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Air India privatization: Airline must be broken up before sale

Air India is in a horrible financial condition. Largely surviving off a government bailout, the company has incurred massive losses down the years during which market share was lost and the business overtaken in the quality of service it provided. Now the company has finally managed to turn a profit – largely due to low oil prices – a privatization is unlikely to result in one buyer taking over the entire airline and assorted assets. Some observers of the international airline industry have expressed surprise at the possible bid from IndiGo for the whole company, stating such a move would be a strategic error.

Given the problems associated with one company taking over the entirety of Air India, the most sensible course of action is to break up the business and sell the component assets to realize the full market value. With the airline in profit (an unusual event given recent history) the government must act to make this happen. Setting free the group of subsidiaries would enable reforms to be undertaken and make the task of dealing with unions much easier because commercial pressures would come into play.

Even though IndiGo has expressed an intention of buying all of Air India if purchasing sections the budget airline is most interested in proves not to be possible, the business model of the company would suggest many assets of Air India would then be sold off. IndiGo is seeking to expand internationally, making slots at international airports and the cheap routes operated by the national flag carrier particularly lucrative. The company would gain little from operating a transport company or real estate assets. Rather than allowing IndiGo to sell of the constituent parts, more value could be realized by the government doing so because it will not be subject to the same commercial pressures to ensure quick sales occur.

Posted in Airlines.

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