The sale of Air India to Tata group marks coming of a full circle for the airline. The airline was founded by JRD Tata in 1932 and was nationalised in 1953. Even though the upfront payment for the purchase is not very high, Tatas would have to spend significant amount of money to refurbish and time to make the airline profitable. It faces additional issue of aligning its operations with its other two aviation company, AirAsia and Vistara and avoid cannibalisation of market. Here is a look at the details of sell-off and Air India\u2019s finances.<\/p>\n
First the details of the deal. As per the agreement, Tata Sons, through its subsidiary, would purchase Air India, Air India express and its stake in the cargo handling subsidiary at an enterprise value (EV) of Rs 18,000 crore. EV implies value of both debt and cash to be invested by Tata. So, Tata would take over debt of Rs 15,300 crore and would pay upfront cash of Rs 2,700 crore to the government. While it may appear that the airline is being sold cheap, it is actually a high-risk investment for Tatas since the airline would need significant amount of additional investment for refurbishment and may incur losses for couple of years before becoming profitable. The sale would not include non-core assets such as land and building, valued at close to Rs 15,000 crore. This would be transferred to a government entity, Air India Asset Holding Ltd (AIAHL). This means Tata would have to vacate the offices and even flats let out to the employees and may be a cause of some short-term discomfort.<\/p>\n
The decision is being hailed as landmark because the Airline had been identified as a money guzzler way back in 2000 when the attempt at sale failed. The second attempt in 2017 failed again because government wanted to retain 26% stake in the company. However, no bidder came forward because of the apprehension that government stake could act as a deterrent in smooth functioning of the airline.<\/p>\n
Airline\u2019s problem could be classified into two categories \u2013 Financial and Operational. For last available year ending March\u201920, the airline recorded consolidated losses of Rs 7,400 crore. With revenue of nearly Rs 33,000 crore, it implies negative margin of 24% indicating the huge distance the new owner would have to cover. As per the Audit report, airline had accumulated losses of over Rs 70,000 crore till FY20, all of this, funded by the government. Despite the infusion of Rs 22,000 crore of funds by the government, airline had negative equity of equivalent amount at the end of FY20.<\/p>\n
A part of the problem gets resolved with financial restructuring. The airline had total liabilities of Rs 96,000 crore. Even though some of this is backed by assets such as aircrafts, right of use etc, excess liabilities net of assets was about Rs 54,000 crore. The high level of debt is also reflected in high level of interest cost. Airline\u2019s interest cost was Rs 4,100 crore, almost 13% of revenue against just 5% for Indigo, the market leader. As stated earlier, Airline would be transferred with only Rs 15,300 crore of debt and rest of the debt would be transferred to the government entity, AIAHL. This alone may save about Rs 3,000 crore for the new owner.<\/p>\n
While the financial restructuring largely takes care of debt, Tata would still have to take care of operational issues such as inefficient utilisation of aircrafts, fleet modernisation and so on. The inefficiency of operations is reflected in the fact that Indigo operated almost 1,400 daily flights in FY20 with its fleet of 274 planes. However, Air India could operate only 400 with half the number of planes. This is an issue that may require investment and the new management would have to handle on priority basis. Another issue, often talked about, is excess manpower. However, contrary to this perception, its employee cost to revenue ratio was only 10.7% which is less than 12.6% for Indigo. In fact, Tata may have to move some of its staff from other aviation businesses to improve the efficiency of service. Yet, it does face the issue of ageing manpower with the airline focussing more on reducing staff rather than recruiting over last ten years. While Tatas are barred from retrenchment for one year, they would, most likely, be offering VRS to the employees after that and going for fresh hiring.<\/p>\n
The sale of Air India is culmination of a complex process which must have involved extraordinary amount of deliberations to make the airline attractive for buyer. For instance, the decision to hive-off all non-core assets which would have increased the cost substantially. While Tata has lot of wherewithal to handle the purchase, it is not going to be a cakewalk either.<\/p>\n","protected":false},"excerpt":{"rendered":"
The sale of Air India to Tata group marks coming of a full circle for the airline. The airline was founded by JRD Tata in 1932 and was nationalised in 1953. Even though the upfront payment for the purchase is not very high, Tatas would have to spend significant amount of money to refurbish and […]<\/p>\n","protected":false},"author":8,"featured_media":14413,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[856,919],"tags":[],"class_list":["post-14412","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate","category-corporate-2","membership-content","access-restricted"],"yoast_head":"\n