Air India Downfall-A case study of a drowning ship. Diksha Singh , LL.M (Investment and Securities Law) National Institute of Securities Market, Maharashtra email- dikshasingh1860@gmail.com

1. AIR INDIA DOWNFALL
A CASE STUDY OF A DROWNING SHIP
[Diksha Singh
LL.M (Investment and Securities law)
National Institute of Securities Market, Maharashtra.]

2. RESEARCH METHODOLOGY
•Descriptive
•Exploratory
•Causative

3. TABLE OF CONTENTS
1. CIVILAVIATION
2. HISTORY OF AIR INDIA
3. FINANCIAL HEALTH OF AIR INDIA
4. FINANCIAL RESTRUCTURING PLAN
5. THE DISINVESTMENT PLAN
6. IMPACT OF COVID-19 ON AIR INDIA
7. MAJOR REASONS BEHIND THE AIRLINE FAILURE
8. WAY FORWARD

4. CIVIL AVIATION
• The history of Indian civil aviation began with its first domestic air route between
Karachi and Delhi in December 1912.
• It was opened by the Indian Air Services in collaboration with the UK based Imperial
Airways as an extension of London-Karachi flight of the Imperial Airways.
• Without any backing from the Indian Government, Tata Sons Ltd., the first Indian airline,
started a regular airmail service between Karachi and Madras three years later.
• To further strengthen the aviation sector of India, the Indian Government and Air India
(earlier Tata Airline) set up a joint sector company, Air India International in early 1948.
• And the nationalization of Indian Airlines (IA) in 1953 brought the domestic civil aviation
sector under the purview of Indian Government. Later the Government-owned airlines
dominated Indian aviation industry till the mid-1990s.

5. HISTORY OF AIR INDIA
• J. R. D. Tata founded Tata Airlines in 1932.
• It was the first to provide commercial Airline services.
• After World War II in 1946, Tata Airlines became a public limited company under the
name of Air India.
• Under the Air Corporations Act of 1953, the Government nationalized the Air
transportation industry and Air India International Limited was born.
• In 1960, Air India flew its first international flight to New York via London.
• In 1962, Air India became the world's first all-jet airline.

6. • From that its name shortened to AIR INDIA from AIR INDIA INTERNATINAL LTD.
• In 2007, Air India and Indian Airlines merged into one airline, with its name remaining Air
India.
• On 1 March 2009, Air India had made Frankfurt Airport as its international hub.
• It was made for onward connections to United States from India.
• On 27 February 2011, Air India and Indian Airlines merged along with their subsidiaries to
form Air India Limited.

7. FINANCIAL HEALTH OF AIR
INDIA
• Around 2006–2007, the airlines began showing signs of financial distress. The combined
losses for Air India and Indian Airlines in 2006–07 were 7.7 billion (US$130 million). After the
merger of the airlines, it went up to 72 billion (US$1.2 billion) by March 2009.
• This was followed by restructuring plans. In July 2009, SBI Capital Markets was appointed to
prepare a road map for the recovery of the airline.
• Thereafter Air India sold 4 of its aircraft during the month of March 2009 for $ 18.57 million
including airbus A300 and one Boeing 747-300. They were sold on “as is where is basis”.
• Previously in 2008 Air India sold 13 aircrafts on "sale and lease back" basis.
• By August 9, 2011 Air India was short of funds. Moody's investor service Inc. said Air India
recovering default is "credit negative" of SBI and PNB. Carrier has been missing salary
payments and defaulting on interest payments in the past 3 months.
• Thereafter, Govt. released 500 crore to ensure interest and salary payments.
• In 2006 Air India’s move to acquire 111 new aircrafts on debt was highly criticized by the
Comptroller and Auditor General of India as the then major cause of debt troubles for the
airline.

