Air India's Excess Baggage

The airline needs privatization. But it will be tough

The scene was all too typical. As an overbooked Air India flight prepared to leave Bombay for New York one day last February, the captain tried to remove some commercial cargo to accommodate four Air-India personnel and their belongings--all flying free on a holiday. When an Air India manager refused, the captain walked off the plane. Flight A101 finally got off the ground, but only after a four-hour delay while a new pilot was found.

The ensuing kerfuffle, which played out in India's national newspapers, was another blow to the already battered reputation of India's international flag carrier. And the timing--a few months before a planned privatization--could not have been worse. "It has been happening for years," says Michael Mascarenhas, Air India's frustrated managing director. "Maybe divestment will help."

Maybe it will. But taking Air India even partly private isn't going to be easy. Tough unions, hamstrung managers, and arrogant politicians have turned the once profitable carrier into a money-losing shambles with a sketchy route map. While there's no shortage of interest among investors, there's strong resistance at home. New Delhi intends to name an investment bank adviser by July 1. But there's still no telling how long a sale will take.

It's not just Air India's problem either. Privatizing state companies has been key to India's plan to build a market economy. But New Delhi is deeply divided over the idea of privatizing anything. Air India is now one of numerous companies with complications at rebirth; others include Indian Oil Corp. and carmaker Maruti. Says Deepak Parekh, a government adviser who structured the Air India sell-off plan: "There is a total reluctance to privatize at all."

Ironically, turning Air India private is probably the best way to revive it as a symbol of national pride. Its slow decline began not long after it was confiscated from its founder, Tata Group, in 1953. Air India's share of its market, 32% in 1980, is now 20%. The carrier hobbles along with 23 planes, 17,600 employees, cumulative losses of $250 million over the past five years, and debts of $550 million. Half of its 80 routes are unutilized. Mascarenhas has made modest headway in cutting the staff. But losses for the year to Mar. 31 were still $20 million on revenues of $1 billion.

It's not hard to see how things got this way. In many respects, the airline is a patronage machine. Most decisions require approval from five ministries. As a government company, Air India is barred from hiring temporary employees and from hedging against rising fuel costs. Mascarenhas says he now needs $250 million in expansion capital--funds New Delhi has no intention of extending.

Aware of the problems, Prime Minister Atal Bihari Vajpayee has thrown his political weight behind privatization. Last December, he picked Information Minister Arun Jaitley to carry the ball. While Jaitley has his constituents, he has his enemies, too. Chief among them is Aviation Minister Sharad Yadav, an old-school socialist pol unlikely to let New Delhi budge from its current Air India plan: 40% is to stay in state hands, and foreign ownership is limited to 26%.

The foreign buyers are plentiful enough. Industry analysts list Singapore Airlines, Lufthansa, and Virgin Atlantic, although none would confirm it is talking. Locally, Tata wouldn't mind recovering its old asset, and upstart Jet Airways wouldn't mind a new one. All these companies are after Air India's U.S. and European routes. For the foreign suitors, Air India also represents a huge growth opportunity. India is a $9 billion market that is expanding by 15% a year; only China matches that pace

Virgin Atlantic Airways already operates two flights on Air India's London route. But just how easily New Delhi will strike a deal come July 1 is unclear. The government's ownership formula, analysts say, is a recipe for more interference. "A 26% holding is not enough for an outside investor to force direction on an airline," says Richard Stirland, who heads the Manila-based Association of Asia Pacific Airlines. "Forty percent is more like it."

That may well be right, considering the tough regulations a private investor would have to get around, including labor laws that prohibit layoffs. Is this any way to run an airline? You can bet Air India's potential investors are wondering just that.

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