Disinvestment of PSUs – An Indian Case Study of Air India

Suseela Sarma L and Rao PS

Published on: 2019-04-30


In India, PSUs were created post Independence to build a self-reliant, state-led economy. Through the 1970s, amid a nationalisation drive, PSUs dominated the economic landscape before a bankrupt government was forced to rethink its strategy post liberalisation. PSUs are a necessity in areas where government has a natural monopoly; like railways, metro rail, utilities or sensitive areas like satellite or nuclear power. In a rapidly evolving world, there should be a model of constant review of the PSU portfolio - what to retain and what to divest. Distortions come into play when a PSU is expected to perform on similar lines as private sector units yet is deprived of management autonomy. Between 1980 and the turn of the century, the focus shifted to a wave of PSU reforms that included minority stake sales, listings and overhauls of PSU management.

Different phases of Disinvestment in India through various Governments.

  • 1991-92 to 1995-96
  • 1996-97 to 1997-98
  • 1998-99 to 2007-2008
  • 2009 to 2014
  • Present Policy – 2014 onwards

The article basically tries to assess the performance and the necessity of divesting one of the major PSUs – Air India – which has not been giving any returns on the finances pumped into it at the expense of other vital social needs. Various governments in the past decade have been trying to reverse the negative trend, but failed. So finally it was a bold step in the right direction, but with certain unattractive offer ratios due to which there has not been any offers from private investors.


PSUs Objectives, Disinvestment; Nitiayog; Privatization; Air India; Financial performance; Core group; Outright sale


Air India Privatisation

Air India, though one of the oldest in the aviation industry globally with wide route coverage, failed miserably due to inefficient management, interference, high employment ratio, free subsidies to public servants and many more negative factors. 

Organisation History

• 1932: Founded by J.R.D. Tata as Tata Airlines – country’s first scheduled airline
• 1946: Tata Airlines became a public limited company under the name of Air India
• 1948: Government of India acquires 49% stake in the company; starts international operation under brand of Air India International
• 1953: Air Corporation Act enacted to nationalize all existing airline assets and Indian Airline Corporation (domestic operations) and Air India International were established
• 1962: Air India International named as Air India
• 1994: Air Corporation Act repealed to allow private airlines to operate on domestic routes; Air India, Indian Airlines converted into Limited Companies under Companies Act, 1956
• 2000: Previous NDA govt drops privatization plan after deciding to sell 51% of equity of Indian Airlines and 60% of Air India
• 2007: Erstwhile Air India and Indian Airline were merged into single entity named as National Aviation Company of India Limited (NACIL)
• 2010: NACIL renamed as Air India Limited
• 2012: UPA govt rule out AI privatisation; Turnaround plan to infuse over Rs 30,000 crore till 2021 approved
• 2017: NDA govt approves in-principle Air India's disinvestment

Operational Status Of Air India

  • 118 aircraft out of which 77 planes owned, 22 on sale and lease back and 19 on dry lease
  • Fleet includes a mix of Boeing B777, B747, B878 and Airbus A319, A320, A321 and ATR42, ATR72360 flights daily
  • More than 18 million annual passengers
  • The airline had reported losses for six straight years.
  • Air India’s debt, now about $8 billion, is growing unsustainably.
  • It was bailed out with $5.8 billion of taxpayer money in 2012.
  • More than 18,000 workers were on its rolls for a fleet of just about two dozen planes.
  • Market Share :19.4% in 2013 and 13.3% in 2017(domestic market)


AIR INDIA FINANCIAL DATA - 2008-2016 - million Rs










Total Revenue










Total Expenses






























Some Facts about the present decision

Air India’s revival process by the government seem to have failed with the national carrier’s eroding market share, continuous losses and a mountain of debts. Merger of Indian Airlines – handling only domestic operations - with Air India (international operations) in 2007 did not yield any improvement in performance with no profits almost for a decade. Government’s primary reason for the decision of disinvestment was its debt of ?52,000 crore out of which, ?22,000 crore was for aircraft acquisition loan and the rest which was substantial is for meeting its day to day operational and other expenses.  Finance Minister Arun Jaitley was very clear in his statement that around ?50,000 crore could be invested in social welfare sectors instead of financing Air India’s debt. The present government has already invested ?23,993 crore out of ?30,231 crore planned outlay by the previous government towards its turnaround budget. In addition there has been a negative trend in its market share due to competition from private players by around 6% in the domestic sector. NITI Aayog’s recommendation on strategic disinvestment of Central public sector units, including Air India, was the precursor. NITI Aayog recommended an outright sale of Air India. The proposal was then sent for consideration of a core group of secretaries on disinvestment, chaired by the Cabinet Secretary. The recommendations given by the Cabinet Secretary-led group were forwarded to the Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, which gave its ‘in-principle’ nod for the national carrier’s strategic sale. The Union Cabinet on June 28, 2018 gave its ‘in-principle’ nod to divest stakes in Air India with strategic disinvestment including its five subsidiaries - Air India Engineering Services (AIESL), Air India Transport Services, Air India Charters which operates Air India Express and Airline Allied Services which operates Alliance Air and Hotel Corporation of India (which owns Centaur Hotels), along with a joint venture AISATS. This was latter announced by the Civil Aviation Secretary R.N. Choubey at a press conference on June 29, 2018.

