Potential DGCA interference, union woes and getting fair value. The group of ministers in charge of selling a yet-to-be-determined stake of Air India has its work cut out.
An Air India Airlines Boeing 787 dreamliner. Credit: Reuters
The recent announcement by the Narendra Modi government on the disinvestment of Air India is a welcome step. For decades, experts have argued for the privatisation of the airline.
This decision by the Modi government, after some mixed signals, comes largely in line with the objectives of the previous NDA government which tried to deregulate the sector. While the attempts of the previous NDA government were stifled to a certain extent by the Directorate General of Civil Aviation (DGCA) and those working for the airline, the Vajpayee government was at least able to commission the Naresh Chandra Committee to chart out a roadmap on the reforms needed for the civil aviation sector in India.
Among many of its recommendations, the committee argued for the privatisation of Indian Airlines and Air India. But for political and bureaucratic reasons, this recommendation was not pursued. Today, when the Modi government has given its-principle approval for the disinvestment of Air India and its subsidiaries, it is imperative to go back to the still-solid recommendations of the Naresh Chandra Committee and other requisite issues in the civil aviation sector.
Three disinvestment lessons
To carry out the disinvestment process, Arun Jaitley had announced that a group of ministers (GoM) will be set up to chart out the modalities of Air India’s future. As has been widely reported, the GoM will include the ministers of civil aviation and law among others.
If the civil aviation ministry is to be involved in the disinvestment process, it is very likely that the vested interest of DGCA, the regulator, will manifest itself in multiple ways. The reason the GoM needs to be concerned about the DGCA is that the regulator’s ideological underpinnings and rigid objectives have hardly changed over time.
During the Nehruvian era, DGCA was housed within the aviation ministry to oversee the performance of Indian Airlines and Air India. But today, because of its positionality with the ministry, DGCA has been unfair in its objectives and has often employed discretionary power to decide, change and modify the rules of the game. As I’ve pointed out, India’s aviation history is littered with examples of the DGCA’s unhealthy conduct towards private players, which has hampered the sector’s growth.
In months to come, if the DGCA is not kept outside the purview of ministry or established as an independent regulator, in line with Naresh Chandra Committee’s recommendations, it might very well hamper the disinvestment process also. It is hard to imagine that the same bureaucrats who have shown anti-competitive behaviour over the years will suddenly become impartial after the privatisation of the airline. Therefore, for smoothing functioning of the disinvestment process, the discretionary power of DGCA must be checked and controlled.
Resolving union concerns
Second, as Rahul Mukherji and Gaurav Kankanhalli have shown, the privatisation of Air India has been a historically sticky and messy issue. One of the reasons the Vajpayee government was unable to fully implement the recommendations of Naresh Chandra Committee report was due to the opposition from the unions and employees on the privatisation of the airline. Today, even though the group of ministers has the necessary political will and backing, it should first focus on clearing the dues of 21,000 employees and unresolved concerns of the various unions. The sheer scale of meeting this objective will require months and the committee must take utmost effort to stop this from potentially derailing the process. Once the debt is cleared, the GoM should facilitate a constructive dialogue with the employees and take their concerns on board.
Third, in terms of the modalities of the process, the Department of Investment and Public Asset Management has suggested that three options – i.e. 100%, 72% and 51% disinvestment are likely to be considered. Given the above-highlighted regulation and stakeholder challenges, my hunch is that achieving 100% disinvestment will be an immense challenge. The two other proposed options, 72% and 51% disinvestment, seems much more feasible and pragmatic. Furthermore, if the aim is to get the best price for the airline, the group of ministers will need to tinker the government’s current FDI policy and allow capital to move freely.
Possible buyers, strategies
In terms of possible buyers for the debt-ridden airline, media speculation seems to suggest that IndiGo Airlines and Tata Group have shown interest. If we go by speculation, the two possible scenarios arise. First, since 2006, the rise IndiGo has been based on a steady consolidation of the aviation market. Offering low-cost affordable travel to its customers, IndiGo has emerged as the sector leader with 40.4% of the market as of May, 2017.
Furthermore, the ‘sale and leaseback model’ followed by IndiGo has ensured that it saves around $4-5 million from each aircraft it uses. Therefore, for IndiGo. acquiring a stake in Air India will not only increase its domestic market share but will also reap substantial benefits from Air India’s international routes.
On the other hand, Tata Group, which holds substantial stakes in Vistara has been tough on the old guards (i.e. Jet Airways, Go Air, IndiGo and SpiceJet) for several issues. Asides their internal fight, the steady growth of Vistara has been phenomenal. Over the last two years, Vistara has increased its market share from 0.3% to 3.2% and according to May’s DGCA traffic teport, the performance, customer satisfaction and regulatory compliance of Vistara have been exceptional. Based on this trajectory, it seems unlikely that Tata Group will invest heavily by acquiring vast stakes of Air India. Although, acquisition of Air India’s domestic assets could be considered.
And finally, for whichever firm that ends up procuring Air India and its subsidiaries, the arrival of GST might reduce the 20% approx. tax imposition on air travel to 6% and 9% tax bracket for the economy and non-economy travel respectively, but the decision to keep the ATF outside the preview of GST will not create market dynamism or boost air travel that government hoped via its UDAN policy scheme.
It might have been a centre-state revenue issue to keep ATF outside the GST purview but as the civil aviation minister recently said, ‘40-45% of [an airline’s] operating costs are fuel. If fuel is high taxed and that too with no set offs, they will be in trouble’.
From potential buyers point of view, it will be interesting to see how will they negotiate the terms of Air India’s procurement and make profits out of it, given the immense taxation, regulation and stakeholder challenges in the sector. But from the GoM point of view, if this disinvestment process is efficiently and democratically pulled off, it will be a huge win for the Modi government.
Gaurav Daga is student of Modern South Asian Studies at the University of Cambridge.