News reports suggest that 11 Air India unions representing over 10,000 employees have started a social media campaign with the ‘Save Air India’ slogan. The Indian government plans to sell 76% of the Maharaja. Under the current terms, a buyer needs to provide a guarantee that permanent employees of the airline will not be fired for at least one year. After that, the buyer is allowed to offer a voluntary retirement scheme (VRS) to employees.
This condition along with the fact that any prospective buyer has to take over two-thirds of the Rs 48,447 crore debt (as on March 31, 2017) of the airline, has led to a situation where none of the Indian carriers are interested in buying Air India. We don’t know about the foreign ones as yet.
News reports also suggest that the International Finance Corporation (IFC), the private investment arm of the World Bank (WB), is likely to underwrite the debt amount of Air India for the successful buyer. It is highly unlikely that any prospective buyer will buy Air India without any arrangement to handle the $7.5 billion debt of the airline (Rs 48,447 crore at $1=Rs 65). Given how risky and difficult the airline business is, such a huge debt amount can pull down even a currently profitable airline. Also, it is worth remembering here that two out of three mergers that happen, fail.
While, the debt part of the airline can be handled, how the government handles the ailing carrier’s employees is more important. As on 1 January, 2017, the airline had 18,049 employees. In comparison, IndiGo had 14,576 employees as on 31 March, 2017. IndiGo also employed 8,225 employees on a temporary/contractual/casual basis. Air India has a 12 percent share of India’s domestic market and has a 17 percent share in flights in and out of India, and it loses money. Indigo has a 40 percent share in India’s domestic airline business and is a profitable airline.
How do things look at the employee cost level? Air India’s employee benefit expenses during fiscal 2016-2017 stood at Rs 2,558 crore. This worked out to around 11.5 percent of the total revenue earned during the course of the year. By comparison, Indigo spent Rs 2,048 crore and this worked out to around 10.6 percent of the total revenue earned by the airline during the course of the year. Clearly, the employee cost is much more in the case of Air India.
Having said that, the difference is not much but can nevertheless be important in a low margin business like airlines are. For any prospective buyer of Air India, one of the easiest ways to control costs, is to get rid of the non-productive part of the employee base. And any prospective buyer having paid good money to the government would want to employ this strategy. This is a low-hanging fruit, but the current terms of sale don’t allow a prospective buyer to do that.
A British Airways bid
But such a situation is likely to arise only if the government is able to sell Air India. Before that, the employee unions are likely to show their nuisance value by making it as difficult as possible for the government to sell the airline. The social media campaign is just the starting point. The opposition parties are likely to join in as well. Congress party member Manish Tewari recently tweeted about what he things would happen if British Airways bought Air India. He went on to ask, ‘won’t souls of millions of Freedom Fighters who sacrificed everything turn in their graves?’ This is terribly bad rhetoric, given that British Airways was privatised way back in 1987, but then the Congress party has always liked the idea of the government owning public sector enterprises. This is not to say that the Bharatiya Janata Party (BJP) doesn’t.
British Airways is just another private airline now and one of the most successful privatisations ever carried out in Britain. So, if British Airways buys Air India, it will be a great thing because the airline has some experience in turning around a government-owned airline, and running it profitably over the years.
As far as employees are concerned, their protests are hardly surprising given that most of them have spent their lifetimes working for a government owned company. The future is unlikely to be as cozy as it is under the current owner and they will make every effort possible to ensure that continues. But the current owner has spent a lot of taxpayer money to keep this airline going. Between April 2010 and December 2017, the accumulated losses of the airline were Rs 46,256 crore.
To keep the airline going, the government invested Rs 26,545 crore into the airline since April 2011. Over and above this, the airline has taken on working capital loans from banks, which as on 31 March, 2017, stood at Rs 31,088 crore. This basically means that the airline keeps running because of the loans it keeps taking on. The banks are lending to the airline primarily because it is owned by the government, leading to the actual debt of the government going up. They would have long-stopped lending to a privately owned airline in a similar situation.
The larger point being that every extra rupee that the government spends on this airline, is a rupee taken away from something else. Let’s take the case of the defence sector. In fact, the vice chief of the Army Lt. General Sarath Chand told a Parliamentary panel sometime back that 68 percent of the Indian Army’s equipment is in the ‘vintage category’. ‘Funds allocated are insufficient and the Army is finding it difficult to even stock arms, ammunition, spares for a 10-day intensive war. The three services are expected to be prepared for at least 10 days of intense battle,’ Lt. General Chand said. This is clearly not a good trend. There are more important things that India needs to spend money on than Air India.
Also, if the government is serious about genuine privatisation (and not the kind where the Life Insurance Corporation buys the government’s stake in public sector enterprises) of loss making as well as profitable government companies, it is important that the sale of Air India goes through.
If the 18,049 Air India employees are allowed to hold the country to ransom, then so will the employees of other loss-making government-owned companies like MTNL, BSNL and a whole host of other companies, in the days to come. If the government doesn’t handle the employees seriously, then the entire idea of selling Air India will end up being yet another jumla coming out of the government.
(Vivek Kaul is the author of the Easy Money trilogy).