Commentary

Why SIA should steer clear of Air India

Singapore Airlines (SIA) says it has not ruled out making a bid for state-owned Air India.

This is after the Indian government announced last week that it intends to divest its stake in the national carrier and offer up to 49 per cent ownership to foreigners who were previously not allowed to invest in Air India.

SIA would be wise to stay away, for several reasons.

First, it already owns 49 per cent of Indian private carrier Vistara, which started operating domestic routes in January 2015.

The airline, which is 51 per cent owned by Indian conglomerate Tata, currently serves 22 Indian destinations with over 700 flights a week, operated by a fleet of 17 Airbus A-320 aircraft. Having already flown more than seven million customers, Vistara plans to launch its first international route some time this year.

SIA should focus all its efforts on the private airline - given that it's been trying for decades to gain a foothold in the Indian air travel market - instead of getting involved in a new venture like Air India.

The second reason SIA should be very wary is that Air India's affairs are in such a bad shape that there's no certainty the airline can be rescued even if there is a transfer of ownership.

Air India has a whopping debt of 520 billion rupees (S$10.8 billion) and while it is possible that the Indian government will absorb a significant chunk to make the airline more attractive to prospective buyers, nothing has been decided.

Even if the debt is drastically reduced, it makes no sense for SIA or any other foreign airline or firm to move in, unless it is given a free hand to do what it must to turn the troubled carrier around.

This will be tricky given indications by the Indian government that it still intends to retain a minority stake of perhaps 26 per cent in Air India after the sale is done.

Any investor coming in will also have to deal with strong, established unions that have stated publicly that they do not support the privatisation of the national carrier.

Air Corporation's Employees Union (ACEU), the biggest union of Air India employees representing nearly 8,000 of the total 24,000 staff, has already made its position clear to the Indian government.

The fear, typical when such transactions are done, is that a transfer of ownership will lead to restructuring and inevitable job cuts.

As painful as it is for employees, the fact is that without such an overhaul, it is impossible for Air India to climb out of the rut that it is in.

The need to manage what will surely come could explain why the Indian government is reportedly exploring options to absorb Air India employees in public sector enterprises and offer them voluntary retirement packages.

Those who say Air India is a good buy will point to the fact that it has a fleet of close to 120 aircraft and controls almost 20 per cent of international traffic, making it the largest international carrier out of India.

 

The air rights - negotiated between governments - that allow an airline to fly from its home base to foreign destinations will be inherited by whoever buys Air India.

Air India also has a wholly owned and profitable low-cost carrier, Air India Express, as well as a 50 per cent stake in ground-handling firm Air India Sats (Aisats) which it owns jointly with Singapore firm Sats.

While there are these positives, they simply do not outweigh the negatives.

StrategicAero Research chief consultant Saj Ahmad said: "Air India is simply toxic and government interference will mean that SIA - or any other firm that steps in - will be limited in its plans to rejuvenate the airline."

Mr Shukor Yusof of Endau Analytics said: "Why intentionally put one's feet into the cesspool that Air India is in? Unless it's being offered for a really good deal, like US$1 for the 49 per cent stake, SIA would do best to avoid it."

A version of this article appeared in the print edition of The Straits Times on January 15, 2018, with the headline 'Why SIA should steer clear of Air India'. Print Edition | Subscribe