State owned carrier, Air India, has invited bids for 14 of its real estate properties, in the hopes of raising around Rs 250 crore ($33m) to offset a portion of its debts. Following the unsuccessful sale of stakes in the carrier in May this year, the Indian government is seeking to raise cash through the sale of non-essential assets.
The government owned airline has been posting huge losses for several years and has been getting deeper and deeper into debt. As part of a turnaround plan formed in 2012, Air India were expected to monetise real estate holdings to the tune of Rs 500 crore ($67m) a year. So far this has failed to happen.
The properties going on sale this month include commercial and residential land as well as residential flats. They are spread over areas in Mumbai, Kolkata, Chennai, Bengaluru, Pune and Amritsar. Bids are open until 1st November 2018.
If Air India sells property for the expected amount, it would only nibble the smallest chunk out of what is estimated to be a debt of Rs 50,000 crore ($6.7bn).
What’s happening with Air India?
The Air India debt story goes back for over a decade. The bad times began rolling when the airline merged with Indian Airlines in 2007. Since then the carrier has posted ever increasing losses year on year, with some analysts claiming significant under reporting by the publicly owned entity.
According to the Civil Aviation Ministry, some of the reasons for the losses include high interest burden, increase in competition, high airport user charges, adverse impact of exchange rate variation and excess capacity in the market. It’s certainly been hard times in India, as we’ve seen with Jet Airways too.
The problems really came to a head in 2012, when the airline initially obtained a Rs 30,000 crore bailout from the previous UPA government of India. That’s a staggering $4 billion.
Since then, the airline has had numerous cash injections from governments as well as loans from banks. Most recently Air India took a loan of Rs 1,500 ($204m) in August this year from the Bank of Baroda, which the government stood guarantor for.
However, that loan was exhausted within a month, leading to the government injecting another Rs 980 crore ($133m) in early September.
Fuel supply issues
According to press reports, Air India are in trouble with their fuel suppliers too. The airline, which drinks around Rs 20 crore ($2.7m) of fuel every day, is not clearing its fuel bills. As a result, the Oil Marketing Companies (OMCs) issued an ultimatum in early September threatening to withhold supply.
The Air India debt with the oil companies extends to more than Rs 5,000 crore ($679m). For the past year and a half, the airline has not been making its daily fuel payments. According to the suppliers, it is only because Air India is a public service undertaking (PSU) that they have been continuing to supply the company. An executive commented that,
Had it been a private firm, we could have already stopped the supply.
Undoubtedly part of the reason Air India sells property this week is in order to raise capital to settle some of these debts. Should the fuel suppliers decide to cut them off, it could be disastrous.
No light at the end of the tunnel
Air India has received bailout after bailout from successive Indian governments, and still the losses grow. The current Air India debt is estimated to stand at around Rs 50,000 crore ($6.7bn), and it’s going up all the time.
Under the airline’s agreed ‘turnaround plan’ back in 2012, it agreed to limit its acquisition of short term, high interest loans. However, short term loans continued to be taken out at more than four times the limits laid down in the plan.
The interest burden of these has simply added to the many financial problems of the struggling airline, leaving it to race through its subsidies and bailouts with no real prospect of becoming a profit making business any time in the near future.
So, why don’t the government just leave it to fail?
The short answer is because 24% of something is worth more than 24% of nothing. And, you know, politics.
The Indian government has been attempting to privatise Air India for some time now. Earlier this year, they invited bids for the indebted airline, but failed to receive any interest in the time window available.
It was unsurprising really, when projections are that the airline will rack up a further $2bn of debt in the next two years. Not only that, but the buyer will be expected to allow the Indian government to retain 24% of the airline. This is presumably in the hope of a new owner turning the carrier around and thereby returning some of the massive amounts of taxpayers money that have already been sunk into it.
The Centre for Pacific Aviation (CAPA) India have advised the government that divestment from the failing airline needs to be pursued with more determination. But, Indian pride and politics probably mean plenty more public cash will be funnelled into the money pit that is the flag carrying airline before the umbilical cord is successfully cut.