Will Ratan Tata's Dream Of Owning Back Air India Come True? Tata's Financial Bid Explained

Ratan Tata, a trained pilot, was keen on getting back Air India in Tata's fold, 63-years after the airline was nationalized by India's first Prime Minister.

(File Photos/ Getty)

Mumbai: Ratan Tata's dream of owning back Air India, an airline founded by his predecessor JRD Tata as Tata Airlines in 1932, may come true as Tata Group has submitted its bids for the loss-making airline, making it a full circle for the $106 billion salt-to-software conglomerates.

When asked for comments, a Tata Sons spokesperson confirmed Tata's financial bid for Air India to ABP News without elaborating further details. DIPAM secretary, in a tweet, confirmed that the transaction advisor received financial bids for Air India divestment. "Process now moves to concluding stage."

Ratan Tata, a trained pilot, was keen on getting back Air India in Tata's fold, 63-years after the airline was nationalized by India's first prime minister Pandit Jawaharlal Nehru for national security and low-cost aviation.

"The doubts about Tata's aviation prowess should be put partially to rest by their Vistara operations. Although they are yet to turn the ink-black, their operations are of the highest standard," Utkarsh Sinha Managing Director at Bexley advisors told ABP News.

A Thorough Due Diligence

Tata Group submitted the bid despite some reservations at Bombay House that a legacy airline will drag down the group, a concern that Ratan Tata's trusted lieutenants swiftly removed in the way of Tata's bid.

Besides Tata's team, led by chairman N Chandrasekaran and group CFO Saurabh Agrawal, Tata Sons hired global consultants Seabury, Alvarez & Marsal, AZB & Partners, and PricewaterhouseCoopers for thorough due diligence to buy the airline, with a legacy of over 70 years.

Tata Sons set up a team comprising leaders from Tata Group firms TCS, Tata Realty and Infrastructure, Tata Steel, AirAsia India, and Vistara for extensive scrutiny, examining the airline's operations.  

Tata's May Fly Maharaja again

Tata Group may fly with Maharaja again as the other bidder, Ajay Singh, promoted Spice Jet, faces a severe liquidity crunch.  In recent months, SpiceJet's news has also included defaults and court disputes. According to the Delhi High Court, the airline has failed on government taxes and payments to the Airports Authority of India (AAI) and vendors, and Singh has indicated his inability to inject additional funds into the loss-making company in his personal capacity.

"Given the greater price stated by Tatas to acquire Air India, Tata has a stronger chance of winning the bid," Sonam Chandwani, Managing Partner at KS Legal & Associates, told ABP News.

Sweetened Deal

Unlike before, when the government stated that bidders must bear at least Rs 23,000 crore of Air India's debt, this time, the government is proposing a "debt-free" transaction. That means that bidders are free to set their own price regardless of Air India's debt.

Although the criteria stated that bids might pay 15% of the offer value in cash and the rest 85% for the debt, even this 85% is not a requirement, and bidders can pay the Maharaja's assets in total cash. Bidders have the option of not keeping Air India's debt and opting for an all-cash purchase, according to government officials, and there is no obligation to buy the company's debt.

"Tata plans to buy Air India's massive fleet of planes in addition to lucrative airport slots in India and abroad. The airline will award the winning bidder control of the airline with 4,400 domestic and 1,800 international landing and parking slots. For this round, the government is enabling potential buyers to determine how much debt they want to buy, after previous attempts since 2017 failed," said Chandwani.

More Pros Than Cons

Air India has more pros than cons, given the government sweetened the deal by allowing bidders to choose how much debt they want to purchase. Tatas also negotiated a non-compete clause with SIA and Malaysia Air Asia Group and bid for Air India following the negotiations. Tatas has performed extensive due diligence and is anticipated to include an indemnity clause to protect itself from future or unknown liabilities and court actions, according to Chandwani.

Legacy Issues:

Air India pays astronomically high lease rentals for its 21 Boeing 787 Dreamliners, well beyond market prices. The challenge that Tata may face is that the lease contracts include assurances from the Government of India and a change-of-control provision, which practically ensures that the winning bidder will continue to pay lease rentals and termination penalties.

Less than half of Air India's 70 narrow-body planes, including 34 leased and 36 owned Airbus A320s, are competitive, and the majority need an overhaul.

Air India had about 5,000 extra personnel in corporate and administrative responsibilities, which harmed the airline's performance, while half of them were about to retire in the next five years.

The airline's engineering and ground-handling companies also had very high costs and onerous contracts, putting a severe strain on profitability. Air India's engineering contracts with GE for its wide-body Boeing planes were similarly expensive, where the outgo increases with time. It is estimated to cost over Rs 25,000 crore to the Tata Group, to make Air India, the Maharaja of skies.

"Sorting the legacy issues: from fleet rationalization and up-gradation to fuel-efficient aircraft to legacy dues and union issues will be key. Someone at Tata needs to take a pen to a whiteboard and make a simple two-by-two matrix for Air India, similar to what Apple did post-Steve Jobs' return to simplify their offering and to refocus on doing a few things really well rather than everything in a sub-optimum way," said Mr. Sinha. He believes adding Air India to the mix will be one of the most compelling challenges any company can take on.

Bidders are weighing whether to buy substantial real estate assets owned by Air India, like worker quarters and residential colonies. It will be fascinating to see how Tatas manages the unionized staff and obligations in the near future," said Chandwani.

India's fundamental outlook for aviation is positive as there is a strong correlation between GDP growth and aviation sector growth. There should be a demand surge once the economy recovers from the Covid shock, and there is a significant untapped opportunity for Tier-2 air travel in India.

"A turnaround there is non-trivial: the legacy issues are deeply entrenched, intertwined, and multi-variate. It will take all the ops and financial engineering muscle the Tatas can muster to make Air India go against the headwinds and turn a corner. Whether or not SIA ends up being a partner to the Tatas in this effort will also be critical to the outcome," said Mr. Sinha.

"I also believe that India is a market where the whole spectrum of ULCC to full-service airlines will find room for growth. Therefore, Air India - with its significant route penetration, should have some advantages."

It is to be seen if Air India's headquarters shifts from Airlines House in New Delhi to Bombay House in Mumbai.