Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

It's been 16 years since Air India Ltd. was last on the block. So strong was the political opposition then to privatizing the national carrier that Singapore Airlines Ltd., Emirates Airlines, Delta Air Lines Inc. and Air France SA pulled out of the race.

Now, India is again mulling the idea of selling 51 percent of the state-owned carrier, Bloomberg News reported Tuesday. But the economics are no longer the same. In the early 2000s, Air India's main problem was inefficiency and red tape. It had three times as many staff per plane as global airlines, and wasn't even permitted to hedge energy costs using derivatives: Pilots would shop for cheaper jet fuel in Singapore and Dubai.

Overload
Air India's $7 billion debt burden will put off potential suitors
Source: Annual reports

It's a different story now. Air India's reputation for being among the most unreliable airlines worldwide is intact. A bigger worry for any potential owner, however, is the dysfunctional capital structure.

A decade ago, the government decided to bulk up the airline. The plane-buying spree that ensued pushed up debt more than 20-fold. Instead of generating cost savings, a merger with a state-owned domestic carrier exposed Air India to the world's fastest-growing major aviation market, which also happens to be brutally competitive.

Taxpayers are still pouring money into Air India as part of a 10-year, $4.5 billion bailout. But there's no guarantee that last fiscal year's $15 million operating profit will endure. Even the Indian aviation minister doesn't think anybody would want to buy the airline.

It's true that when the government hoped to get $700 million for the loss-making carrier in 2000, Air India had bilateral flying rights to 60 countries. The only way Richard Branson could start a Virgin flight between the U.K. and India was by signing a code-share arrangement with the flag carrier.

Flying Low
Air India is losing market share at home
Source: Directorate General of Civil Aviation, Bloomberg

Even with open skies and an abundance of low-cost carriers, though, there's an investment case for Air India -- provided it goes bankrupt first.

Tinkering won't be enough. According to Indian media reports, creditors have discussed a plan to convert $1.5 billion of the carrier's $7 billion debt into 40 percent equity. This could lower Air India's interest burden by 25 percent, but would still leave it too indebted.

A better idea might be to use India's new insolvency code to wipe out the government, leaving lenders as 100 percent owners. Assuming banks forgo more loans in exchange for full control, the carrier's total debt could fall to $2 billion. That would be the lowest since the 2008 financial crisis, and sustainable.

Hyper-Competitive
Indian carriers kept slashing fares last year even as jet fuel prices jumped
Sources: Yatra.com, Indian Oil, Bloomberg News
Note: Average fares for New Delhi-Mumbai. Note: Jet fuel prices in New Delhi.

At that stage, if creditors were to hawk 60 percent of the carrier, global airlines could bite. Indian taxpayers would lose their worthless equity, but they would be spared having to pony up the remaining $900 million of the existing rescue package, plus the cost of future bailouts.

Struggling state-owned banks, which classify Air India as a special-mention account, would swap a lousy asset for a better one. That would go some way toward pruning their own $90 billion recapitalization burden. Finally, a privatized Air India would price seats rationally, which would be a relief for the country's hyper-competitive aviation industry.

With so much riding on it, New Delhi should nudge the airline toward bankruptcy. Privatization is already 16 years late, but it can wait a bit longer. Patience is the greatest virtue for Air India's customers. It might be for investors, too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net