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Investing in Air India might be a strategic move for investors

Juwhra Salem/Dubai
Filed on February 2, 2020

(KT file)

Transferring the assets' ownership from the government to the private sector is called 'privatisation'. Governments are bent on privatising for different drives, including, but not limited to remove its fiscal drains and to improve the allocation of public resources. Consequently, the availability of such assets in one's market supports the host country in attracting foreign investments to it as well as allows the international investors to enter and operate in countries of their interest if privatised opportunities exist.

More relevantly, promoting outward investments is among UAE's key economic objectives; therefore, recognising any privatisation efforts is the key to seize an investment opportunity for UAE's investors.

After Saudi Aramco's partial privatisation, the latest Indian government's second time decision to privatise the state-owned Air India is an evident illustration of such efforts.

A few days ago, the Indian government announced to offload 100 per cent of its stakes in Air India and to proceed with its strategic disinvestment process. Hence, it has invited the domestic and international investors to submit their Expression of Interest (EoI) by March 17, 2020. The effort marks the Indian government's second attempt to disinvest in its airline in less than two years.

In 2018, the Indian Government offered 76 per cent of its equity in the airline to the market. Nonetheless, it was unsuccessful in attracting any bidder. Later in the year, it was revealed that the probable reasons for the failure of this process included the government's decision to retain 24 per cent of the stakes, the volatile crude oil prices, fluctuations in the exchange rate, the airline's high debts and restriction on bidding by individuals. For all I know, perhaps, the timing was not right too. In 2018, everyone was anticipating the 2019 general elections and questioning about the next Indian government.

Learning from the past, the government this time tweaked the terms of Air India's sale, it also bundled Air India Express along with engineering and other subsidiaries in the deal. It expanded the package to include a further relaxed net worth requirement from Rs50 billion for eligible bidders to Rs35 billion. Also, it offered the investor to absorb a total of Rs232 billion, 32 per cent lower from the 2018 debt amount. Additionally, the deal includes Air India's 121 aircraft and 25 aircraft in Air India Express fleet that might be used for domestic flights. Plus, the Indian government is open to further revise those terms.

Investing in Air India might be a strategic move for investors who look forward to expanding its presence in the Indian market. Yet, should the UAE or the International investors seize this opportunity or not depends on multiple factors, including:

First, although Air India has a huge potential value, a recognised brand in the region, a vast domestic and global network to key destinations, important slots, and bilateral rights, it still lags behind many Indian domestic carriers when it comes to main indicators such as load factor and on-time performance.

Second, the disinvestment yet restricts foreign bidders; it suggests that the majority ownership and effective control of Air India will remain with an Indian entity, hence, allowing the foreign investors ownership of only up to 49 per cent.

Third, The Air India brand will, however, have to be retained by the new owner. Leaving us to question how this condition is not an interfering element.

Fourth, the new investor should be ready to handle any challenges by the airline's worker unions if the bid affects the current or potential jobs of the airline.

Fifth, the investor would not only have to overcome Air India's internal issues but also thwart off domestic low-cost airlines and international competitors such as United airlines as well as Singapore Airlines, who partially owns Vistara Airlines.

In conclusion, privatisation is striking, and recent examples make it evident that governments should leave the business for the private sector and benefit from the values driven from this process. India's government has realised that privatisation is the way out for Air India's struggles, but what will happen next cannot be determined yet. While Air India's bid is attractive now when compared to 2018, UAE's or international investors will still need to properly assess all the elements in this bid as well as draw from the previous attempts of privatisation in India and in the region.

- Juwhra Salem is a Dubai-based economic specialist. Views expressed are his own and do not reflect the newspaper's policy.


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