TATA’s Talace Takes Over Air India, Final Details Emerge

Air India’s Origin

Air India, originally Air-India, the airline formed in 1932 (as Tata Airlines) that expanded to become India’s major international airline, serving southern and eastern Asia, the Middle East, Europe, Africa, Australia, the United States, and Canada in addition to domestic routes. The company’s headquarters are in Mumbai.

J.R.D. Tata launched the first regular service in 1932, flying mail and passengers between Karachi, Ahmadabad, Bombay (now Mumbai), Bellary, and Madras (now Chennai). Routes had been extended to Trivandrum, Delhi, Colombo, Lahore, and other intermediate places by 1939. Following World War II, Tata Airlines was renamed Air-India Limited and transformed into a public business in 1946. Air-India International Limited was founded two years later to launch international services between Bombay and Cairo, Geneva, and London.

In 1953, India nationalised all Indian airlines, establishing two corporations: one for domestic service, known as Indian Airlines Corporation (which merged Air-India Limited with six smaller lines), and one for international service, known as Air-India International Corporation. In 1962, the latter’s name was reduced to Air India. As India’s flag carrier in the following decades, the airline expanded its foreign services to all continents except South America and developed its cargo business. In order to obtain a competitive advantage in computerised reservation searches, the airline dropped the hyphen from its name in 2005, changing it to Air India.

Air India struggled to remain competitive once India began permitting commercial airlines in 1994. Despite a severe loss in market share, the firm was kept bloated by an overly large fleet and labour force. It began losing money in 2007 and later that year amalgamated with Indian Airlines to establish National Aviation Company of India Ltd. (NACIL; rebranded Air India Ltd. in 2010).

Why Air India has to be sold?

The sale of Air India to a private company has been in the works for quite some time. AI was founded in 1932 by the Tata Group, but after India got independence in 1947, the government purchased a 49 percent interest in AI. The remaining portion was purchased by the government in 1953, and AI was nationalised.

The national carrier dominated Indian skies for the following three decades. This supremacy, however, has come under serious threat as a result of economic deregulation and the growing involvement of private companies. Ideologically, the government running an airline did not exactly fit with the liberalisation credo.

To alleviate losses, AI (which operated foreign flights) amalgamated with Indian Airlines in 2007. However, the fact that the airline has never turned a profit since 2007 demonstrates how poorly it was managed.

In fact, during 2009-10, the government (and hence the taxpayer) has spent over Rs 1.1 lakh crore to either directly make up the losses or to raise loans to do so. AI’s debt stood at Rs 61,562 crore as of August 2021. Furthermore, for every additional day that AI remains operating, the government loses Rs 20 crore — or Rs 7,300 crore every year.

Why wasn’t it sold earlier?

The first attempt to diminish the government’s involvement, known as disinvestment, was attempted under the then-NDA administration in 2001. However, that attempt to sell a 40% share in the company failed. As the sustainability of running AI deteriorated with each passing year, it became evident to all, including the government, that the government would have to privatise the airline sooner or later.

During its first term, the Narendra Modi government attempted to sell another 76 percent share in the company in 2018. However, it elicited not a single response. The most recent attempt began in January 2020, and despite the fact that aviation is one of the worst-affected sectors owing to the pandemic, the government was able to ultimately complete the sale.

So how was it managed this time?

There were two major roadblocks.

The first is that the government still has an interest in the company. In other words, as long as the government retained a certain percentage of AI, private players did not appear to be interested. That’s because the mere prospect of government ownership, even if it was as small as 24 percent, made private enterprises question whether they would have the operational independence required to turn around such a heavily loss-making airline. Unlike previous attempts, the government is selling the entirety of its interest this time.

Two, AI has a massive amount of debt on its books, not to mention recurring losses. Previously, the government anticipated bidders to pick up a portion of the debt along with the airline. That strategy did not work. This time, the government let bidders choose how much debt they wanted to take on. These two things were decisive.

Why is the Air India Sale Special?

There are two ways to look at it from the government’s point of view.

