School of Business, Economics, and IT Division of Business Administration Assignment, Master Thesis, 15 HE credits in Business Administration Privatization: What we learn from failure - A case study of Iran Air Degree Project, Business Administration, Master Spring term 2014 Author: Seyed Fatemeh Alaei Author: Anette Andersson Supervisor: Nataliya Galan Examiner: José Ferraz Nunes Abstract Privatization: What we learn from failure-A case study of Iran Air. By: Seyed Fatemeh Alaei & Anette Andersson Assignment, Master Thesis, 15 HE credits in Business Administration Spring term 2014 This thesis was conducted to assess how the privatization of Iran Air process managed in last efforts and how should it be in right way. It increases the knowledge about privatization in Iran and the need for it. Iran air as our case study is a flag-carrier airline company that is protected by government regulations and subsidies. We try to find the reasons for failure of privatization in Iran Air and their attempt on privatization. The method used to collect data was a qualitative methodology, consisting of semi-structured interviews with relevant managers, and knowledgeable professors and the official sites and press. In conclusion, we find that privatization is an important need for Iran Air Company and the main problems that are against Iran Air can be categorized to political, financial, and social. The effects of political connections are most pronounced in countries with high levels of corruption. Iran’s level of corruption and law enforcement environment are lower than those are in developed countries. The root of financial problems of government and the company is the deficiency of liquidity to compensate the debts, but the share did not sell. The social problem arises from the uncertainty of the future of employees of going private company. Decreasing the level of corruption and increasing law enforcement in country are general solution for political problem. Preparing transparent financial statements and fair evaluation of share base price are our suggestion to Iran Air. The staff must be sure of their future. Social Security Organization and employment laws of country or any other response organization must protect them. Keywords: privatization, privatization effects, privatization failures, airlines privatization, privatization in Iran List of content 1. Introduction ........................................................................................................................ 1 1.1 Background ...................................................................................................................... 1 1.2 Problem definition ............................................................................................................ 3 1.3 Purpose and research questions ........................................................................................ 4 1.4 Limitation ......................................................................................................................... 4 1.5 Thesis Outline .................................................................................................................. 5 2. Methodology .......................................................................................................................... 6 2.1 Scholarly approach ........................................................................................................... 6 2.2 Investigation approach ..................................................................................................... 7 2.3 Collection of data ............................................................................................................. 7 2.4 Analysis methods ............................................................................................................. 9 2.5 Source critique .................................................................................................................. 9 2.6 Reliability and validity ................................................................................................... 10 3. Literature review .............................................................................................................. 11 3.1 Collection of literature review ........................................................................................ 11 3.2 Requisites of privatization .............................................................................................. 11 3.2.1 Factors of privatization ................................................................................................ 11 3.2.2 Determination to privatize ....................................................................................... 12 3.2.3 Evaluation ................................................................................................................ 15 3.2.4 Pricing the IPOs ...................................................................................................... 15 3.3 Privatization methods ..................................................................................................... 16 3.3.1 Public Floatation of Shares ..................................................................................... 16 3.3.2 Contracting .............................................................................................................. 17 3.3.3 Public-private partnerships ...................................................................................... 17 3.3.4 Other methods ......................................................................................................... 18 3.4 The effects of privatization............................................................................................. 19 3.4.1 Positive effects with implementing privatization .................................................... 19 3.4.2 Problems with implementing privatization ............................................................. 20 3.5 Model of analysis ........................................................................................................... 23 4. Empirical evidence ........................................................................................................... 25 4.1 Structure of the empirical presentation .......................................................................... 25 4.2 Privatization in Iran ........................................................................................................ 25 4.2.1 Revision of Article 44 of the Constitution of Iran .................................................. 25 4.2.2 Privatization Organization (IPO) ............................................................................ 26 4.2.3 Tehran Stock Exchange (TSE) ................................................................................ 26 4.2.4 Iran OTC Market ..................................................................................................... 27 4.2.5 Privatization to Date ................................................................................................ 27 4.3 Iran’s National Airlines: Iran Air the flag carrier........................................................... 27 4.3.1 Iran Air history ........................................................................................................ 27 4.3.2 The standards that Iran Air follows ......................................................................... 28 4.4 Why Iran Air goes for privatization ............................................................................... 28 4.4.1 Sanctions ................................................................................................................. 28 4.4.2 Financial reasons ..................................................................................................... 29 4.4.3 New management and increasing profitability ........................................................ 29 4.4.4 Other reasons ........................................................................................................... 30 4.5 The process of privatization in Iran Air Company ......................................................... 30 4.5.1 Iran to privatize national carrier Homa ................................................................... 31 4.5.2 Tehran seeks to privatize national airline ................................................................ 31 4.5.3 Iran Air to Be Privatized In the Next Few Weeks ................................................... 31 4.5.4 Iran Air to Raise $1.2 Billion over Coming Weeks through Privatization ............. 32 4.5.5 Last efforts ............................................................................................................... 32 4.6 Privatization model in Iran ............................................................................................. 33 4.7 The effect of privatization for Iran Air Company-success or failure ............................. 35 5 Analysis ................................................................................................................................. 36 5.1 The reason of failure of privatization at first steps ......................................................... 36 5.2 How Iran Air should manage the privatization? ............................................................ 37 6. Conclusion ............................................................................................................................ 40 6.1 Conclusion