The challenges to turn Air India into an entity attractive to potential buyers
With the govt powering ahead with its resolve to sell the airline, hectic efforts are on behind the scenes to pull it back from the brink, bring it to a manageable shape and then hand it over to a buyer who can turn it around.
Around 40-odd union representatives were asked to deposit their mobile phones outside before they trooped into the boardroom. In the meeting, the management outlined the impact of the divestment process on the employees. The 12,000-odd employees would be ensured job security only for a year after the airline’s sale. Other benefits and service conditions would also change, including lifelong medical support for family, free passage on Air India flights as well as rules around employee’s provident fund, leave encashment and gratuity. The meeting also carried a confidentiality rider—the union leaders are not permitted to speak publicly about what was discussed. The union leaders pressed for better terms. We’ll do our best to negotiate with the government, the management assured them.
Later in the week, on 17 October, Air India Assets Holding Ltd (AIAHL), a special purpose vehicle of the company, raised a round of government guaranteed bonds, totalling Rs 7,985 crore with tenure of 10 years at 7.39% from the markets. This was the third bond issue by AIAHL, which has now raised Rs 21,985 crore through three issues. This SPV has taken on Rs 29,500 crore worth of Air India’s working capital loans, and the bond issues are meant to help repay the loans.
With the government powering ahead with its resolve to sell the airline after a taxpayer funded bailout infused almost Rs 30,000 crore since 2012 to no avail, hectic efforts are on behind the scenes to pull it back from the brink, bring it to a manageable shape and then hand it over to a buyer who can turn it around. The 89-year-old airline, started by JRD Tata back in 1930 and nationalised post Independence, clocked consolidated revenues in excess of Rs 27,000 crore in 2017-18, with a loss of Rs 5,799 crore. Finance or interest charges exceeded Rs 4,000 crore in that period. Consolidated debt on the books now stands at Rs 58,000 crore.
Earlier this month, fuel suppliers led by Indian Oil Corporation had threatened to pull the plug, discontinuing supplies at half a dozen airports. On efficiency parameters too, Air India is a laggard. The airline lags behind most Indian domestic airlines when compared on the basis of their cancellations (2.6%), on-timeperformance (53.5%) or airline load factor (80.9%). In mid-2018, the NDA government had tried to divest a 76% stake in the airline.
The efforts drew a blank then, with no interested bidders. The actions of the last week aim to make the airline more attractive for a potential bidder, with manageable debt and a free hand on manpower. It brings us to the question of the potential bidder. What will make Air India attractive to say Indigo, which has 48% share of the domestic market, or the Tatas, who already have interests in two airlines — Vistara and AirAsia? Can it attract an international player (Qatar Airways had shown interest) or could a large Indian corporation with no interest in the aviation sector so far, be tempted to throw its hat in the ring?
R Gopalakrishnan, former Tata Sons director, who saw two divestments— CMC and VSNL— come into the Tata fold during his time, says successful disinvestments in India have depended on the ability to push back on government interference and then merging the organisations fully, like how IPCL merged with Reliance Industries. “Governments are notorious for interfering, and even if they sell off 100%, they might still interfere, because Air India can easily become a political issue after divestment. The new management will need skills to repel such interferences, and at the same time must have integrating skills, fully merging Air India into their own organisations,” Gopalakrishnan said.
That is easier said than done, especially as airline mergers have a bad history in India. The Kingfisher-Air Deccan merger and the Jet Airways-Sahara merger both crashed and burned. To present Air India in a digestible form, its complexities need to be understood and broken down. What we refer to as Air India is really a group of companies with four distinct airlines operations as well as allied businesses.
There’s Air India’s international operations with wide-body planes, the domestic operations with narrow body planes, a profitable low-cost international operation called Air India Express and a domestic regional play called Alliance Air that launched a flight to Jaffna last week.
There’s also an airline maintenance unit, a ground handling business, a hotel subsidiary and a catering joint venture. It has a 12-13% share of India’s domestic market but an overwhelmingly large share of international routes served by Indian players. It is also the only Indian airline with long haul flights to the USA or Australia. Even Jet Airways, which has ceased operations now but was once a dominant player, did not have Air India’s range. Air India’s landing slots at London’s Heathrow, itself are tradable assets. Oman Air had paid $76 million for a Heathrow slot in 2016.
So what is the government’s thinking here? While the disinvestment will be handled by the Department of Investment and Public Assets Management (DIPAM) that reports to the finance ministry, the shots will be called by the Air India Specific Alternative Mechanism headed by home minister Amit Shah. An adviser, who asked not to be quoted, said the final configuration in which Air India is likely to be offered for a private sector bidder will be decided soon. The view within government circles is that once the debt is taken off its book, all the airline needs is better marketing and sales to optimise its yield per seat and improve its load factor. The goal is to present the airline as a premium asset.
