Air India Finally Has a Chance to Lose the Baggage

(Bloomberg Gadfly) -- Privatization of India's state-run economy has been hobbled by an extreme reluctance to cede control over companies that ultimately are vehicles of power and patronage.

Except for a brief period in the early 2000s, when a minister dedicated to such disposals tried to drop "the baggage of 50 years of socialist discourse," the preferred strategy has been to sell a few percentage points of the state's stakes on stock exchanges while retaining ownership and meddling rights. "It's like the government wants to sell its old car, but still wants to drive it every Sunday," the late Saumitra Chaudhuri, a member of India's erstwhile Planning Commission, once told me.

So Prime Minister Narendra Modi will win plaudits by selling Air India Ltd., the national carrier, to a new controlling shareholder. The plan, detailed Thursday, calls for the government to offload 76 percent of its holding and $5.1 billion of the airline's $7.8 billion debt.

The remaining 24 percent won't be retained by way of a perpetual right to interfere in commercial decisions. Rather, this is a sensible ploy to capture some of the upside for the hapless taxpayers who sustained the mismanaged behemoth through expensive follies -- like a 2007 merger with Indian Airlines Ltd., the state-owned domestic operator. The document seeking expressions of interest for the unprofitable carrier makes it clear that this final stake will be sold later, perhaps when the new owners take the airline public.

As Anurag Kotoky of Bloomberg News has noted, the only potential bidder to have publicly expressed a desire to buy Air India is InterGlobe Aviation Ltd.'s IndiGo, a homegrown low-cost airline that's obviously drawn to the flag carrier's bilateral flying rights and slots at busy airports like Heathrow and John F. Kennedy.

Tata Group, the conglomerate with $103 billion in revenue that owned Air India before it was nationalized, has also said it might consider a bid with its long-time partner Singapore Airlines Ltd. They were the front-runners in a previous privatization drive, which was abandoned at the last minute.

Given the salt-to-software conglomerate's desperation to be India's No. 1 steelmaker -- it seems to have overpaid for bankrupt mills -- it's unclear Tata would want to take on another big deal so soon. But Singapore Airlines, with which the group has a joint-venture domestic airline, Vistara, might fancy this opportunity to get a leg-up on Middle Eastern competitors.

Of those rivals, Qatar Airways Ltd. -- which wants to set up a short-haul carrier in India with 100 planes -- would love to get its hands on Air India, too. Qatar Air has denied a news report of a joint bid with IndiGo. (A foreign airline can only buy up to 49 percent, so bidding with an Indian or overseas partner makes the most sense.)

Any buyer from that politically volatile region needs to be realistic, though. While the stream of migrant workers from India makes the economic case, the chances of a Hindu nationalist government handing the flag carrier to a Middle Eastern buyer are next to zero. For the same reasons, nationalism and security, Singapore Airlines has a better chance than any Chinese suitor.

Air France-KLM and Delta Air Lines Inc. may join the fray, according to local media reports, together with Jet Airways India Ltd., which has been dethroned by IndiGo as the nation's top carrier.

The European carrier, and Delta, have a disadvantage: They lack regional hubs to fly passengers between India and the West, unlike Singapore, Dubai and Doha, Qatar's capital. Jet Airways, though, does have an Abu Dhabi connection to offer, through its equity partnership with Etihad Airways PJSC.

The debt suitors are being asked to assume is on the high side. So the potential partner that comes forward should be given the additional comfort of not having to look after all of the 27,000 people who work at Air India, its five subsidiaries and a joint venture. 

The government is saying new owners would be free to shed the excess load after one year. That's encouraging, and might help ensure this isn't one deal that fizzles out for want of interest.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

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