(Editor’s Note: The views expressed are that of the authors.)
By K. T. Jagannathan and T. S. Shankar
The government has no business to be in the business of running enterprises.
The erstwhile Swatantra Party and its founder, late C. Rajagopalachari, often laid much store by this philosophy while opposing the Indian National Congress, or simply Congress Party then.
Much water has flown under the bridge since then. Perhaps, governments are beginning to realise the misstep of dabbling in business enterprises (be it airlines, banks and what not). But governments (successive ones, at that) have often found it difficult to re-track the step.
Simple economics makes it difficult for them to excel in the art of governing an enterprise. Running a government is one thing. But running an enterprise is quite another. After all, they have one too many on their hands. Also, their hands are tied for a variety of reasons that border simply on politics.
Reading against this backdrop, the Narendra Modi government in India must be pleased that it would be getting off its back the bleeding national carrier, Air India. The decision has been hailed as path-breaking by some. Still others feel that this will set the stage for further reforms on the disinvestment front.
For a sizeable number, the sale of Air India is an anti-people move. All the same, it is a bold ‘stop-loss’ decision – to use the market parlance – by the Modi government.
Just consider the numbers:
- Cash support by the government to Air India since 2009-2010 till Aug. last is Rs 54,584 crore ($7.25 billion).
- Guaranteed support for debt by the government since 2009-10 till date is Rs 55,692 crore ($7.4 billion).
- Total debt as on Aug. 31, 2021, is Rs 61,562 crore ($8.18 billion).
- The daily loss of Air India is Rs 20 crore ($2.66 million).
The numbers are quite disconcerting. Indeed, Air India has been in ICU (Intensive Care Unit) for a long while now.
The Government of India was clearly dipping into somebody else’s pocket to keep it flying somehow or the other. Who is this somebody? Clearly, one is reminded of India’s most iconic cartoonist R. K. Laxman’s famous common man! His pocket is picked of whatever remains in it to keep the Air India in ICU (should we say to keep it flying!).
But the innocent common man is not even remotely aware of it. So, there is no way he could complain about it. Well, the Tata Group have outbid the other aspirant to win the race for Air India.
The right or wrong of it notwithstanding, the government, perhaps, must be relieved to discover that the Tatas have won the race for acquisition of Air India. The brand equity enjoyed by the Tatas certainly has brought a sense of credibility to the sale exercise.
What is the deal about? What will the Tatas get? What is the cost to them? Some of the salient features of the deal are:
- Talace Private Limited, a full-owned company of Tata Sons Limited (the holding firm of the Tata Group), has emerged the winning bidder of the debt-laden Air India.
- Talace will own 100 per cent stake in Air India.
- Talace will also hold 100 per cent stake in low-cost airline – AI Express.
- Further, it will hold a 50 per cent stake in the ground-handling joint venture, AI SATS.
- Tatas will get 141 aircraft.
- They will get access to a network of 173 destinations, including 55 international routes.
- Tatas will have the ownership of iconic brands of Air India, Indian Airlines and the icon, the Maharaja.
- The deal also means that the Tatas will have to bear a portion of the debt run up by the national carrier.
What direct liabilities will the Tatas bear because of the Air India buy? Among its obligations are:
- The Tatas will bear a debt liability to the tune of Rs15,300 crore ($2.03 billion).
- They will transfer cash worth Rs 2,700 crore ($359 million) to the government.
- They, however, cannot transfer logo/brand for a period of five years.
- Post-deadline, they are allowed to transfer the logo/brand to only an Indian entity, should they wish.
- The Tatas can offload equity after one year. But they must ensure business continuity for a period of three years.
Indeed, the Air India buy will make the Tatas happy. There are plenty of reasons for them to become emotional. After all, Air India was snatched away from them by the former Congress Party rulers of Independent India.
Air India is now returning to where it had originally belonged. But the Maharaja comes back to the Tata stable in an impoverished condition. The Tatas will have to strive hard to get the Maharaja out of the ICU quickly and nurse the iconic brand to reasonable health.
Emotions alone will not help, as Air India is facing bad weather now due to a combination of factors. Perhaps, the Tatas were irreconcilable to the fact that they were de-possessed of the Maharaja very many summers ago. They, however, have kept their passion for their airline business.