A senior investment banker, who has advised some of the top aviation deals in India over the last 15 years, pointed out that it is a little more complex and there are too many intangibles to consider while valuing Air India. “What happens when it is no longer a flag carrier? What privileges does it lose?” he asks. Or the fact that Air India is a member of the Star Alliance, the international alliance of airlines, that also includes Lufthansa or Singapore Airlines, but not British Airways. If a bidder is a member of a different alliance such as Delta or SKY, it might be less attractive for them.
He points out that there are usually two ways of valuing an airline. One is to put a multiple on earnings before interest, tax, depreciation, amortisation and rent (EBITDAR), but may not be ideal when the balance sheet is being restructured. The second, he said, would be on the basis of depreciated value of assets, which would be planes owned by Air India and its landing slots and real estate. Air India fully owns 87 planes in its 172-strong fleet.
ICICI Securities analyst Anshuman Deb had arrived at a range for Air India’s valua valuation in 2017, on the basis of EBITDAR multiple, pegging it at between Rs 16,000 crore and Rs 30,000 crore, but isn’t ready to peg a new value to it today. He says that while those numbers may not have changed much, there is no scientific way of valuing such a complex organisation that no one will want buy in its entirety.
“Without the debt, it is very valuable. Then you have to try to sell it at full valuation. That will be a very large number, will need lot of capital,” Deb said.
Sweeteners & Bitter Pills
A number of around Rs 10,000cr - Rs 15,000 crore is floating around as ideal debt to leave on the books. It will mean taking another Rs 15,000 crore of debt out, beyond what has been transferred to AIAHL already. One way ahead is to sell and lease back Air India’s airplanes, especially as this debt was taken in the first place to buy the planes. It’s a usual practice at airlines — take delivery of new planes, sell them immediately to a financier at a profit, and then lease back the plane.
Modern planes often have a 30 year life for commercial operations, after which they continue to remain air-worthy for decades and are used for other purposes. Air India’s 25 Boeing Dreamliners still pack in a lot of value, Deb of ICICI Securities points out. Ashutosh Mishra, head of research at Ashika Capital, says there is a possibility of turning AIAHL into a Real Estate Investment Trust. “I have had discussions with Air India’s bankers.
All real estate assets of Air India will have to be stripped out of the company, not just the big buildings they own in Mumbai, Delhi and Kolkata, but every piece of land they have at different airports needs to be put in to AIAHL to make this work,” Mishra said. He further adds that the government has drawn lessons from the selloff of Specified Undertaking of Unit Trust of India (SUUTI) where after all dues were taken out, it yielded much better value.
State Bank of India is the biggest lender to Air India and its merchant banking arm SBI Caps is advising Air India on this as well as the bonds issues. Air India also has legal firm MV Kini & Company as its advisers, while the government is being advised by Ernst & Young and Cyril Amarchand Mangaldas. Kapil Kaul, head of aviation industry body CAPA, feels that in the changed circumstances, after Jet Airways has ceased operations, there will be greater interest in Air India and the entire process of disinvesting Air India will take another six to nine months.
“The government of India is more determined, and there is clarity on strategic issues. Marketing this transaction and last mile execution will be critical,” he said. Not much has been done to sell the idea to employees, though. Apart from permanent employees, Air India also has around 8,000 staffers on fixed-term contracts. Aggrieved agitating employees can easily derail the process or make it look bad. Jitender Bhargava, a former executive director of Air India, author of a book on the airline, and an advocate for its privatisation, feels the approach needs calibration.
“The deal should be sweetened for employees too. Their benefits should be guaranteed, jobs secured and training provided to match efficiency parameters. Some should be offered alternative employment, as was done when Mumbai airport was privatised,” Bhargava says. While there is a gag on employee members of trade unions, George Abraham, general secretary of the Aviation Industry Employee’s Guild, representing 4,500 staffers, is under no such compulsion. He retired from Air India four years back, is a three-time corporator, and is currently contesting the Maharashtra Assembly elections from Kalina on a Congress ticket.
Abraham says that the stakes are high and employees are fearing for their jobs and accommodation as many stay in the four Air India colonies built around the airport on land that belongs to Mumbai International Airport Ltd (MIAL). MIAL has been pestering Air India for rent.
“Earlier, the management would speak to us, discuss the issues. This time, it is being pushed down,” Abraham said, hinting all the trade unions of Air India are gearing up for battle. The Maharaja is being put through the paces. The months ahead will be interesting to watch.