Plan to demerge profitable AI units gets thumbs-up

As the government on Wednesday gave an in-principle approval for disinvestment of Rs 52,000 crore debt-ridden Air India and five of its subsidiaries, all eyes are now on the airline's profit-making arms.

As per the plan, the government will demerge three profit-making subsidiaries of Air India before taking any decision about its strategic disinvestment.

Kochi-headquartered Air India Express (AIE), which is AI's most successful subsidiary, on Wednesday reported a net profit of Rs 296.7 crore for 2016-17, helped primarily by higher revenues and reduced costs.

The airline has been registering operating profit since past four years primarily on the back of its strong market base of connectivity between Gulf and South Indian states. The airline had earned a net profit of over Rs 415 crore in the last fiscal.

Similarly, Alliance Air, the regional arm of Air India which has been reported to be making operating profits, has been an important player in the regional connectivity scheme (RCS) initiated by the central government to help common man fly at fares starting at Rs 2,500. The airline also has plans to start operations in Saarc region.

Air India Transport Services Ltd is another profitable subsidiary. In the last two years, the company, which has been providing services to the parent company and others, is also reported to have a profit of over Rs 100 crore.

"The core issue to be addressed would be treatment of unsustainable level of debt of Air India. Demerger and strategic disinvestment of subsidiaries would need to be considered with respect to their relation to Air India (for instance vis-à-vis the draft GH Regulations) and respective strengths/position in the market," said Peeyush Naidu, partner, Deloitte.

Jitendra Bhargava, former Air India executive director and author of the book, 'The Descent of Air India', said while there is huge irreparable debt crippling the airline, the government should not overlook the huge assets the airline has. "The government must look at these assets so that the debt does not look as staggering that way it is made out to be," Bhargava said.

He said the present government has been swift in taking the decision to privatise AI and there should not be any further delays in getting into the technicalities of it, as it would cause further losses, and make the prospect even more unattractive for the investor.

A senior AI executive said that only thing the government should keep in mind is that privatisation should not an excuse for selling off the airline and its assets at below the valued price. "The disinvestment of Centaur hotels in Mumbai is a classic example of it. This should not be repeated," he said. The sale of Centaur by the NDA-I government hit controversy. These hotels belonged to the Hotel Corporation of India, which is a subsidiary of Air India.

It is alleged that Airport Centaur Hotel was first sold for Rs 83 crore. However, within months it was re-sold for a profit of Rs 32 crore. Similarly, the Juhu Centaur Hotel was sold for Rs 153 crore which later attracted resale base price of over Rs 1,300 crore.

Asked whether the government should hold some equity in the airline after disinvestment, almost all the experts DNA Money spoke to, replied in negative.