In one of its boldest reform moves, the government approved the privatization of debt ridden Air India and its five subsidiaries. The debt laden airline has been struggling to become profitable amid growing competition from low cost rivals. Air India, once the country’s biggest airline, has seen its domestic market share slump to 13 percent as private rivals such as IndiGo and SpiceJet have expanded.
The airline has a working capital loan of Rs 30,000 crore and Rs 22,000 crore of aircraft purchase loan on its books. Air India has over 110 planes in its fleet, including 43 wide body aircraft, and flies to 41 international and 72 domestic destinations.
Air India has struggled since private rivals were first allowed in 1994 to fly in India’s skies. Together with Indian Airlines, another state owned carrier with which it merged in 2007, it has a domestic market share of just 13%.
Minister of State for Civil Aviation Jayant Sinha said on Thursday that IndiGo has expressed interest in the strategic disinvestment process to buy Air India stake, a day after the Union Cabinet gave an in-principle approval for disinvestment of Air India, paving the way for privatisation of the troubled national carrier, which turned into a taxpayer money guzzling machine ridden with inefficiencies and mismanagement.
The Co-founder Rakesh Gangwal, a former CEO of US Airways, said that IndiGo will make a serious bid for Air India’s international operations. IndiGo expressed its interest in bidding for Air India in a letter to the aviation ministry sent hours after a cabinet meeting cleared the disinvestment of the state owned company.
Rakesh Gangwal and Rahul Bhatia, founders of IndiGo, clarified Thursday that their primary interest in Air India is in the carrier’s international operations that include the low cost Air India Express, and that they are not keen to partner the state in a joint venture for the flagship airline.
Gangwal said, “A joint venture maybe a good model, but the company cannot bring value to that proposition. From our perspective as a corporate entity with public shareholders we would not go down a path where there would be a joint venture or even a minority or majority stake which the government would own.”
“Indigo is not looking to acquire all of Air India,” said Rahul Bhatia, co-founder of the airline on a call with investors on Thursday.
‘Air India’s international operations would bring a very important element to our network,’ IndiGo’s co-founder Bhatia said. ‘It will provide a rapid entry into restricted, and in some cases, closed international markets.’
The basic fundamental of keeping costs low, a characteristic a frugal Gangwal has imprinted on IndiGo, the airline he founded in 2005 along with Rahul Bhatis. And in that process, IndiGo intends to overhaul Air India’s fundamental business model, make it a low cost airline which flies long haul routes without the baggage of premium service.
InterGlobe Aviation Ltd’s IndiGo will expand internationally, following the same low cost business model that has worked for it in India, irrespective of whether it succeeds in its bid for Air India or not, the company’s co-founder said in an analyst call, explaining the logic behind the company’s articulated intent to bid for the state run airline.
“Full service will just not work for us, if we just parody other guys, other things come into play like legroom, frequent flyer program, the comfort of the blanket and how well the flight attendant smile that becomes a difficult game and we are not quite interested in playing that game,” the reticent Gangwal said insisting repeatedly that it was not about getting bigger but for a profitable international operation. IndiGo’s interest is in the network that Air India has built over the decades.
To build such networks quickly would be difficult. They have been built over a 70-year period, which was easier then as aviation was nascent, they reasoned. “We won’t be able to replicate the slots that Air India or United have got over a period of time,” Gangwal said.
“IndiGo is a natural player to take advantage of the significant and lucrative international market opportunity that India offers,” Gangwal said. “It is about time that IndiGo enters the long-haul international market.”
A combination with Air India would help consolidate IndiGo’s position as the country’s biggest airline with a domestic market share of 54.2 percent and a total fleet of 283 registered planes. For a successful bid, IndiGo will have to buy out either the international or the entire airline operations of Air India, without a partnership with the government, Gangwal and Bhatia told analysts.
‘Irrespective of how Air India plays out, we are generally of the view that it makes fundamental economic sense to enter the long haul international market. India is under served in nonstop international destinations. A large opportunity exists for India. Success will depend on taking traffic from connecting hubs and from high cost nonstop hubs on low-cost flights.’ Gangwal said.
Long-haul international flying is changing and will be a worldwide phenomenon. But it will be opposite to short-haul, low-cost flying which took off first in North America. Here is growing from Europe to Asia.
The Tata group, which founded India’s first commercial airline, Air India, which was later nationalized, is considering buying a stake in the debt laden national carrier in partnership with Singapore Airlines Ltd, according to the sources.
However Tata Sons, the Tata group’s holding company, declined to comment: “We do not comment on such matters,” a spokesperson said. The Tata group and Singapore Airlines have shown interest in Air India before, having announced a bid for 40 per cent of the carrier in 2000.
Finance Minister Arun Jaitley said on Thursday, after the Cabinet meeting that the government will form a Group of Ministers to look into the ways to divest its equity stake in Air India, adding that the GoM will also decide on the modalities of the proposed disinvestment, including the quantum of the stake to be diluted and ways to deal with the carrier’s existing debt. The government has accepted the NITI Aayog suggestions on privatisation of Air India, he said.
‘NITI Aayog’, or the National Institution for Transforming India is a Government of India policy think-tank established by the BJP government to replace the Planning Commission which followed the top down model. The stated aim for NITI Aayog’s creation is to foster involvement and participation in the economic policy making process by the State Governments of India.
‘NITI Aayog’, or the National Institution for Transforming India is a Government of India policy think-tank established by the BJP government to replace the Planning Commission which followed the top down model.
Civil aviation secretary Rajiv Nayan Choubey said that Interglobe Aviation, the company which operates IndiGo, was the first one to formally write to the government showing its interest in buying Air India, adding that the company can bid for the airline once formal bids open.
Further, Jayant Sinha said that many other private players, both domestic and international, have approached the government, adding, “But those were informal talks. IndiGo’s was the only formal EOI.”