India's Tata Takes On an Albatross

US$2.6 billion Air India takeover reflects Modi’s and Ratan Tata’s drive

By: John Elliott

Tata’s planned US$2.6 billion takeover of Air India has significant ramifications beyond the basic news of what must be the biggest money-loser ever to have been privatized anywhere since Britain’s Thatcher government coined the phrase in 1979.

First, it shows that Narendra Modi’s government, while facing intense criticism internationally for its harsh Hindu nationalism, is capable of pushing through a deal that has eluded previous governments since 2001. That could bode well for economic reforms, including further privatizations that are planned along with other government asset sales

Secondly, it demonstrates the continuing clout of Ratan Tata, the 83-year-old former chairman of Tata Sons whose businesses include software, steel, retail, hotels, cars, and chemicals. He clearly still holds sway as chair of Tata’s charitable trusts, which have a 60 percent controlling stake, having ousted his first choice as his Tata Sons successor in a boardroom coup five years ago this month.

It also points to a new era for India’s aviation after decades of public sector mismanagement and government interference, often corrupt. Private sector airlines will no longer have to compete with the heavy subsidies doled out by the government, while politicians, bureaucrats, and senior staff will have to curb their plundering of the airline for their personal benefit.

The airline is currently losing Rs200 million (US$2.6 million) a day and Tata has agreed not to shed any of some 13,500 employees for a year. Reports suggest an injection of US$1 billion or more will be needed – along with changing the business culture and rebuilding a faded brand.

A letter of intent was handed to Talace, a Tata subsidiary, on October 12, following the US$2.4 billion deal’s announcement on October 8. Details are set to be finalized by December when Tata would take over the airline along with US$2 billion of its total US$8.2 billion debt. It is paying just US$388 million in cash to the government, which is shouldering the remaining US$6.2 billion debt. The group is looking for a new CEO for the airline.

There have been problems for decades – in 1987, Ratan Tata and another top industrialist, Rahul Bajaj, were put in charge of Air India and Indian Airlines, then the domestic carrier, by the late Prime Minister Rajiv Gandhi to try to introduce private sector methods and profitability. They failed.

Problems escalated in 2007-08 when the airlines were merged by Praful Patel, then aviation minister, without any change of top management nor any attempt to align and rationalize operations. Patel, who belongs to Maharashtra’s National Congress Party, also ordered 110 aircraft that were arguably not needed with the merger. He has been questioned by investigative agencies over various money laundering deals plus questionable sales of traffic rights to foreign airlines done while he was, with hindsight, one of India’s most notorious (and suave) aviation ministers.

Ratan Tata and Tata’s other two airlines

“Air India is notionally India’s national carrier, but its real role for decades has been to line the pockets and make life comfortable for those directly involved in its affairs – from ministers and bureaucrats, who get kickbacks on aircraft and other orders and benefit from freebies and powers of patronage, to top executives, pilots, and other staff who often don’t work but do block change,” I wrote on this blog in 2009 when Patel was in charge.

In that article, I quoted the then-new chairman listing many of the problems he faced, which continue despite some improvement: Air India has 32,000 employees compared with 12,000 “in any like-to-like company.” Employees are not conscious of working for a business in crisis. Pilots, “sitting at home,” are paid “80 hours of flying allowances”. Despite a freeze on recruitment, “we have recruited”. 

“There is a duplication of every activity and no single chain of command”. “Revenues are 14,000 crore and costs are Rs19,000 crore” (approximately US$2.9 billion and US$3.9 billion).

“We have 22 offline stations where we no longer fly”.

“We have an alarming number of aircraft (25) and engines (33) on standby”.

For 800 business class seats from Delhi, 750 meals are ordered but there are only 400 travelers – “no-one knows” where the other 350-400 go.

Despite all that, and his own experiences in the 1980s, Ratan Tata has been determined to take back the airline that was founded by the group as Tata Air in 1932 when India was still part of the British empire. It was nationalized in 1953 by Prime Minister Jawaharlal Nehru, six years after independence, because he wanted key national assets to be in the government’s hands.

One of Air India’s early aircraft with J.R.D. Tata who founded the airline

Tata gains around 130 aircraft (with valuable landing and parking slots in India and overseas) that it will need to align with its two existing airline interests – Vistara, which is a joint venture with Singapore Airlines, a long-standing Tata partner, and a stake in Malaysia’s AirAsia budget airline. Both are making losses.

Some observers, including India’s influential Business Standard, have said that Tata has been “generous” in the deal, given that various of the airline’s profit-making side businesses have already been offloaded. The government has also been desperate to sell, having failed in 2018 because of a lack of interest when it wanted to maintain a statutorily influential 26 percent financial stake.

There was just one other bid, from Ajay Singh who heads SpiceJet, a successful private sector carrier, but some reports have suggested he was only doing the government a favor because it needed a second bidder in order to let Tata win.

While Ratan Tata has driven the desire to regain control, the task of turning round the unwieldy, over-manned, massive loss-maker and creating a new culture will presumably be down to Natarajan Chandrasekaran, chairman of Tata Sons and a career executive, who headed TCS, the group’s leading information technology company, till the 2016 coup. 

This is the third daring takeover driven by Ratan Tata. A US$2.3 billion acquisition of Jaguar Land Rover from Ford in 2008 has done well, despite some problems. Cars fascinate him and the UK-based business gained financial strength plus management commitment and focus that had been lacking. But a US$13.6 billion acquisition in 2007 of Britain’s Corus steel company, which was pushed through despite opposition from some colleagues, was a loss-making failure.

Privatizations

For the Modi government, the deal is a major achievement. The previous Congress government, headed by Manmohan Singh as prime minister from 2004, was not enthusiastic about selling control of government assets and made little effort to tackle Air India’s problems, leaving Patel in charge for nearly seven years.

Privatization involves the government moving ownership into the private sector by selling off a controlling financial stake and Air India is the first case in India since 2004 – after the previous Vajpayee BJP government had privatized 12 corporations. Divestment, as it is practiced in the country, involves minority stakes being sold without any change in management. Both privatization and divestment are usually opposed by vested interests, as happened with Air India, notably by trade unions and top management and other vested interests that do not want their status and benefits to be upset.

The Modi government’s pending divestment initiatives include an initial public offering for Life Insurance Corporation of India (LIC), along with privatizations where the government is selling controlling stakes in Bharat Petroleum Corporation (BPCL), BEML that makes earth moving equipment, and the Shipping Corporation of India, along with steel and electronics businesses and a helicopter operator.

The Air India case should help to encourage buyers for those businesses because it shows that the government does have the will to finalize deals. It might also help large-scale monetization plans announced earlier this year, which involve handing operation of businesses over to the private sector while the government maintains control. 

But first Tata has to finalize its deal with the government in the next two months and maintain currently favorable reactions among the staff. Then it will gain control and hope that its due diligence has not missed any more of the sort of problems that the chairman outlined in 2009.

John Elliott is Asia Sentinel’s South Asia correspondent. He blogs at Riding the Elephant.