Tata Sons own 84 per cent share in Air Asia, which has a market share of 5.2 per cent. They also hold 51 per cent share in Vistara, which has a market share of 8.3 per cent. With the return of Maharaja, it will add Air India to its airline portfolio.
Perhaps, the Tatas will bring all the three – Air Asia, Vistara and Air India – under one wing.
Predictably, India’s main national opposition party, the Congress Party, attacked the Modi government for selling the family silver.
The Secretary of Department of Investment and Public Asset (DIPAM), Tuhin Kanta Pandey, has a different take on the issue, though.
“What the Tatas are getting is not a cash cow but an airline that is bleeding, where money needs to be pumped in to refurbish obsolete aircraft and dust up strangled ones while being unable to touch any employee for one year and only be able to resize staff after paying a VRS (Voluntary Retirement Scheme),” he told the Press Trust of India, in an exclusive interview.
”It won’t be a very easy task there. The only advantage is they (the new Air India owner) are paying the price, which they think they can manage. They are not taking the excessive debt accumulated to fund years of losses. We are continuing it as an ongoing concern. This process has also saved a huge amount of tax-payers money going forward,” Pandey said in that interview.
He could not have articulated it any better. The moot point is: Have the Tatas been guided by emotion? Is there a strong business rationale for them to buy back Air India? Well, one can keep debating till the cows come home.
A fact-check will be in order. The software entity of the Tatas, Tata Consultancy Services (TCS), remains largely the cash cow for them.
A substantial portion of the income for Tata Sons comes from TCS, which is proving to be a cash-vending machine for the Tata holding company. The digitisation push in the wake of COVID-19 pandemic has further brightened the prospects for TCS. That must be music to the ears of mandarins at Bombay House, the headquarters of the Tata Group.
Companies such as Tata Motors and Tata Power are not really in the pink of health, however. Tata Motors reported a net automotive debt of Rs 40,900 crore ($5.43 billion) at the end of Financial Year 2021. Debt went up to Rs 61,300 crore ($8.15 billion) at the end of the June 2021 Quarter, mainly due to the impact of change in working capital requirements, the company informed investors in a presentation in recent months.
The outstanding borrowing of Tata Powers stood at Rs 16,504.41 crore ($2.2 billion) at the end of Mar. 31, this year, according to a recent filing with the stock exchanges. These two are indeed the traditional businesses of the Tatas.
The automobile scene is changing dramatically with focus increasingly turning towards green vehicles. This means that a strategy re-jig and more investment into technology. One isn’t quite sure of how their existing airlines – Air Asia and Vistara – are doing now.
Acclaimed as the most efficient and trusted globally, Singapore Airlines had a wafer-thin profit of about $700 million on revenue of $16 billion for the year ended Dec. 2019. That was in pre-COVID times! That gives a clue or two to the health of the airline industry.
These are different times and trying ones at that. Many private players did enter the Indian sky. But most of them disappeared from the sky at the take-off stage. And the survivors are very few. Indeed, the mortality rate in the Indian airline business is very high. It passes one’s comprehension as to why people are still interested in the airline business.
The existence of an opportunity does not automatically assure any entrant a success. Why is it so? The reasons are not far to seek.
A robust business model is sine qua non for the success of any enterprise. Often, the airline business witnesses unbridled price competition. When you play the volume game, it is quite possible you bleed and that results in eventual elimination from the scene.
Profitable existence calls for a sense of responsible behaviour from all the participants. The absence of it is the cause for the bloodbath across diverse economic fields.
The Air India sale is still at a nascent stage. Yet, the Tatas will do well to articulate their plan of action to inject a sense of confidence among diverse stakeholders in the Tata Group and in Air India.
A well-respected group with enormous brand equity does not mean that they have a Midas touch. It requires a rational thought-process and well laid-out business plan to make a success out of any effort.
None could have imagined that the Tatas would be caught in a Mistry imbroglio. They have won a legal war, no doubt. The fact of the matter is that the Tata brand has come under stress during the Mistry episode.
As it tries to bring yester-year glory back to the Maharaja, the world at large is looking forward to a vastly refreshed transparent approach from the Tata Group to navigate the new normal business world.
(K. T. Jagannathan is a Chennai-based senior financial journalist and T. S. Shankar is also a Chennai-based aviation journalist, twice nominated for the global “Best Decade of Excellence Award for Aviation Journalism.)
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