One, it demonstrates Prime Minister Modi’s dedication to minimising the government’s role in the economy; he can claim to have spared taxpayers from having to pay for daily AI losses. Given the previous challenges of AI disinvestment or any disinvestment at all (see table), this is a noteworthy accomplishment.

However, in terms of money, the agreement does not represent a significant step toward the government’s current-year disinvestment aim. Furthermore, the Tatas will assume Rs 15,300 crore of the total AI debt of Rs 61,562 crore and will pay an extra Rs 2,700 crore in cash to the government. This leaves a debt of Rs 43,562 crore. The assets left behind by the government, such as buildings, are expected to yield Rs 14,718 crore. However, the government will still be saddled with a debt of Rs 28,844 crore to repay.

So, it could be claimed that if the government had run AI successfully, it could have produced profits and paid off the debts — rather than selling the airline (which can make profits) and still being saddled with a large amount of debt.

Apart from the emotional issue of taking control of an airline that they founded, the Tatas see AI’s takeover as a long-term bet. If this investment is to pay off, the Tatas will have to invest substantially more than what they have already paid the government.

TATA’s Plan To Make The Airline Profitable

The Tata group was the successful bidder in the national carrier Air India’s divestment process. Tata Sons, the controlling company of the Tata group, presented a winning bid of Rs 18,000 crore as the Enterprise Value of Air India through its wholly-owned subsidiary Talace Pvt Ltd.

Following the acquisition, the Tatas will own 100% of Air India (a full-service airline operating in domestic and international markets), 100% of its subsidiary Air India Express (a low-cost carrier airline focusing on short-haul international operations, particularly in the Middle East market), and 50% of the joint venture Air India SATS (airport services on ground and cargo handling). Air India and AIXL have a total of 13,500 permanent and contractual employees.

At the Tata group, we are thrilled to be declared the winner of the bid for AIR INDIA. This is a historic moment, and it will be a once-in-a-lifetime opportunity for our company to own and operate the country’s flag carrier airline. It will be our goal to create a world-class airline that will make every Indian proud. On this occasion, I’d want to pay respect to JRD Tata, the pioneer of Indian aviation, whose memory we treasure.

N. Chandrasekaran, Chairman, Tata Sons Pvt Ltd

The Tatas will gain control of iconic brands such as Air India, Indian Airlines, and the Maharajah. Air India operates 117 wide-body and narrow-body aircraft, whereas AIXL operates 24 narrow-body aircraft. Air India owns a substantial number of these aircraft.

Air India has a distinct and appealing international footprint. The overseas market accounts for more than two-thirds of Air India’s total revenue. It is India’s leading player in the foreign market, with a significant presence in North America, Europe, and the Middle East, as well as valuable slots and bilateral rights. Following the share acquisition agreement, the Tata Group intends to establish a new business vertical to integrate all of its airline interests, including Air India. The Group’s stakes in Air India Express and AISATS will be held by the new vertical.

The Tatas currently own a majority stake in both the low-cost carrier AirAsia India and the full-service airline Vistara. An enquiry submitted to the Tata Group about the split went unanswered. The result is significant in light of the fact that Tata Sons’ subsidiary Talace was the highest bidder for the national airline during the divestiture process.

Talace has quoted an enterprise value of Rs 18,000 crore for the Centre’s 100% equity stake in Air India, along with Air India Express and AISATS. Talace will keep Rs 15,300 crore of Air India’s total debt out of the Rs 18,000 crore. The remainder will be paid to the Centre in cash. The government has set a reserve price of Rs 12,906 crore.

Based on the bid results revealed last Friday, the Centre plans to enter into a share purchase agreement (SPA) with Talace by the end of December. Talace will receive more than 140 aircraft as well as eight logos, in addition to other assets such as human resources. Tata Sons will now own two full-service carriers, Vistara and Air India, as well as two low-cost carriers, Air India Express and Air Asia India, and a ground and cargo handling company, AISATS.

Tatas would receive 117 wide-body and narrow-body aircraft from Air India, as well as 24 Air India Express aircraft. Air India owns a substantial number of these aircraft. It will use these planes on approximately 4,000 domestic itineraries and 1,800 overseas routes. It will also gain access to Air India’s frequent flyer club, which has over three million members.

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Divya Singh
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