Privatisation: The Search for a Suitable Maharani

PRIVATISATION
The Search for a Suitable Maharani

With the flight-decks cleared for its privatisation, Air India is set to find itself in a new world of possibilities-and pitfalls.

By Sunit Arora

As the country's second big-ticket privatisation takes wing, here's an airpocket of a flashback. In late 1998, the Hong Kong-based Cathay Pacific made a conditional offer to pick up a 40 per cent stake in the ailing Philippine Airlines. The rider: Cathay Pacific wanted the strike-ridden airline to slash its staff by 3,000 employees. Philippine Airlines declined to do so, and the deal fell through. Today, the airline is practically grounded.

This is the brave new world staring at another ailing national carrier, Air India, whose flight-path is now set on the disinvestment mode. If everything goes according to plan, a post-privatisation AI's equity will look thus: a consortium of strategic partners-26 per cent foreign, and 14 per cent Indian, or perhaps entirely Indian-will have management control. The airline's employees and domestic financial institutions will hold 10 per cent each, and the government will retain the remaining 40 per cent stake. Says Arun Jaitley, 47, Union Minister for Disinvestment, the nodal ministry for the AI privatisation: ''The 26 per cent is the outer limit of what the foreign investor can bring in. Similarly, 74 per cent Indian equity is the minimum that will ever be allowed.''

By and large, the airline's disinvestment plan has met with grudging approval, highlighting more than anything else AI's earlier status of a sentimental public sector mascot. Deadpans Michael Mascarenhas, AI's 56-year-old Managing Director: ''We look forward not only to the source of funds, but also to modernisation.'' Adds K.A. Ramakrishnan, 48, Director, Business Consulting Group: ''This is an opportunity to restore the vibrancy of AI as an organisation and bring back the glory of a home-grown brand.''

Why, even AI's workforce-which has seven unions-has welcomed the move, in principle. The pilots are happy. Says Captain S.P. Verma, 55, President, Indian Pilots Guild Association: ''It's indeed a very good idea which needs to be implemented at the earliest.'' A similar view is echoed by the airline's engineering association.

The problem airlifts when you speak to Y. Eswara Reddy, 48, the secretary of Air India Employees Guild, which has 12,000 members. ''In a limited sense, it is a step in the right direction. However, we have opposed-and continue to oppose-privatisation per se.'' In short, the guild is worried about job retrenchment. AI has 750 employees per aircraft, which soars above the global norm of 150. A huge wage bill compounds problems. Any strategic partner would look at the airline seriously only if it is allowed to cut the workforce-and drastically.

A Large Pill for Bitterness

Analysts mutter that the decision to give 10 per cent equity to employees is ''a large pill to take away the bitterness.'' The Air India Employees Guild is unhappy too, arguing that the proposed equity stock options will be distorted by the wage differentials in the airline. Answers Pradip Baijal, 45, Secretary, Disinvestment: ''The 10 per cent is only a ceiling. The department of public enterprises is working out a scheme. Of course salary equations are possible-it's been done the world over.''

The wait-and-watch reaction to the AI privatisation is driven by uncertainty about the modalities (See The Flight Plan). Baijal stresses that speed is all-important. ''The whole process should be completed in 10 months' time.'' Urges G.V. Ramakrishna, 72, the former Chairman of the Disinvestment Commission: ''Any delay in selecting a global advisor would put off the foreign partner. Speed is of the utmost importance.''

Only then will the government's interpretation of management control become clear. The run-up to the disinvestment announcement has only served to highlight the deep fissures within the government on this issue. Time and again, various facets of the government have stressed the airline's close link with the state. Says Ravindra Gupta, 58, former Secretary, Civil Aviation: ''This government would like that all Indian carriers remain substantially-owned and effectively-controlled by Indian nationals.'' For now, the only certainty is that while the CEO will be of the strategic partner's choice, the chairman will be nominated by the Indian government.

There is also the issue of bilateral air-services agreements, which are negotiated between governments. Between AI and IA, they utilise only 45 per cent of these rights-and this is the single-largest attraction for a foreign airline. However, until the shareholders' agreement is drawn up, it will not be clear whether the government will allow the airline to negotiate these rights, or whether it will charge the airline for using the rights. Warns U.R. Bhat, 48, Director, Jardine Fleming: ''The more the evidence of backseat driving by the government, the less the perceived value of the company in the eyes of the potential investor.''

There is no less ambiguity surrounding the role of the domestic Indian partner. Ideally, any international airline would want a partner with a domestic airline. However, there are only two such candidates in the country-Jet Airways and Sahara Airlines. Private-sector ace Jet Airways, for one, refused to comment on the ai disinvestment announcement.

However, it is unlikely that the government will hand over AI's cockpit to a domestic airline in TOTO. While the Tata Group is another possibility, it would have to set up a domestic airline from scratch. Says Y.C. Deveshwar, 53, CEO, ITC, and a former managing director at AI: ''A foreign airline would find the whole thing attractive only if it gets linkages in the domestic market.''

Of course, a domestic partner sans an airline is a viable option too. Those can be built. Or alliances can be formed. But in the absence of these, that raises issues of what a partner brings to the table-apart from cash, of course-to help in the running of an airline. The glamour apart, sleeping partners can find the hurly-burly world of the aviation business quite disconcerting. Explains BCG's Ramakrishna: ''The issues of culture and compatibility will reign supreme. If the partnership comes unstuck for these very reasons at some point of time in the future, it will undo all the effort that has gone into the exercise.''

Cleaning up AI's Balance-Sheet

Ironically, prettying up AI's balance-sheet before the disinvestment takes off is another issue on the government's plate. In the past, the government has refused point blank to pump in funds into the airline. Now, willy-nilly, it may be forced to do so to shore up the airline's value before disinvestment. The airline not only has accumulated losses of Rs 1,000 crore, its equity base is a low Rs 153.80 crore, and it is saddled with working capital loans of Rs 1,100 crore.

Sure, the sale of Hotel Corporation, AI's fully-owned subsidiary, is certain to bring in some much-needed money into the company. The airline expects the sale to come through in the next six months and fetch around Rs 800 crore. Adds Baijal: ''We may do some window dressing at a later stage. Contemporary privatisation literature says first restructure the balance-sheet. We will decide over the next 10 months whether it is necessary to put in money.''

By then the bids should be in. Who are the possible candidates? An ideal partner would be an airline that operates in routes where Indian traffic is high. And has some experience in flying to and from India. A serious competitor to AI in this market would have to address the issue of cannibalisation. On the face of it, United Airlines and Lufthansa have voiced their disinclination to invest in AI. The national carrier's arch-rival for European routes, British Airways, is going through a financial crunch and a break up with alliance partner American Airlines. On the other hand, a resurgent Air France is a viable option. It also has an alliance with East-coast major Delta, which makes for a seamless flow of traffic from the US to India. As does, for that matter, KLM, with Northwestern and Continental.

The cash-rich Swissair is a dark horse. The airline has indicated its interest in acquisitions. Then, there are the Asian Tigers: Singapore Airlines, which has reserves of $18 billion, and the aggressive and upcoming Korean Airline. Of course, the aviation industry changes with bewildering regularity. In any case, whoever chooses to fly in to rescue AI will be watching the signals from the government. The heart of the matter is the government's position on the status of AI's excess workforce. Over 10,000 jobs hold the key to the privatisation of AI. And the clock has started ticking.

Additional reporting by Seetha, Ashish Gupta, R. Chandrasekhar, & Rakhi Mazumdar

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