the process transparent."

Air India’s privatization did come up several times in the UPA tenure too at the highest level, said another top bureaucrat who was directly involved in the process, but did not want to be named.

The UPA took the airline into this debt trap; now NDA should make sure it is not remembered for selling the flag carrier cheap. A special committee of retired and serving Air Indians should negotiate best terms and keep the process transparent.- Jitender Bhargava, former executive director of Air India

However, political will was lacking. The argument given was this: Air India was being given on an average some Rs2,000 crore equity by the government every year since 2011. Nearly 40% of its outgo of some Rs25,000 crore is spent on oil bills and airports, which anyway comes back to government-owned oil and airport companies, besides the taxes paid. This includes Rs6,500 crore in fuel, Rs1,500 crore to airports and Rs500 crore in service tax.

“So, it was seen as just transferring money from one arm of the government to the other," said this bureaucrat, recalling a conversation at the Prime Minister’s Office. “Air India also has immense prestige attached to it. The last thing the (UPA) government, already marred by scam allegations, wanted to signal to the world was the end of its own airline. It’s not just another company."

However, Air India can no longer bank on perpetual government support as private airlines steadily eat into its share. Governments the world over have stepped back from owning airlines and hotel chains. This is Air India’s BA moment. Or is it?

Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.

Share Via