MIAMI – The ink is dry on the check and you’ve handed it over to the seller. Now what?
Last week, the Tata Group, an international conglomerate, agreed to take over bankrupt and debt-ridden Air India (AI) from the Indian government.
The deal was valued at US $2.4bn. Tata receives the assets of the airline including planes, buildings, real estate, domestic and foreign slots, and routes. In addition to AI, Tata also received Air India Express (IX), a low-cost Indian airline with a fleet of 24 Boeing 737-800s, and Alliance Air (9I), an Indian regional airline that primarily flies ATR 72s.
It also takes on a large chunk of the airline’s US$5bn in debt.
Writing a check and taking a decrepit airline off the government’s hands is one thing. But how do you go about rebuilding it? While it will be interesting to watch the actual scenario play out, India’s Business Standard offers a look at what might take place – and what it might cost to pull it off.
Who is the Major Player?
The Tata group is a Mumbai, India-based international conglomerate that manufactures automobiles, airplanes, and makes tea and coffee as well as specialty chemicals – among many other things. It was founded in 1868 and is one of the biggest and oldest industrial groups in India.
The precursor of the group founded Tata Airlines in 1932 as a mail carrier and kept the airline private until it was nationalized and renamed by the government in 1953 following the country’s independence from Great Britain.
At its peak, AI was known as a top-tier leader in comfort and luxury on long-haul international routes. But the airline’s fortunes changed in recent years due, according to the airline, to aviation fuel prices, high airport usage charges, competition from low-cost carriers, weakening of the rupee, and high interest rates due to its poor financial performance.
Outsiders say the airline suffered for its inconsistent service standards, low aircraft utilization, dismal on-time performance, antiquated productivity norms, lack of revenue generation skills, and unsatisfactory public perception.
Whatever the causes, Tata now owns an airline that was bleeding about US$2.6m per day and had grounded planes, including Dreamliners, due to insufficient maintenance capability. Air India had leased six engines from GE in 2019. But when the fleet was grounded during the pandemic, the airline fell behind in payments and the engines had to be returned.
First Things First
The first thing that has to take place is the restructuring of the debt. Overwhelming debt and poor financial fundamentals are often what kill an airline. Returning the company to solid financial footing with the ability to pay off debt and satisfy lenders is the foundation for any successful rebuild.
What is interesting about the restructuring is that during government ownership, the debt was backed by a sovereign guarantee – an assurance that the government would back the loan. Now, with privatization, that guarantee is gone.
However, Tata is a large international organization with a credit rating equal to that of a government. It should receive favorable terms from backers. But sources quoted by The Business Standard say that this is a complex process and that it will take some time.
Once the debt is on track, Tata will need to decide how to integrate AI with AirAsia (I5) and Vistara (UK), the other airlines in its portfolio. Tata will take control of the Indian subsidiary of AirAsia in March. It’s likely that the two will merge and form a major Indian low-cost carrier.
As for Vistara, anything that happens there will have to be in conjunction with Singapore, although Tata owns a 51% stake to Singapore Airlines’ 49%.
Prevent the Strikes
It’s also important to get unions on your side. Yes, there are labor unions in India.
At this point, things seem to be going well – for the most part. Following the purchase announcement, All India Cabin Crew Association general secretary Sanjay Lazar wrote to the Tata family saying that the union looked “forward to a mutually bright future for the entire Air India family as a part of the Tata group” and pledged to “work together.”
The Business Standard reported that Parag Ajgaonkar, general secretary of Air India’s Employees Union, expressed a similar sentiment while also ensuring co-operation. “This takeover is of immense emotional value for us Air India employees who have always been grateful to Sir J R D Tata for building an airline that is our bread and butter today.”
Foremost on employees’ minds are arrears (back pay), salary cuts, staff accommodation, and medical and flight benefits.
One problem cropping up early and reported today by the Indian Times is that the government is requesting that all airline staff vacate their homes in the staff quarters within six months of the takeover.
Over 7,000 AI employees live in government-subsidized colonies that are located on about 184 acres of land in Kalina, Santacruz in Mumbai just south of Chhatrapati Shivaji Maharaj International Airport (BOM).
The government says that the staffers can remain in the quarters for six months, or until the units are monetized, whichever happens sooner. Those who stay longer will face fines and a large increase in rent.
Unions, however, want employees to be able to stay until their retirement.
As for the pilots, the Business Standard says that the Indian Commercial Pilots Association and Indian Pilots Guild are demanding that last year’s pay cut be rescinded.
“We receive allowances per hour flown at a fixed rate. That was cut by around 40% last year. Now that the traffic situation has improved, the pay cut should be withdrawn,” a senior pilot said.
“We have made enough sacrifices for this organization during the pandemic. We can’t keep bleeding to sweeten the pot for sale of Air India,” Captain Praveen Keerthi, general secretary of the ICPA wrote to the management on Saturday.
Finally, how do you want to configure and upgrade your fleet? This may be the most difficult and crucial decision for the new owners.
The Boeing 787s are due for landing gear overhauls within the next two years. Two of the Boeing 777s are unfit to fly and need a great deal of work and refurbishing of the interior. Air India has 70 A320s, and the government said it will hand 58 of them over to the Tatas in flying condition. But what about the others?
As a Business Standard source says, “The Tatas will have to make a decision whether to continue with the A319 and older A320 aircraft or phase them out.
Also, the interiors of many planes are worn with visible wear and tear on the seats and outdated or inoperable IFE.
How Much $$?
So how much will all this cost? US$1Bn? $2Bn?
There is a lot of work to be done, a lot of decisions to be made and a lot of money to be spent. It will be a long process, probably three to five years, assuming no global financial meltdowns or pandemics.
But it will also be an interesting process to watch, to see if the Tata Group can turn around AI and return it to its former glory in the skies.
Featured image: Air India Boeing 747-8 VT-ESN. Photo: Lorenzo Giacobbo/Airways