No one wants to buy Air India

Animal spirits or death wish? Risk taking appetite or cautious decision making? 

These are difficult choices to make and apply equally to governing polity as well as corporate captains. The case of Air India sale emphasises this painful choice. The line between the two is not just thin, but almost invisible. Tata Group’s acquisition of Anglo-Dutch steel company Corus in 2007 for about $12 billion and of Jaguar Land Rover in 2008 for $2.3 billion was seen as brave and courageous and even visionary. The Corus deal went south, while JLR is seen as a success today. 

Was the Tata Group too brave or too foolhardy? Opinion will be divided.  

Similarly, the Modi government decided to go ahead with GST and Aadhaar even though it was considered politically fraught by many observers. Some thought it was foolhardy politically, but brave economically. 

This is the choice political and corporate leaders face when they go for big decisions. A similar situation has emerged in the sale of Air India. The government took a big political risk and expected private sector to take a business risk by acquiring it. 

Prime Minister Narendra Modi invested much effort in the project to sell Air India and cut the losses that have been bleeding the tax payers. There is little or no justification politically or economically for tax payers to bear the burden of an inefficient, costly and poorly-managed airline when private entities can and have done a better job. The estimated accumulated debt of $8 billion looks even worse when one considers the additional estimated $1-billion loss every year. 

These billions of dollars can be better spent on welfare and infrastructure in a country where both are sorely needed. From an external perspective, it appeared that Prime Minister Modi handed the task of managing the disinvestment to Jayant Sinha, who was moved from Ministry of Finance to Ministry of Civil Aviation in July 2016. Additional support to Sinha was offered by way of Cabinet Minister Suresh Prabhu, who is also reform oriented.

An alumni of Harvard Business School and a 25-year career in the corporate world, including as a partner in McKinsey, was perhaps the ideal choice to lead the toughest case of disinvestment that the government of India has attempted. As it happened, nobody turned up, even to express interest in acquiring Air India. Usually, even in the toughest of cases, bidders exit after having participated in the initial process. First step is submitting an expression of interest, then participating in the bidding. And then choosing to stay in the game or exiting, depending on the situation. In the case of Air India, nobody had the courage (or foolhardiness) to even express interest. 

Here comes the aftermath of the failure where risk and courage are being debated. Government officials are privately saying that the industry does not have risk taking appetite. The question then goes back to the original one.

How much risk is tenable and how much is suicidal? 

A couple of insights have emerged from conversations with people who were working closely with the government and potential bidders. 

The numbers did not add up. The equity structure thought up by the government would scare even the most risk-taking entrepreneurs. The government said it will hold 24 per cent. An Indian private entity would hold a minimum of 51 per cent and the rest 25 per cent could be with foreign investors. Now, domestic companies don’t have the financial muscle to buy 51 per cent. And foreign buyers would not want to take the burden of change for just 25 per cent equity and lack of control. Partial government ownership doesn’t fly at all. This is an issue that Sinha would appreciate with his corporate background. 

Attitude and approach. Those in the know were most disappointed by the approach and the attitude of some in the Civil Aviation Ministry. “They were not hearing the concerns of the potential bidders. It was almost as if the government was doing us a favour by offering Air India,” one of the insiders lamented. 

In the end, it appeared that the goodwill and tenacity of Modi was wasted by the team tasked to manage the disinvestment. Modi took the political risk, but the people who prepared the deal made the deal even riskier for potential buyers.  

The future for Air India looks bleak at the moment. Sinha and the Ministry of Civil Aviation will have to change their approach and see the sale from the perspective of the buyer. Entrepreneurs and corporate conglomerates can set up a new airline for much less than the cost of acquiring Air India. Though undoubtedly, the assets are flying slots, real estate and its market share. Without control and freedom to make it efficient, the terms have pushed the deal from being risky (acceptable) to being foolhardy (unacceptable) for potential buyers. 

The Ministry of Civil Aviation needs to understand the difference between the two now.

The author is an economic analyst and author of Kranti Nation: India and The Fourth Industrial Revolution. Views are personal.