May 31, 2018 / 11:28 AM / in 22 days

Air India sale exposes hurdles for Modi's divestment drive

NEW DELHI, May 31 (Reuters) - The Indian government’s offer to sell stakes in Air India has failed to draw a single bid so far, underlining the challenge it faces in fixing the debt-laden state carrier, as well as meeting a broader target of stake sales in government-held firms.

Prime Minister Narendra Modi’s government announced a plan in March to divest a 76 percent stake in Air India and offload about $5.1 billion of its debt.

This month, it eased some terms and extended the period to make bids, but as the revised deadline loomed there were still no takers for the airline, which flies some lucrative routes but also has one of the industry’s highest employees-per-aircraft ratios.

India’s civil aviation secretary, R.N. Choubey said on Wednesday that the government was unlikely to further extend the May 31 deadline, and that it expected bids to come in at the last minute.

Selling the state carrier is key to Modi’s plans to divest assets and help keep the fiscal deficit at 3.3 percent of GDP, a goal already under pressure from giveaways to farmers and other welfare benefits ahead of a national election in 2019.

If there are no bids for Air India, the government would need to step up elsewhere to meet its divestment target, said Renu Kohli, a Delhi-based independent economist.

“Relative to what we are seeing this year ... uncertainty in the financial markets, aggravated distress among banks and rising interest rates and oil prices, it does not seem like a very supportive time for people to come and buy such an asset,” Kohli said, adding that Air India needed large investment.

The government may look to raise a record 1 trillion rupees ($15 billion) from the sale of state assets in the current fiscal year that started on April 1, and Air India was expected to be a significant contributor.

While the government has not set any minimum price, the sale could fetch between 80 billion and 100 billion rupees ($1.2 billion to $1.5 billion), banking sources have told Reuters.

Air India, known for its Maharaja mascot, has some of India’s most lucrative international and domestic landing and parking slots that are key for airlines.

While the buyer would have management control and gain access to more than 2,500 international slots and over 3,700 domestic slots, it would also need to take on Air India’s 27,000 employees, 40 percent of whom are permanent staff.

The terms also stipulate that the government would continue to hold a 24 percent stake, and the winning bidder would need to abide by conditions, not yet detailed, designed to safeguard employee interests.

The government had also restricted merging the airline with the buyer’s existing businesses, but later relaxed the rule to allow some integration for business efficiency.

India’s IndiGo Airlines and Jet Airways, which had initially shown interest, opted out of the race for Air India after the initial terms were disclosed. They have not made any comments since the clarification was issued by the government earlier this month.

Steel-to-autos conglomerate Tata Group, widely seen as a potential suitor for Air India, was also unlikely to consider a bid as the terms were too onerous, sources told Reuters in April.

Tata already operates two airlines in India, including Vistara with Singapore Airlines.

Singapore Airlines has in the past said it was keeping an “open mind” about Air India, but three sources close to the company have played down the carrier’s interest, despite its previous public comments.

The sources say the airline is more focused on growth at Vistara, which is expected to place an order for widebody jets in the coming months for its international operations.

A Singapore Airlines representative said the airline had “no update to provide” on Air India.

“Possibly the current condition is not conducive as the domestic airline industry at large is currently under pressure, driven mainly by the dual impact of rising fuel costs globally and weakening currency,” said Arindam Som, analyst at India Ratings, a Fitch Group company. ($1 = 67.4625 Indian rupees) (Reporting by Aditi Shah; Editing by Sanjeev Miglani and Alex Richardson)

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