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Air India is a government-owned airline. Since airlines are a very competitive business, any airline which is even slightly mismanaged makes losses.
Since Air India is heavily mismanaged, it is making a lot of losses.
The Indian government has been mulling the divestment of this firm for a very long time. This is, in fact, the third time they were trying to divest this firm. However, this airline simply received no bidders! The Air India auction was a flop show which caused the government to rethink its divestment strategy.
The divestment of beleaguered IDBI bank has also been put on hold considering the negative response received by Air India.
In this article, we will have a closer look at some of the reasons why Air India did not receive any bidders.
Private firms find it very difficult to be partners with the government. This is because governments have a very bureaucratic way of working which has no regards for cost and efficiency. This drags down the performance of the corporate firms that partner with the government.
In case of Air India, the government holds 100% stake as of now. It is looking to divest only 76% of this stake. This means that the government will still be a 24% shareholder. Although the private firm would have an absolute majority, it would still not be able to make decisions without government approval. This arrangement is not acceptable to most corporations. This is the reason why there have been no bidders for Air India.
Air India has over 400,000 people on its payroll. They have more employees than any other airline. To top it up, more than 50% of these employees are permanent. This means that their services cannot be terminated. Also, this means that their salaries will continue to grow by a set percentage regardless of the macro environment that the company is facing. Also, it is well known that Air India is highly unionized.
This makes it impossible to even lay off temporary staff without any political interference. This means that the potential bidder will have to inherent Air Indias very large and inefficient staff. Also, there will be very little possibility for downsizing. It is a known fact that a lot of Air Indias employees are inept and apathetic towards their work.
Air India is saddled with a huge amount of debt. In dollar terms, the airline has over $5 billion in debt. To put that into context, if Air India were to stop paying its loans, this single entity would account for over 2% of the non-performing assets being held by Indian banks. Also, it is a known fact that Air India has been making record losses because of its high indebtedness.
The accumulated losses continue to disrupt the airline because almost its entire revenue goes towards making interest payments on its loans. There is nothing left for other expenses and expansion.
Bidders will be expected to take over almost three-fourths of these liabilities. Most listed companies do not want to invest in a government-owned airline with high operating and financial leverage. That is simply too much risk and may turn out to be a recipe for disaster.
Air India owns a lot of real estate across India. A lot of this real estate is considered to be prime property and is being sought after by many developers. If Air India were to offer these properties for sale, maybe that would sweeten up the deal for potential investors. However, at the moment, Air India was protecting its assets while trying to dispose its liabilities.
This meant that they wanted the prospective investors to take up the loans, but the government still wanted to retain the ownership of the land and buildings. This move was seen as a negative sign by many suitors who simply gave up the quest without filing any bids.
The paucity of suitors for Air India has left the current Indian government in a fix. This is because the government has laid out plans to spend a lot of money on farm loan waivers and other welfare benefits that have been announced keeping the 2019 election in mind. The money for these schemes is going to be made available via divestment. The Indian government was heavily banking on the divestment of Air India to meet its targets. Air India alone would have contributed more than 20% of the money required.
It is unlikely that the government will make another attempt to sell this loss-making airline soon. This will come as a double whammy to the government. Not only will Air India not provide money for government programs, instead it will consume some of the money earmarked for them.
Air India is known to be an enterprise that survives by guzzling taxpayer money. It seems like this will continue for another few years. Also, the precedent set by Air India is very bad. This has depressed the sentiment in the market. As a result, if the government puts its other enterprises for sale, those attempts at divestments may also fail.
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What the Current Wave of Protectionism and Populism mean for the Future of Globalization and Free Trade
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