8. FINANCIAL RESTRUCTURING
PLAN
• In 2010, the consortium of banks approved the financial restructuring plan (FRP) of Air India, which may enable
the ailing carrier to save several hundred crore in the first year itself.
• Air India signed four agreements with the SBI-led consortium which were as follows-
1. Master Restructuring Agreement
2. Working Capital Facility Agreement
3. Appointment of Facility Agent Agreement
4. Appointment of Trustee Agreement
• One of the major highlights of the agreements include conversion of about Rs 10,500 crore of the airline's
working capital in to long-term loan, carrying an annual interest of 11 per cent, this would lead to
substantial savings of about Rs 1,000 crore in 2012-13 itself.
• Also in addition , non-convertible debentures (NCDs), guaranteed by the government, worth Rs 7,400
crore to be issued and subscribed by the investors.
• Apart from this, part of the working capital of about Rs 3,500 crore to be restructured as cash credit
arrangement.
• Air India had proposed that the government should infuse equity of about Rs 30,231 crore in the 2012-21
financial period.
• It also includes conversion of short-term working capital loan of Rs 7,000 crore into cumulative
preferential shares or NCDs and more time to repay a debt amount of approximately Rs 14,000 crore.

9. • By that time the government had infused equity of Rs 800 crore in 2009-10, Rs 1,200
crore in 2010-11 and another Rs 1,200 crore in 2011-12.
• Where the debt-ridden carrier had outstanding loans and dues worth Rs 67,520
crore, of which Rs 21,200 crore is working capital loan, Rs 22,000 crore long-term
loan on fleet acquisition, Rs 4,600 crore vendor dues besides an accumulated loss of
Rs 20,320 crore.
• In addition the airline had total of Rs 21,714.38 crore as short-term working capital
loans and used to pay an interest of over Rs 2,600 crore annually.
• FRP was based on the airline's overall Turnaround Plan aimed at providing
immediate relief to Air India through provisions such as –
1. Funded Interest Term Plan,
2. repayment moratorium of Long Term Loans and
3. upfront equity infusion by the government.

10. DISINVESTMENT PLAN
• In 2018, the Government of India intended to sell 76% stakes of airline stakes to private buyers and keep rest
24% stakes with itself.
• However, it proved to be a failed attempt as no single bidder turned up to this offer.
• Government holding even a minor stake in the airline post disinvestment and an overhead debt
burden of Rs. 33,392 with all current liabilities of the airline was seen as a huge negative for any
potential buyers.
• However, the rationale behind holding a 24% stake was that the sale of the remaining 76% would
immediately swell the value of government’s shareholding in the airline, which it would offload at a
later point in time.
• After 2018 Air India bid failure the Government created a Special Purpose Vehicle named ‘Air India
Assets Holding Limited’ , to partially relieve Air India of its debt liabilities.
• Nearly half of the total ₹58,000 crore of debt of Air India was transferred to this SPV.
• Under the SPV a specialized panel was created named Air India Specific Alternative Mechanism ,
which was headed by the then Home minister Mr. Amit Shah.
• By September 2019, this SPV was able to raise Rs 7000 crore to refinance its debt after a bidding
process where its bond issue was fully subscribed for a time period of 3 years.
• In the year alone the SPV had been able to refinance nearly 25% of the ₹29,464 crore debt at a rate
of 6.99%, which was lower than the interest rate Air India had been paying on its loans by 150 to 200
basis point.
• This reflected the confidence of the entire market in securities fully backed by Government of India.
The positive response received from all categories of Investors acted as a stimulus to the
disinvestment process of Air India Limited.

11. • During the year 2020 ,Air India had been incurring continuous loss and the
debt on it has also increased significantly by 26 crore on a daily basis.
• Airline had also stopped issuing air tickets to various government agencies on
credit basis till the due amount is cleared.
• During 2020 the total debt incurred by the airline was Rs 58,000 crore.
• The national carrier incurred a provisional loss of Rs 7,982 crore in 2019-20 as
compared to the net loss of Rs 8,556 crore in 2018-19.
• Thereafter, the Government took the decision for selling off its entire 100%
stake in the national carrier and 50% stakes in Air India SATS Airport Services
Private Ltd.by March 31, 2020.
• However due to the pandemic lockdown situation the disinvestment plan of the
government could not be executed.
• In the Union Budget for 2021, Rs 2,268 crore is proposed to be allocated for the
SPV.
• As of current situation the potential buyer of Air India will have to take up the debt
amount of Rs 23,286 crore on the airlines.

