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Case study on Tata Sons’ purchase of Air India

Case study on Tata Sons’ purchase of Air India
Background

Background

Corporate Clients Wanting To Invest

Corporate Clients Wanting To Invest

Investments
In Bank FDs

Investments
In Bank FDs

Looking To Improve
Their Yields

Looking To Improve
Their Yields

Case Characteristics

Case Characteristics

  • The airline was founded by Jehangir Ratanji Dadabhoy Tata as Tata Air Services, later renamed as Tata Airlines in 1932.
  • Post World War II, it had become a public limited company and was renamed as Air India. In 1953, the Government of India passed the Air Corporations Act to purchase a majority stake in the airline carrier from Tata Sons. Its founder JRD Tata continued as the chairman till 1977.
  • When the aviation sector was opened up for private participation in 1994, 6 major private airliners i.e. Jet Airways, Air Sahara, Modiluft, Damania Airways, NEPC Airlines, and East-West Airlines, entered the market, eating into Air India’s space.
  • In 2000-01, futile attempts were made to privatise Air India. Plus, these low-cost airlines started causing a dent into Air India’s market share.
  • In order to combat this competition, the then UPA government decided to merge Air India and it’s domestic arm Indian airlines into a single entity, which was completed in 2006. The idea was to leverage the combined assets and capital to push growth.
  • But, from 2006 onwards it suffered losses after its merger with Indian Airlines. This, majorly because prior to the merger, the ministry had purchased 111 new wide-bodied aircrafts which cost them close to 67,000 crore. And post merger, the combined entity had close to 30,000 employees in its payroll.
  • According to the ministry reports, the airline lost approximately ₹570 million (US$7.6 million) because of extra commissions that Michael Mascarenhas, the then-managing director had sanctioned.
  • The combined losses for Air India and Indian Airlines in 2006-07 were ₹7.7 billion (US$100 million) and after the merger, it went up to ₹72 billion (US$960 million) by March 2009.
  • By March 2011, Air India had accumulated a debt of ₹426 billion (US$5.7 billion) and an operating loss of ₹220 billion (US$2.9 billion). It was seeking ₹429 billion (US$5.7 billion) from the government.
  • The then government agreed to provide Air India about Rs 30,000 crore in equity funding, spread over a decade.
  • As on August 31, Air India had a total debt of ₹61,562 crore.
Fascinating Findings

Fascinating Findings

  • One more glaring reason observed behind Air India’s decline, was its difficulty or reluctance in keeping up with its competitors, who were using smaller aircrafts that were faster, more fuel-efficient and required less servicing in comparison to it’s aging fleet.
  • A CBI investigation in 2011 had revealed that the national carrier was paying for these 111 planes through various loans and its internal resources. A double whammy to the chaos were the agitating employees who were upset with the wage disparities.
  • In 2012, a study commissioned by the Corporate Affairs Ministry recommended that Air India should be partly privatised.
  • At the end 2016, the NITI (National Institution for Transforming India) Aayog proposed the divestment of Air India to the Ministry of Civil Aviation.
  • Government has decided to sell 100% shares of both Air India and its budget carrier Air India Express as well as 50% shares of AISATS (Air India Limited and Singapore Airport Terminal Services).
  • To attract more bidders this time, the government has already decreased nearly ₹30,000 crore (US$4.0 billion) of debts and liabilities in an SPV (Special Purpose Vehicle).
  • On 27 January 2020, the Government released the Expression of Interest (EOI) to invite bidders.
Actionable Alternatives

Actionable Alternatives

  • The reserve price first set by the government at ₹12,906 crore was calculated as a weighted average of the business valuation and asset valuation.
  • Air India has been sold to Tata Sons for ₹18,000 crore as the conglomerate outbid the consortium led by SpiceJet’s chief Ajay Singh.
  • The Tata Sons holding company Talace Pvt Ltd will take over ₹15,300 crore and the remaining ₹46,262 crore will be transferred to Air India Assets Holding Limited (AIAHL).
  • The VVIP planes that carry the President and Prime Minister will retain their Air India One call sign but their management and maintenance will be handed over to the Indian Air Force.
  • Tata Sons will now pay ₹2,700 crore in cash to the government and take over the remaining debt of ₹15,300 crore.

Remarkable Results

Return of the prodigal son

Return of the prodigal son

The airliner returns to its original owners after 90 years. It holds a great sentimental value for Ratan Tata, who believes that this acquisition will help the group strengthen its hold on the industry and it will bring back the glory of its past.

Leaders in domestic space

Leaders in domestic space

On the business front, the Tata group already has a strong presence in the industry, with a majority stake in AirAsia India and a joint venture with Singapore Airlines named Vistara Airlines. This deal will make it the second largest domestic carrier in India.

Lucrative airline real estate

Lucrative airline real estate

The Tatas will further have access to over hundred planes, thousands of trained pilots and crew. Plus it will get 4400 domestic and 1800 international landing and parking slots in India apart from the 900 lucrative parking slots worldwide (including Heathrow).

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