Privatization Of Air India – Economic And Legal Implications
This Blog is written by Jatin Pandey from Kirit P. Mehta School of Law, NMIMS Indore. Edited by Harshita Yadav.
India currently has one of the highest growth rates in civil aviation and ranks among the countries with the highest expected growth levels in both civil aviation passengers and freight, considering the economic growth prospects. Air traffic in India is expected to rise 3.3 times over the next 20 years. Despite these optimistic figures, National carrier Air India operated by the Government of India continues to be a loss occurring entity. Things deteriorated further a few months ago when unpaid oil companies stopped the airline’s supply of fuel at six airports. Air India couldn’t survive with the growing competition because of the existing choices available in the market and other factors such as higher oil prices. Under such a case, the government only has the option to privatize the airline by seeking the right bidder who is willing to accept a portion of the debts. As of 31 December 2017, Air India has an operating fleet of 115 aircraft, mainly Airbus and Boeing aircraft including A-319, A-320, A-321, B-747, B-777, and B-787, of which 69 are owned/leased in finance, 24 are on sale and rent.
THE JOURNEY OF “MAHARAJAH”
Air India was founded by J R D Tata as Tata Airlines (Tata Sons Ltd division) in 1932. It became a Public Ltd company called Air India in July 1946. In 1948, the Government of India bought 49% of the stake in Air India (with the option of buying an additional 2%). In 1953 the government nationalized the airline and passed the 1953 Air Corporations Act, which granted the monopoly rights to Air India, and its partners. This act was repealed following a recommendation from a standing committee headed by Pramod Mahajan in 1993 and since 1994 private sector players are allowed to participate in the aviation market. In 2007 the decision was taken to merge Air India with Indian Airlines to form NACIL (National Aviation Company of India Limited). The aim was to ensure a lower level of administrative costs and other services. Some of the stakeholders opposed this merger because they argued that the structure, culture, and ethos of both airline operators are different.
IMPACT OF AIR INDIA ON THE ECONOMY
With a gradual approach, the government envisages a profitable sale of Air India, which includes five subsidiaries, a joint venture, and 27,000 staff, in addition to an unsustainable debt of Rs. 52,000 crores. Without a clear path forward from the government, Air India will continue to consume the capital and tend to incur losses that eventually lead to the government shutting it down According to the CAPA (Centre for Asia Pacific Aviation) report since 2012 the airline has received a subsidy of $4 billion and continued government ownership will result in a loss of $1.5 to $2 billion in the next two budget year. The taxpayers’ money will be invested by the Government in Air India. Owing to the rising crude oil prices, the airliner’s operating costs will increase further, plunging it into losses.
THE DOWNFALL OF THE MAHARAJAH AND THE GOVERNMENT’S PLAN FOR REVIVAL
Until the 1990s, the airline enjoyed a large market share, after which the government opened the market to private players because of which Air India began to become a loss-making entity. Air India is serving over 370 routes, out of which 9 are profitable. The rising cost of fuel has contributed to higher operating costs that have eroded the profit margins Air India contrasted with airlines in the private sector that are more effective in terms of ticket pricing, decision-making, selecting the best routes, offering value-added services, etc. The untimely merger in 2007 with Indian Airlines is the biggest reason for its downfall as it led to a whopping loss of Rs. 7000 crores recorded in 2010-11. Another major reason for the losses is the number of staff/workers is very high compared to industry standards. Air India needs only 12000 employees whereas it has 32000 employees. All these factors contributed to the downfall of Air India.
To revive Air India, the Government of India is planning to privatize it. Privatization means the transfer of ownership, property, or business from the government to the private sector is termed as privatization. The government ceases to be the owner of the company or entity. The process in which a few individuals take over a publicly owned business is called privatization. In this case, the government is planning to transfer 76% of its Air India stake. A 100% stake in its subsidiary Air India Express is being sold and a 50% share in its ground handling operations arm is also being sold. Civil Aviation Minister Hardeep Singh Puri said on December 12 that under the proposed disinvestment process, the Modi government will sell its entire 100 % stake in Air India, as the Centre-owned carrier registered a debt burden of more than Rs 50,000 crores after facing losses in the last few years. During 2018-19 it reported an estimated net loss of Rs. 8,556.35 crores.
Other subsidiaries, such as Alliance Air, Hotel Corporation of India, which owns the New Delhi and Srinagar Centaur estate, Air India Air Transport Services, and Air India Engineering Services, are not sold. They will be transferred to a special purpose entity along with roughly a third of Air India’s Rs. 48,781 crores outstanding debt. The government essentially provides a majority stake in Air India and Air India Express with management control and a combined debt burden of Rs. 33,392 crores.
ECONOMIC IMPLICATIONS OF THE PRIVATIZATION OF AIR INDIA
With no clear path forward given by the government, Air India can continue to consume the capital and incur losses that eventually lead to the government shutting it down. According to the CAPA (Centre for Asia Pacific Aviation) report, the airline has already received $4 billion in subsidies since 2012 and continued government support would result in a loss of $1.5 to $2 billion over the next two fiscal years. In the last two months, crude oil prices have risen by 14% and in the last one year by 50%, and there is no indication that it will decrease in the next few years. Consequently, the airliner’s operating costs would rise further, plunging it into losses.
Considered by many as a government fiscal burden, Air India has the ability to operate efficiently if managed well and without the privileges of powerful people on India’s power portals. One of the major hurdles to Air India’s privatization last year was the number of airline losses and debts incurred. However, it is reported that Rs. 29,000 crores ($ 5.7 billion) of Air India’s working capital debt (not secured by any asset) would be transferred to a new company leaving a burden of Rs. 25,000 crores ($ 5 billion), which are secured longer-term debts.
LEGAL IMPLICATIONS OF THE PRIVATIZATION OF AIR INDIA
Air India reportedly has a debt load of around Rs. 52,000 crores and a salary delay of approximately Rs 1,200 crores, accumulated after August 2012. The salary for Air India’s 27,000 pilots and crews is pending. Consequently, the government has agreed to disinvest and privatize. In its plan of disinvesting government remains silent on this issue. In the last effort to disinvest Air India’s bloated staff strength was flagged by potential investors. The airline has 9,617 permanent workers, with 36% of permanent employees leaving over the next five years. It’s uncertain whether the new investor will retain the employees. Article 14 to 18 of the Indian Constitution confers its entire people the right to equality. Article 14 covers the basic concepts of equality before the law as well as protection against unreasonable discrimination. Article 15 concerns the prohibition of discrimination on grounds of race, caste, religion, sex, place of birth. Article 16 guarantees equal opportunity in matters of public employment. The idea of privatization has severely affected the socially and economically weaker section of the society due to reservation policy, subsidies, and other benefits being denied.
Reforms are compulsory in every segment of society, especially in developing countries of Asia, since nothing except change is permanent. Policy-making bodies must debate changing the business environment and providing policy guidelines for them. One sincerely hopes that this time the disinvestment exercise is thought wisely, pursued determinedly, and is successful because the prospect of transforming Air India into a robust carrier is linked with it. The latest DGCA data also indicated that more passengers were ferried by the debt-ridden airline in December 2019 versus 2018. It has ferried 1.6 million passengers, 14% higher than in December 2018. However, media reports have emerged that the government-owned carrier reported its lowest market share in November i.e., 12.01%. The crude price is likely to prevail around $50–$60 per barrel in the medium to long term as per estimates by Goldman Sachs, and where more than 60% of the carrier’s revenue stream is in foreign currency especially after the significant improvement in operating performance since 2015–16. Thus, effecting strategic disinvestment of Air India at this stage will be inappropriate.