12. IMPACT OF COVID-19 ON AIR INDIA
• Covid-19 hit the entire aviation industry leaving major players like
American Airlines, Luftansa, and all others even remotely connected
with the airline industry all hurt and bruised.
• It also caused a major impact on Air India's disinvestment plan.
• The airline sustained a $500-600 million loss during this period.
• Not bidders came forward to buy Air India. Because they were having a
hard time dealing with the pandemic.
• Though Tatas were interested in it, a single bidder did not make the
deal a healthy one. Hence, the government planned to wait for market
sentiments to improve.
• Until then the airline was funded with a $300-400 million to meet its
interim operating requirements.

13. MAJOR REASONS BEHIND
AIRLINE FAILURE
• Broadly seeing through the ailing airline history , 3 major reasons for failure could be drawn out-
1. Interest burden ,
2. Loan repayment,
3. Overhead expenses.
• On a micro level the major factors which led to the failure of the airline were-
1. Merger of Air India with Indian Airlines in 2007. (extra employees burden, difference in work cultures,
dirrerence in promotion time period, constant purchasing of planes by both airlines, no route and aircraft
planning, reservation systems of both airlines merged in feburary 2011)
2. Lack of accountability in leadership positions. (frequent changing of chairmen, all major decisions taken
by government which leads to further delay in decision making process, Government officials lack
business experience thus no efficient decisions coming forward)
3. Running of planes on loss making routes for a long period of time. (370 flights operating per day – 120
international flights out of which only 9 routes are profitable)
4. Low monetisation of assets- (Lack or faulty initiatives to monetise its assets- one of the primary
requirement of meeting the revenue deficiency led to dip in the company’s fortunes. The audit report of
2016 noticed that for five out of 12 properties the terms and conditions made it impossible to monetize.
The turnaround plans envisaged that Rs 500 crore will be earned from monetization of 12 properties but
the airline till February 2016 had marked only six.

14. 5. Non-availability of proper aircraft- (The audit finds that there has been a mismatch in
demand and availability of the airline. Example- the airline after the recommendation
by the consultant to buy induct A320 aircraft to reduce maintenance cost, it took three
years for the airline to float a global tender. Till March 2016, it could only induct five
A320’s which jeoparadised the plan of reducing maintenance cost.
6. Mismanagement in granting bilateral agreements with foreign countries- (The audit
reports have pointed out that more than required granting of bilateral seats to carriers
of foreign countries hurt Air India’s prospects. S a result sixth freedom traffic carried
by foreign airlines rose significantly which had an adverse impact on Air India’s
business plans. For instance bilateral seats was enhance from 13,330 seats to
50,000 seats in the India-Abu Dhabi befitted Etihad Airways at a cost of Indian
carrier)
7. Mismanagement of manpower- (the airlines currently have around 16000 employees
which means on an average 700 employees for one aircraft, which is way more than required,
In addition there was under utilisation of of pilots and cabin crews led to loss for the
airline)
8. Politically motivated moves- ( air crafts purchased haplessly during the time of NDA
government , where they should be leased and upgraded later on.

15. WAY FORWARD
• Air India is a fine example about what could possibly go wrong with a
public sector company
• It is operationally inefficient and unable to compete with private sector
operators.
• Market economy norm says that the government should not be in
business of providing goods and services where private sector has a
vibrant presence.
• Air India’s presence was distorting the market because it has no fear of
failing.
• As of present scenario , the Strategic Disinvestment bidding has already
been closed in Dec , 2020.
• One of the confirmed bid has been jointly placed by a consortium of Air
India employees and Interups , the chairman of the investment firm ,Mr.
Laxmi Prasad.

16. • Their bid proposes to give 51% stake to the Air India employee association, which
includes 219 staffers, including some board members and 49% stake to Interups Inc
which Is a US investment firm acting as financial partner.
• Another possible bid (still not confirmed) is by Tata Group (along with Singapore
Airlines) after 67 years of Government takeover of airlines from them.
• Airlines could have been saved from downfall –
A- merger of already debt burdened airline with another debt burdened airline was
undesirable.
B- Aircrafts should have been leased rather than purchased, so that it could be upgraded
with time and technology.