Air India Is Moving Towards Privatization – What Will Happen Next?

As reported yesterday, the Indian government is once again looking to privatize struggling national carrier, Air India. The renewed interest in privatization comes after news of a forthcoming committee report by Cabinet Secretary P. K. Sinha. Here, we look at the political, economic, and market factors involved in Air India’s latest privatization bid.

Air India 747
The Indian Government is once again seeking to privatize Air India. Photo: Sean D Silva / Wikimedia Commons

History is telling

In May 2018, the Indian government attempted and failed to privatize the national carrier. At the core of the issue, no private-sector buyer expressed interest in the state-owned airline.

Indeed, the proposal was unattractive for many investors. On one hand, the government insisted that both domestic and international routes be sold together. This would limit the number of interested investors and make the purchase unattractive to domestic operators.

Air Inida 787
Air India’s privatization would likley include its assets, staff, routes, and some financial commitments.  Photo: Simon Boddy / Wikimedia Commons

On the other hand, any bid for the airline, at the time, would have included upwards of US$5bn of debt. Not to mention, the government would have retained a 24% stake, and the carrier had to keep its 27,000 strong labor force.

For many would-be investors, the 2017-18 proposal was fundamentally unattractive. Only once the Cabinet Secretary’s report is published later this month, however, will the details of the 2019 privatization proposals be known.

A change in dynamics

While the details of the upcoming privatization plan are unknown, changes in market dynamics will certainly influence investor appetite for the national airline.

Unfortunately for the national carrier, recent developments have not always been stellar. Back in December 2018, the airline was injected with $300m of public funds intended for the maintenance of aircraft purchases and loans.

SpiceJet
While Air India has been struggling, other airlines in the country, such as SpiceJet, have grown. Photo: Nisarg Vyas / Wikimedia Commons

The $300m transfer, and $72m spent on maintenance for grounded jets only added to the airline’s precarious financial position. Indeed, the airline is said to hold a total debt burden of more than US$8bn, according to an Economic Times article published last June.

Domestically, while carriers such as SpiceJet, Vistara and Indigo have thrived, Jet Airways has nearly collapsed. The combination of Jet’s difficulties and Air India’s struggles have led to a scarcity in international flights and has opened the market for foreign carriers.

Singapore A330
As India’s international airlines have struggled, foreign competitors such as Singapore Airlines have gained significant market share. Photo: Aero Icarus / Wikimedia Commons

Indeed, Vistara part-owner Singapore Airlines has made significant inroads into the Indian market, joined by other carriers such as United and the ME3. Thus, any Air India investor would not only have to overcome the company’s internal issues but also thwart off domestic low-cost carriers and international competitors.

Political and broader factors at play

Privatization is invariably a challenging and political affair, and Air India is no different.

In a column published in The Diplomat, Krzysztof Iwanek outlines that while PM Modi “is in a political position today to actually push through the long-sought privatization of Air India” political ideologies, security interests, and pure will may stagnate the process.

Air India ATR
Air India has a mixed fleet able to cover 37 international and 69 domestic destinations. Photo: SEBASTIEN MORTIER / Wikimedia Commons

In truth, many analysts share this position, and some go further. While some in the government are seeming to look for a successful disinvestment, Financial Times analyst Kiran Stacey points to the failed 2018 privatization as symptomatic of “flaws in New Delhi’s ambitious plans to privatize major parts of Indian industry.

Indeed, if one takes a broader look beyond Air India, the government has largely been unable to privatize its 331 state-owned enterprises, scarcely meeting its disinvestment targets by means of asset sales, not ownership transfer, according to the FT.

Air India 777
Could Air India be one of the government’s successful privatizations? Photo: calflier001/ Wikimedia Commons

So. what will happen next? Well, only time will tell the truth but, historical lessons, market changes and political factors will certainly, once again, be at play.

Air India could not be reached for comment.

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