Why the govt must not waive off Air India's debt before selling it to private players

The government has decided to sell Air India, an organisation that has been incurring losses for over a decade.

As demanded by the pro-PSU sellout brigade, the airline, that was once the pride of Indian skies, will soon be in the hands of private sector companies.

But there is one major problem with the national carrier that is in the way of allowing private parties' way to acquire the government airline: its massive debt.

The company has a debt of Rs 52,000 crore on its books which accounts for annual interest outgo of Rs 4,500 crore. This is about 21% of the airline's turnover.

No private player has the heart to take over such a massive amount of debt on its balance sheet. Therefore, the government is considering the option of writing off the debt to make the deal more attractive to the buyer.

According to Mint, “The aviation ministry and the Department of Investment and Public Asset Management will on Friday present to a ministerial panel their recommendation on the amount of debt that needs to be written off Air India’s books to make the state-owned airline attractive to potential investors.”

Business practices

It is said that in business there should be no emotions. Hence, a loss making government carrier deserves to be sold. But then business also means that there shouldn't be any dole outs to the private sector.

In the biggest of mergers and acquisitions across the world, the acquiring company is expected to take over the debt of the company being acquired.

Take the $10.7 billion Bharti Airtel's acquisition of Zain in 2010. The Indian telecom player not only paid $8.3 billion up front and $700 million after a year, but it also took over $1.7 billion of debt that was on the company books as on 31 December 2009.

In 2007, when Hindalco Industries Ltd offered to buy Novelis Inc in a $6 billion all-cash deal, the acquirer had taken into account the debt of $2.4 billion on the books of the acquired company in the transaction value.

The Air India sale

Despite being projected as a lost case in the aviation industry, the airline boasts of some great numbers in comparison to other players.

Air India has five subsidiaries, of which only two are loss making. AI Express reported a net profit of Rs 296.7 crore for 2016-17. During the fiscal, the airline’s revenues rose 14% to Rs 3,335 crore.

In 2015-16, Air India's employee-to-aircraft ratio was only 106 for a fleet size of 136. Industry leader IndiGo, operated at a higher employee-to- aircraft ratio of 116 and a lower fleet size of 106, according to Economic Times.

The company has improved its operations over the past few years.

The company has prime parking slots in international airports as well as real estate all over the globe. All this and various other things make the Air India, a much better airline than what it is projected as.

If at all the government is willing to write-off the debt of Air India's debt, it can certainly do it without having to sell it to the private sector. After all, efficient private sector players from different sectors in the country are also demanding a loan write off from the government. The stressed assets from the corporate sector account for Rs 10 lakh crore at the moment.

Sooner or later, the government will agree to write-off a part of the debt of the private sector companies. Then why can't there be a similar deal for Air India?

However, given the ever changing fortunes of the aviation industry, there is no guarantee of a permanent revival for Air India. So in case the government actually want to exit the aviation sector, it can do so, but that deal should be fair and not a dole out to the private sector.