Earlier this week, the government sought approval from the Parliament for infusing Rs. 2345 crores of equity in Air India along with Rs.1300 crores for Air India Asset Holding. The airline has been a loss-making entity since almost a decade, with no respite in sight. Infusing equity into the Maharaja is a lost cause.
Currently, Air India holds around 13% of the market share. Although it is the third largest carrier in India, there is a huge gap between the largest carrier Indigo (42% market share) and the government-run airline. Further, Air India’s share has been on a steady decline in the past few years.
So, why does the government want to infuse capital into a loss-making entity? It is quite clear that a few thousand crores will be like a band-aid. The debt has been mounting over the years. The airline’s debt is an integral part of India’s fiscal deficit. Failure to divest Air India’s shares is one of the main reasons the government will miss its fiscal deficit target for 2018-19.
Taxpayer’s money needs to be spent responsibly. Any amount of equity infusion will not help bring the airlines out of its current state of debt. Attempts to consolidate Air India’s debt have been going on since 2012 with no workable solution in sight apart from the routine infusions.
The aviation business functions on a high operating cost. Airline fuel constitutes more than 50 percent of the cost of operating the airlines. With volatile crude oil prices, the debt will only add up. The government argued that high oil prices were the reason there were no bids. But that will not change anytime soon.
Attempts by the government to divest its share found no takers as the government is still reluctant to give up control. Earlier this year, the government called for bids for the sale of only 76 percent stake in Air India, retaining 24 percent stake. There was not even a single offer to buy the airlines during the bidding period. The buyer would have to incur the cost of a high debt which would barely have commensurate returns.
The government’s divestment option also includes retaining Air India staff for a year. Air India’s staff is used to working under the bureaucratic setup. There have been recurrent complaints on the indifference of the staff. In an industry with a competitive environment, a buyer would hardly benefit from the staff that seems to have been stuck in the past decade.
It would be wise to declare the airline carrier as a sick unit and entirely divest the government’s share. Further, the government should leverage Air India’s large fleet and wide reach. Declaring invites for bids without consultation with potential buyers is a haphazard move. Consulting private players, interested in buying the airlines would ensure that the workable solution is charted out.