CAPA’s Key Success Factors for the Privatisation of Air India
10 October 2017
Clean-up the balance sheet: This is the most important first step. The airline can never be viable in its current avatar due to its massive debt and interest burden. The core divestment should consist of the airline operations only, namely Air India, Air India Express and optionally Air India Regional. They should be sold along with aircraft-related debt and reasonable working capital loans.
Special business units: SBUs such as MRO (Air India Engineering), catering (Chefair), ground handling (both Air India Air Transport Services and AISATS) and Centaur Hotels – should be sold off separately to raise capital that can be used to retire debt. Property and other non-core assets should be placed in a separate Special Purpose Vehicle.
Divest 100% of the airline: The government should exit Air India completely. Any level of equity retention will deter investors due to concerns about the prospect of continued government interference post-privatisation.
Allow foreign airlines to participate: Global carriers should be permitted to invest up to 49% as per the FDI norms for the sector. No major Indian corporation from outside of aviation will invest in such a complex project without an experienced strategic partner. Allowing foreign airlines to participate will increase the number of interested bidders and the valuation.
Permit flexibility on staffing and the brand: The new investors should have reasonable flexibility to take commercial decisions on employee numbers and productivity over time, particularly for non-core roles, ideally by not replacing retirements. Similarly with retention of the Air India brand, the government should be open to discussions.
Offer a single integrated network: The domestic and international operations should be offered in one line, as there is significant value in the feed which they provide to each other. Air India is also part of a global system as a result of its membership of Star Alliance. Separation of domestic and international operations will result in reduced interest.
Establish a special task force on continued improvement until handover: The Government of India and the Ministry of Civil Aviation must endeavour to ensure that the prospect of privatisation does not lead to management taking their eye off the ball pending new ownership. A task force should be established to focus on continued improvement in operations, financials and staff motivation until the time of handover.
Ensure reasonable timelines for the tender process: Air India represents a complex opportunity. Prospective bidders will need sufficient time to assess the offer, conduct due diligence and arrive at a valuation, and should not be rushed through this process.
Refrain from sweetening the deal with a bilateral freeze: Once relieved of most of its working capital loans, Air India represents an attractive opportunity. The offer does not need to be accompanied by any assurance that seat entitlements for foreign carriers will be temporarily frozen to provide competitive breathing space. In fact, bilateral policy should be opened up. A commercially-run, debt-free Air India no longer needs to be protected.
Provide comprehensive disclosures: The data room should include detailed information on Air India’s finances and labour contracts (including any ongoing negotiations) as these are two of the most sensitive issues that will impact interest and valuations. A large proportion of the technical staff are due to retire within the next 5-10 years which is an issue for which the new owners will need to prepare.