Disinvesting in the Maharaja: India steps towards more economic reform
On Friday, 8 October, the government of India announced that the Tata Group had won the tender to buy Air India, India’s national airlines. The announcement came just a week before the airline's 89th birthday on October 15. India’s flagship carrier has returned to the Tata family after 68 years as a government-owned enterprise.
Where it all began
Air India was founded as Tata Airlines in 1932 by J.R.D. Tata with a preliminary investment of INR 2 lakhs. The first plane, known as the Tata Air Mail, was personally piloted by J.R.D Tata. The airlines was subsequently renamed as Air India in 1946. Air India International with flights to Europe was initiated in 1948. The international service was one of India's first public-private associations wherein the Centre owned 49 per cent of the stakes, the Tatas 25 per cent, and the balance held by the general public.
Air India was ultimately completely nationalised in 1953. For the four decades that followed, it continued to be an armour of pride for the nation, exercising substantial control over the domestic airspace. However, with the entry of numerous private players in the aviation sector in 1994-95, the Maharaja began losing market share to rising competition. The government’s multiple attempts earlier to disinvest from Air India beginning this century did not yield concrete results.
Understanding the disinvestment process
The Modi government’s efforts towards privatisation first materialised in June 2017, when the Cabinet Committee on Economic Affairs (CCEA) presented its in-principle approval for strategic disinvestment of the airline, along with five of its subsidiaries. In March 2018, the government went on to invite Expression of Interest (EoI) from various investors with interest in buying 76 per cent share, while 26 per cent remained with the government. Along with this, the bid also required the buyer to absorb approximately 70 per cent of Air India’s debt.
By May 2018, it was noted that no bids had come in, following which the government did not float invites for any more bid requests until January 2020. The new EoI included buying 100 per cent share in the carrier, with the buyer taking up debt of Rs. 23,286.5 crore. In October 2020, the government modified the proposal by stating that the buyer could choose to absorb as much debt they wanted. By April 2021, financial bids started coming in. In September 2021, it primarily came down to two competitors; the Tata Group and the SpiceJet conglomerate. Finally, in October 2021, the Tata group won the bid, welcoming back the Maharaja at a whopping sum of Rs. 18,000 crore.
Strengthening Air India under Tata Group
Extending the Tata Group's track record to Air India, which has successfully handled industries spanning from retail and software to steel as well as automobiles, may require more than financial investment. While analysts examining Tata Group's takeover of 100 per cent of Air India from the Centre indicates that the airline will require an equity infusion of more than $ 1 Bn in the coming times, they also emphasise the need to change the company's culture.
Even though the airline has a number of significant assets, such as premium slots, landing rights, along with a large fleet, it also has a number of challenges that the Tata Group might seek to address. These include greater-than-industry-standard aircraft lease rentals, onerous maintenance contracts, and crew pay that are far more than the industry average . Furthermore, the government has obliged that the Tata Group keep the airline's personnel for at least a year after the acquisition closes. Beyond that, any downsizing must be done through a voluntary retirement scheme (VRS).
Impact on other airlines and foreign direct investment
It is widely accepted that Air India under the Tata Group will soon become a major competitor in the domestic and international markets. India's biggest carrier by market share, the low-cost airline IndiGo, has already declared plans to bring major improvements in its services. The CEO of IndiGo, Ronojoy Dutta, reportedly also stated that the new enfranchisement of Air India ought to be seen as a formidable competition.
Given Air India’s status as a national carrier, there has been a special condition with respect to foreign investment; "Foreign investment(s) in Air India Ltd, including foreign airline(s), shall not exceed 49 per cent either directly or indirectly, except in the case of those NRIs who are Indian nationals, where foreign investment(s) is permitted up to 100 per cent under the automatic route." In other words, while non-aviation players are allowed up to 100 per cent FDI in private airlines, international carriers have a limit of 49 per cent. The whole cap for Air India, on the other hand, is 49 per cent, and the government believes it should be maintained.
The way forward
Air India’s privatisation is among the most prominent in the government’s wider disinvestment policy. Following this, India must also push for partnerships with the private sector in other realms. This would enable the government to continue to serve the public better by enacting its role as a facilitator and establishing the regulatory mechanisms for private enterprises to support the country’s economic growth.
This article has been co-authored by Aarushi Aggarwal and Radhika Sharma.