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June 8, 2000
Business Commentary/Dilip Thakore
Air-India: Illusory privatisation proposal
Though almost all major mainstream newspapers gave the proposed divestment by the Union government of its majority stake in Air-India front page display, it would be prudent to resist the temptation to uncork the champagne just yet.
True, the Union Minister for Divestment Arun Jaitley did go on record to say that the new 'strategic investor' in Air-India would be expected to assume management control of this deep-in-the-red public sector airline. However, the contours of the proposed privatisation of Air-India are fuzzy and you can bet your bottom rupee that there are many furious wheels churning within the wheels of the seemingly generous and momentous divestment proposal.
The truth is that Air-India, with its massive aircraft and equipment purchase opportunities and myriad freebies such as free travel and jobs for kith and kin, is too big a prize for the nation's politicians to give up without a fight.
This is implicit in the proposed shareholding pattern after divestment: privatisation is a word that is anathema to all politicians. The Union government will retain shareholding parity with the strategic investor with each major partner having a 40 per cent stake in the restructured carrier. Ten per cent of the equity will be issued to employees by way of stock options and the remaining 10 per cent will be given to domestic financial institutions. This 'big-ticket divestment' will ensure that at least 74 per cent of the airline's equity will remain in Indian hands, the minister said.
Much importance has been given to the Union government's 'concession' that the strategic partner/investor can in turn offer up to 26 per cent of his 40 per cent to a foreign investor which may even be an airline company.
The decision to permit a foreign airline to own 26 per cent in the restructured Air-India is a major concession in the Indian context as it would enable the foreign airline to block ordinary board resolutions and force a shareholders' meeting. Nonetheless, it is obvious that at such shareholder-meets the strategic investor -- including the foreign airline -- is likely to be outvoted. This is the significance of the Union government retaining a 40 per cent equity in the restructured and/or 'privatised' Air-India.
Anybody who knows the least bit of why Air-India -- which right up to the early nineties was a profitable airline -- has since run up an accumulated loss of Rs 10.04 billion, knows that it is the politicians and the airline's employees who have ruined the carrier. Because of political indecision on the purchase or lease of new aircraft, Air-India's fleet size has remained stagnant. The nationalised airline's fleet size is a mere 23 aircraft. For the same reason, it is also perhaps the oldest fleet in the world with the average age of its planes being 14 years. Against this Singapore Airlines' (94 aircraft) average age of fleet is five years, British Airways (282 aircraft) 10 years, Lufthansa (289 aircraft) 6.7 years and Malaysian Airlines (93 aircraft) four years.
Not content with lumbering the world's second-largest nation with a pathetically small fleet, the political class has also transformed the carrier into the most labour-intensive airline in the world in a bid to appease kith and kin.
Air-India boasts of 750 employees per aircraft (British Airways:227; Lufthansa:185; Singapore Airlines:341; Malaysian Airlines:170), with the result that employee costs account for over 25 per cent of its total annual expenditure against an industry average of 10 per cent. The airline is also bogged down by powerful and unyielding trade unions. Little wonder then that the nation's high-potential international airline has gone to the dogs.
Though these are the two deepest wounds inflicted upon the national airline, there are many other examples of the open, continuous and uninterrupted abuse of Air-India by government servants and its employees. Among them: free passages availed by politicians and government servants; widespread nepotism in employment; continuous maltreatment and neglect of fare-paying passengers; the acquisition of a notorious on-time record, and widespread theft and pilferage of food and beverages indented for fare-paying passengers. It is against this pathetic backdrop that the citizen, whose savings finance this airline, must assess the privatisation proposal.
Evidently, with the Union government retaining 40 per cent stake and offering another 10 per cent to the employees who did little to extricate it from the morass it is now in, this combination will own 50 per cent of the equity in the airline. And another 10 per cent of the equity would be off-loaded to public sector financial institutions whose carefully selected chief executives are government 'yesmen'. Therefore, the chances are that despite this great song and dance about privatisation, government and the airline's employees will be the majority shareholders.
It's difficult to believe that the strategic investors whom the Union government hopes to attract into partnership won't see through this move. Hopefully, they will force the Union government to reduce its equity in the restructured airline to 26 per cent. Only then can the task of cleaning the hangars of Air-India begin and the restructured airline take wing.
Dilip Thakore was the founder-editor of Business India and Business World and is currently editor of Education World.
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