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Can a Middle-Eastern suitor fly in for Air India?

The overall aviation sector was doing well because of softer fuel prices and healthy air passenger traffic growth

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With the buzz on the privatisation of state-owned airline Air India (AI) erupting again, aviation experts say it was the right time for such a move but wondered whether investors' would have the appetite for it or whether politically and strategically it would be the right overture.

Even as presentation for divestment of government stake in the airline was reportedly being made to the Prime Minister's Office (PMO) and the finance ministry, telecom experts believe a staggering debt of around Rs64,000 crore –as per the latest financial numbers released in 2014-15 – there would not be many takers for the national carrier except for the deep-pocketed Gulf carriers such as Emirates, Etihad and Qatar Airways.

Pankaj Pandit, who is an ex-Air India employee and now works as an airline consultant, said, "The appetite for buying Air India, according to my analysis, will come only from this middle-eastern airlines such as Emirates, Etihad and Qatar Airways because they are the ones with deep pockets. If you look at takeovers in recent past, they (Gulf carriers) have been buying airlines in Europe and Australia. Qatar, in particular, may look at AI as it wants to catch up with Emirates; for which it will have to grow inorganically. European carriers may not be interested in buying an Asian airline".

According to him, the timing for it would right as AI's operations had finally become cash positive after a long time and the overall aviation sector was doing well because of softer fuel prices and healthy air passenger traffic growth.

For instance, in fiscal 2016, the airline reported an operational profit of Rs 105 crore after a long time while its losses were down to Rs3,587 crore from Rs5,859 crore in the previous year.

"At least, it (AI) is not losing cash and is cash positive. That is the least you can expect from AI, which has a huge debt. It can never be Ebidta (earnings before interest, depreciation, taxes and amortisation) positive. It would be a good move for the government to get out of such a capital-intensive business that is ruled by employee unions," he said in favour of the privatisation.

Pandit feels that public sector undertaking (PSU) airline was in debt trap, which was bleeding by over Rs5,000 crore every year just to service the debt.

Another former bureaucrat, who was at the helm of the airline and did not want to be named, also batted in favour for the privatisation of the airline.

"Financially, if there is a possibility to divest stake in a company (read AI), which is under stress, then why not?" he said.

In Pandit's view, stake buyout of the government-run airline by any middle-eastern carrier could hit a political road. The senior government official, however, does not see that as a major hurdle.

According to him, strategic considerations would play a bigger role in the transfer of ownership of the PSU airline from government-hand to a private operator.

"How does it matter whether it (prospective buyer) is a middle eastern or a far eastern as long as there is an appetite anywhere one should try. It (stake sale) will depend on whether you look at AI only as a financial asset or something more than that. That is going to be the core of the decision. There are many other things that AI does. Who will do that? That will have to be taken into account. Air India has a strategic presence in the market," said the ex AI executive.

According to him, the decision on AI divestment would not be an "easy call"; "it is not an easy call. If it was easy, somebody would have done it".

Another telecom expert, who spoke on condition of anonymity, said it was imperative to transfer operations of Air India to a private airline operator to arrest any further erosion in its value.

"Talks of privatisation of AI has been in the air for the last 20 years but except for offloading 2-3 assets of Centaur, there has not been much progress on it. Over this time, we have seen a great deal of erosion in its value," he said.

Citing the example of automobile major Maruti Suzuki, he said if government equity in Maruti had not been sold to Japan's Suzuki at the right time, its value would not have appreciated so much.

"Today, Suzuki is in control (of Maruti) and government got their money. Suzuki is a very good example of how PSU disinvestments can do well, not only for the government but also for investors if done at the right time," he said.

Close to Rs 24,000 crore has already been sunk into AI under the Rs 30,231-crore turnaround plan worked out in 2012. It slipped into a financial quagmire after it placed an order for 111 aircraft in the mid-2000, which widened its debts on the books.

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