2009-08-12
There have been many articles and suggestions about Air India and what has gone wrong with it. It is true that the present crisis in Air India is the deepest crisis the airline has ever faced. It is also true that Air India and Indian Airlines have never received budgetary support, except for the initial support they received for paid-up capital at their formation about 60 years back. Air India was a highly regarded airline worldwide. The gradual fall of its reputation was based on many factors. It was a culmination of government rules and regulations, government interference in its running, including aircraft purchase, and also its web of union agreements. In 2000, a serious attempt was made to divest government equity to a strategic partner so that the airline could be run as a private airline with minority government holding and private management. The project was gone into with a proper advisor but the sale fell through because of unnecessary hype in the media and Parliament. Plus, the sales’ timing coincided with the September 11, 2001 terror attacks. Consequently, the global aviation industry went into a tailspin and there were no buyers at that time.
The government then appointed a committee headed by Naresh Chandra, former cabinet secretary and India’s ambassador to the US, Deepak Parekh, chairman HDFC, and K Roy Paul, former secretary civil aviation, among others, on July 21, 2003 to prepare a road map for the aviation sector. The report of this committee, submitted on September 30, 2003, was accepted by the government. The report did go into the issues of the two public sector airlines. However, it is unfortunate that the government ignored the report’s recommendations in so far as Air India and Indian Airlines are concerned. The report did not suggest merger of the two airlines. It reviewed the norms of foreign equity in the public sector and had stated that, “at present in the domestic transport sector equity participation by foreign individual companies is capped by 40% and foreign airlines are not allowed to hold foreign equities either directly or indirectly”. The report stated that control on foreign participation and ownership in the airline sector has been widely prevalent in airline industry, based on Chicago Convention of 1944 which created a legal system in which citizenship of airlines was a critical component. The report accepts that even mature airline industry countries like the US continue to retain national ownership and control requirements for their airlines (even though they were always in the private sector). It has also suggested that foreign equity investment in India for the airline sector for both domestic and international scheduled air transport services should be liberalised and allowed up to 49% foreign investment but with the approval of the Foreign Investment Promotion Board.
On the issue of the two public sector airlines, the committee has recommended that they should be freed from the ‘shackles that are associated with government ownership’ as they have the inherent strength to withstand competition. They had, therefore, suggested that both Air India and Indian Airlines be freed from government ownership and control as this would lead to efficiency gains. The report has further suggested that equity infusion could be obtained either through strategic investment ie., FDI or through foreign institutional investors, but has expressed preference for the FDI route. It has also taken into account issues of national security concerns, given the strategic nature of air services. Citing the example of FDI in telecom in India, it suggested that foreign equity investment norms pertaining to both domestic and international scheduled air transport services should be liberalised and allowed up to 49% FDI.
Coming to privatisation of Indian Airlines and Air India, it suggested that the government should reduce its share to 49% in Indian Airlines and 40% in Air India through sale of equity to a strategic partner at 26% in Indian Airlines, 40% in Air India, with rest to employees and other investors. The methodology recommended was to consider private placement of shares with domestic financial institutions (FIs) and banks. As FIs and banks have access to ample liquidity, the shares on these two airlines could be sold after independent valuation. Selected foreign institutional investors could also be invited to be a part of the consortium. The report has also stated that even if government is a minority shareholder in the above, management control may remain by default with the government. It suggested the way out of this predicament would be to allow the institutional investors freedom to have management teams of their choice.
It is unfortunate that the Naresh Chandra report’s recommendations on the two public sector airlines were ignored. Instead of being privatised, the two airlines were merged unsuccessfully. Hence, the present mess. Strategic divestment still remains an option.
The author is chairman, International Foundation for Aviation & Development (India Chapter) and India’s former representative to ICAO
There have been many articles and suggestions about Air India and what has gone wrong with it. It is true that the present crisis in Air India is the deepest crisis the airline has ever faced. It is also true that Air India and Indian Airlines have never received budgetary support, except for the initial support they received for paid-up capital at their formation about 60 years back. Air India was a highly regarded airline worldwide. The gradual fall of its reputation was based on many factors. It was a culmination of government rules and regulations, government interference in its running, including aircraft purchase, and also its web of union agreements. In 2000, a serious attempt was made to divest government equity to a strategic partner so that the airline could be run as a private airline with minority government holding and private management. The project was gone into with a proper advisor but the sale fell through because of unnecessary hype in the media and Parliament. Plus, the sales’ timing coincided with the September 11, 2001 terror attacks. Consequently, the global aviation industry went into a tailspin and there were no buyers at that time.
The government then appointed a committee headed by Naresh Chandra, former cabinet secretary and India’s ambassador to the US, Deepak Parekh, chairman HDFC, and K Roy Paul, former secretary civil aviation, among others, on July 21, 2003 to prepare a road map for the aviation sector. The report of this committee, submitted on September 30, 2003, was accepted by the government. The report did go into the issues of the two public sector airlines. However, it is unfortunate that the government ignored the report’s recommendations in so far as Air India and Indian Airlines are concerned. The report did not suggest merger of the two airlines. It reviewed the norms of foreign equity in the public sector and had stated that, “at present in the domestic transport sector equity participation by foreign individual companies is capped by 40% and foreign airlines are not allowed to hold foreign equities either directly or indirectly”. The report stated that control on foreign participation and ownership in the airline sector has been widely prevalent in airline industry, based on Chicago Convention of 1944 which created a legal system in which citizenship of airlines was a critical component. The report accepts that even mature airline industry countries like the US continue to retain national ownership and control requirements for their airlines (even though they were always in the private sector). It has also suggested that foreign equity investment in India for the airline sector for both domestic and international scheduled air transport services should be liberalised and allowed up to 49% foreign investment but with the approval of the Foreign Investment Promotion Board.
On the issue of the two public sector airlines, the committee has recommended that they should be freed from the ‘shackles that are associated with government ownership’ as they have the inherent strength to withstand competition. They had, therefore, suggested that both Air India and Indian Airlines be freed from government ownership and control as this would lead to efficiency gains. The report has further suggested that equity infusion could be obtained either through strategic investment ie., FDI or through foreign institutional investors, but has expressed preference for the FDI route. It has also taken into account issues of national security concerns, given the strategic nature of air services. Citing the example of FDI in telecom in India, it suggested that foreign equity investment norms pertaining to both domestic and international scheduled air transport services should be liberalised and allowed up to 49% FDI.
Coming to privatisation of Indian Airlines and Air India, it suggested that the government should reduce its share to 49% in Indian Airlines and 40% in Air India through sale of equity to a strategic partner at 26% in Indian Airlines, 40% in Air India, with rest to employees and other investors. The methodology recommended was to consider private placement of shares with domestic financial institutions (FIs) and banks. As FIs and banks have access to ample liquidity, the shares on these two airlines could be sold after independent valuation. Selected foreign institutional investors could also be invited to be a part of the consortium. The report has also stated that even if government is a minority shareholder in the above, management control may remain by default with the government. It suggested the way out of this predicament would be to allow the institutional investors freedom to have management teams of their choice.
It is unfortunate that the Naresh Chandra report’s recommendations on the two public sector airlines were ignored. Instead of being privatised, the two airlines were merged unsuccessfully. Hence, the present mess. Strategic divestment still remains an option.
The author is chairman, International Foundation for Aviation & Development (India Chapter) and India’s former representative to ICAO
