A Renaissance Moment for India and Air India?
After more than 68 years under government ownership, Air India is all set to return home to Tata Sons for $2.3 billion, including debt. The news was thoroughly exhilarating not because of Tata Sons’ win but because of the historic importance of this deal. The resale of the airline marks a significant reset of the business environment as it reaffirms the government’s faith in private sector efficiency and productivity; this was also the government’s biggest privatization deal since 2004. We have been through an entire lifetime’s worth of misery and dread in the past year, and this deal marks the beginning of good times, the beginning of a hopeful era, and the beginning of the Indian dream, much like the American dream. In addition to the government’s reaffirmation, we can look forward to good times because the deal has finally terminated the government’s tumultuous relationship with the carrier which was hobbling the government with unwanted emotional baggage that was well beyond the government’s capacity to handle. Finally, free of this leaking vessel the government can focus their efforts on far more pressing socio-economic issues like their widening fiscal deficit, the economy’s growth rate and the welfare of the larger population. But most importantly, this deal is a positive signal that Modi’s privatization would be executed as it was proposed; a trend not seen in most of his other policies and initiatives.
The government had allocated a stark Rs. 7 Lakh crores towards interest and other related payments in their Rs. 30 Lakh budgets for the fiscal year 2021-22. The fact that interest payments form roughly a third of our budget is not only economically unviable but also a scary thought. While Tata Sons is only assuming responsibility for Rs. 15,300 crores, the government, despite the remaining Rs. 46,262 crores of debt, is in a far better position than before because they are no more responsible for infusing cash into the airline, supporting its employees and digesting its losses. Besides this, the sale is also a moment of rejoicing for the multiple employees of the airline as with a Tata ownership they have the guarantee that their welfare and job security is in the hands of a corporate Mother Theresa, who will take utmost care of them irrespective of the financial implication, rather than some corporate shark. Let’s hope they don’t let us down after such high praise!
While the Tata bid is 15% higher than the floor price; and the airline is deep into the red and highly leveraged the $2.3 billion prices is also a bargain all factors considered. Tata is poised to gain a full-fledged airline, Air India, and budget carrier, AI Express, that integrate well with its existing portfolio of Vistara, a full-fledged airline, and Air Asia, a budget carrier, for a whole sum of just two billion dollars. Post integration the four would collectively hold a 26.9% stake in the market, second only to Indigo. The sheer breadth and width, literally and figuratively, will give Tata the room to make a large and ambitious play in the airline sector. More importantly, the addition of Air India will add a large number of lucrative airport landing and parking spots, both international and domestic, that will give it far more destinations and consequently higher passenger traffic, which could lead to a substantial increase in revenues that could help bring the flailing carrier out from the red deeps of its balance sheet. The fact is that Tata has a higher chance of reviving the carrier as it is not hobbled by government bureaucracy, a large debt load and lack of expertise.
Yes, Air India has developed a venerable bad reputation amongst consumers in the past decade and getting out of that wormhole will not be an easy task. On top of that, Air India has an ageing fleet as they couldn’t upgrade during their financial turmoil of the past decade. This could be an expensive ordeal to deal with when the time to retire their fleet comes. Furthermore, the Tata Group doesn’t gain any land or other assets of Air India, which could have acted as a cushion they could have used to recoup their investment in case the airline doesn’t take off. But, the one ace the Tata’s have is their partnership with Singapore Airlines. Vistara’s employees have been trained in conjugation with Singapore Airlines’ teams and practices, which are revered and unparalleled in the entire industry. Access to this pool of talented people and practices alike gives the Tatas invaluable ammunition to use.
The fact of the hour is that Tata Sons wouldn’t have bid for the airline had they not seen some potential beyond the obvious emotional value. They had teams of lawyers, accountants, advisors and other professionals’ pore over this deal for the last 2 years. While the negatives are large and glaring, the superlatives are equally strong especially considering the group’s existing foray into airlines. The deal is not only a win for Tata but also for the government as they have sent a much-needed positive message of their commitment and faith in the private sector to investor and business communities across the world. At a time when America and China are declining, investors and businesses need economies to park their COVID-19 surcharged cash gains in. With this deal, investors can finally treat India as a serious and potential investment as the one roadblock- the government’s lax vision for the private sector- has been effectively eroded by this deal. While this may be a tad bit too ambitious the one thing, I can safely say is that we are finally announcing to the world that we are there, and we are ready to fight for the premiership of the world championships. The Tata’s get a family heirloom, Modi a much-needed win and the population an opportunity of greater prosperity. India is finally back, baby.