Past History on divestment

Air India’s privatisation, proposed in the year 2000, was dropped after opposition from the then Civil Aviation Minister, during the earlier NDA government. It was then planned to sell 51% of equity of the then Indian Airlines, with 26% stake to a strategic partner and decided to disinvest 60% of Air India stake, which was running international operations, with 26% foreign entity stake.

Motive and causes for revival of disinvestment decision again now?

  • Huge debt: Operationally inefficient, poor management and is unable to compete with private sector operators. Due to this it has been consistently making losses dependent totally on government’s funding with a massive debt of around Rs 50,000 crore.
  • Profits are always overstated: There has been a strong belief that the financials show operational profits when actual picture is of reverse with consistent losses. CAG questioned its operational profit of Rs 105 crore for 2015-16.
  • Failure of 2012 bailout package: The 2012 turnaround plan was a total failure with a bailout package of Rs 30,000 crore, when AI has not shown the desired results. It has raised a merge Rs64.06 Cr as against the targeted figure of Rs 500 Cr, through monetization of assets from FY 2012-13 to FY2015-16.
  • Wastage of tax payers money:
    With the same situation continuous with AI, and the government will have to keep bailing out Air India will lead to wastage of tax payers money and also affecting the fiscal health of the government. Government might as well utilize these funds for more productive and needed areas such as health and education.
  • Will give a push to pending reforms:
    This will send a strong signal to investors that India is serious about reforms and pave the way for disinvestment of other loss-making companies, such as Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Ltd (BSNL) which can’t compete in India’s hyper-competitive telecom market.
  • Principles of market economy:
    Considering the basic norms of market economy followed globally, the government should deter itself from providing goods and services in areas. Where the private sector has a vibrant and strong presence. With no fear of actions against failures with continuous easy access to government finances and practically no fear of failing affects price discovery in the market and can hurt private sector operators in the business.

What are the challenges in its privatization?

The process may not be as easy as in other PSUs due to some factors:

  • The NITI Aayog has said that all non-aircraft related debt should be written off to make it attractive for investors. But it will be difficult to convince banks, financial institutions, oil companies and the Airports Authority of India to agree to such a massive write-off.
  • The human resources part of the restructuring will be politically tricky but financially essential. All critical employees must be rehired into the aviation entity “at market levels” this is crucial for any investor.
  • The Air Corporation Employees’ Union has warned the government of a “major confrontation” if it decides to go ahead with this disinvestment. As Air India’s strategic disinvestment has failed to entice investors, the entire sale process and terms need to be reviewed/revised to ensure the company is viewed as an attractive investment opportunity.

Process of AI disinvestment - No taker for Air India stake sale as bids close without a single offer

  • The government had called bids for a 76% stake in Air India, which includes 100% stake in low-fare international subsidiary Air India Express and 50% holding in ground handling company AISATS.
  • The government had extended the deadline for bids to May 31from May 14 and had targeted completion of the sale by December this year.
  • In a major setback to the government’s disinvestment agenda, the proposal to sell a majority stake in national carrier Air India failed to attract any takers.
  • Though India’s largest low-cost airline Indigo expressed formal interest to the Civil Aviation Ministry in taking over the international operations of Air India but later withdrew its intention.
  • The reasons that may have affected interest in Air India are said to include total debt and liabilities of Rs 33,000 crore on the books of the airline and the government’s retention of a 24% stake in the entity.
  • There will be no interest in bidding for the airline unless the government decides to sell 100% in Air India, an airline official said on condition of anonymity.
  • Government has formed a Group of Ministers, headed by Mr. Jaitley, to decide the modalities of disinvestment and come back with a detailed proposal. The group has to decide on the quantum of stake sale, its unsustainable debt, whether to allow foreign investors to bid for the national carrier or not, if Air India’s operations will be split into domestic and international before sell-off and whether Air India’s subsidiaries will be divested simultaneously or separately.
  • Group of ministers would decide on the future course of action. Inputs will be taken from the transaction advisor on what went wrong.

Some suggestions on the process prior to its revamp: What should be the way ahead for the government?

  • The company should be restructured into different entities: (1) Aviation, (2) Leasing, (3) Airport services, (4) Hotels), (5) Maintenance and others. Restructuring of these entities will ensure maximum value during sale and minimize financial loss to the government.
  • A dynamic management with relevant aviation experience not characteristic of public sector enterprises plagued by bureaucracy will be necessary.
  • All excess assets including excess employees must be handled with due legal aspects. It is important to sell the company debt-free. This will ensure the buyer has freedom to buy the company as per its own capital structure requirements, with much wider bidder group.
  • The existing debt of around ?50,000 crore can be reduced by sale of excess land, offices and other assets around the world.
  • All human resources should be re-employed in other government enterprises as feasible.
  • This will make Air India an attractive investment for potential bidders, with the obstacles of excess employees, above-market contracts and other legacy costs being realigned.
  • The government can study the approach implemented globally by some international airlines for restructuring - North American legacy carrier, and Asian, European and Middle-Eastern flag carriers.
  • Government should sit with professionals to find ways to make the deal attractive for a prospective buyer.
  • Government should try convincing the financial institutions to convert a part of the debt into equity.
  • The government can even infuse equity capital one last time in Air India.