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Boarding Suitors

With the government finally biting the bullet, potential buyers are weighing up the Air India opportunity.

Boarding Suitors

Boarding Suitors

After much dilly-dallying and half-hearted attempts to revive the fortunes of Air India, the government has decided to offload the airline. The fact that Air India's revival is beyond the wherewithal of the government became evident when Finance Minister Arun Jaitley talked about the need for Air India's pestiture in a television interview. Since then, things have moved fast. Jaitley's comments were followed by the cabinet's in-principle approval for the stake sale in late June. A group of ministers will delve into the finer details of privatisation, including the amount of stake to be sold, treatment of debt and its subsidiaries, and how to manage public interests.

Initially, it seemed that the government may face difficulties. It was believed that AI's massive debt (Rs 46,570 crore), accumulated losses (Rs 47,440 crore between 2007/08 and 2015/16), and privatisation-averse employee unions could deter potential buyers. But that's not the case.

According to reports, several entities have informally shown interest in buying the beleaguered airline. Low-cost carrier IndiGo has sent a formal letter to the civil aviation ministry expressing interest in buying the international operations of the airline. In fact, the lure of international operations is so big for IndiGo, that it could acquire the entire airline if the government sells the whole nine yards.

AI is a behemoth with large international and domestic operations. Even though its market share in the domestic market is low (13 per cent), nearly 75 per cent of its capacities are deployed in international operations. Through a bunch of subsidiaries, the airline has its fingers in every pie - maintenance, repair and overhaul (MRO) operations, hospitality (Centaur Hotels) and airport services.

NITI Aayog has recommended that AI assets be unbundled to make the privatisation process faster. Hiving off subsidiaries also makes sense because the government would be able to derive higher valuations for each of the entities.

Potential buyers liken Air India to someone born with a silver spoon, and turned into a spoilt brat over a period of time because the parents were too busy focusing on other things. It continues to possess the inherited privileges, but is incapable of putting them to efficient use.

For any investor, AI's biggest strength is going to be its network and trained workforce, including the pilots and operational staff. To build an international network of the size of AI is extremely difficult for any carrier, let alone a private carrier. AI has preferential landing privileges and airport parking slots at key destinations such as New York, London, San Francisco and Tokyo. These slots were acquired by AI over the years, and at the time these airports were far less congested. Besides, the technical know-how and operational expertise of the AI staff, especially in international operations, is not easily available in the domestic market.

In a call with analysts, elaborating its plan for AI, IndiGo's Co-founder Rakesh Gangwal said, "AI was able to acquire those slots through bilaterals. Now, Heathrow [in London] and Kennedy [in New York] airports are slot-constrained." AI flies to 41 international destinations covering 28 countries across Asia, Europe and North America.

Lack of slots at key airports is the biggest reason why domestic airlines are unable to use India's share of bilateral agreements with foreign countries. The new buyer would get a readymade network and easy entry to restricted and closed international markets. It may just have to recalibrate AI's network to sync up with its existing network or vice versa.

For instance, IndiGo could feed the inbound international traffic to its fairly elaborate domestic network. Similarly, if Tata Group, through its partnership with Singapore Airlines, buys AI, it would use India as a hub to increase connectivity between South Asia and Europe/ North America.

In India, too, airport slots are limited at airports like Mumbai and Delhi which account for a sizeable chunk of air traffic. It's difficult to sustain an airline without having presence in one of these cities. AirAsia India, for instance, shunned Delhi and Mumbai initially due to high airport costs. Later, it changed plans because other markets could offer limited growth.

The attractive slots are difficult to obtain because allocation of slots are based on 'grandfather rights' that favour legacy carriers. Carriers like IndiGo, AI, SpiceJet and Jet Airways hold most of the preferential slots. It is clear that AI's network has higher value than most of its other assets that include a fleet of 140 aircraft, real estate properties, and subsidiaries - even though some of them are profitable.

AI is fully owned by the government, and nobody would want to invest unless granted complete freedom to restructure operations and undertake a management overhaul. But, on the other hand, the government should not miss out on the opportunity for a future upside. Take the case of Balco and Maruti Suzuki. When the government sold its entire stake in Maruti, its market cap was around Rs4,000 crore. That has gone up to Rs2.24 lakh crore today.

The involvement of the GoM (group of ministers) would ensure that the transaction is closed in a timely manner without having to face opposition. "All the other policy and public interest issues that we have to consider are complex. From the pure business and financial perspective, this is not a complex transaction. I have done far larger transactions," said Jayant Sinha, Minister of State for Civil Aviation, in a panel discussion recently.

On a visit to the US in 2014, Prime Minister Narendra Modi outlined the functioning style of his newly-elected government. He had famously said, "It is not the government's business to run a business." Three years later, he is walking the talk.

@manukaushik

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