x

Abu Dhabi, UAEMonday 18 June 2018

Air India's privatisation is the biggest overhaul for Indian aviation

Despite Air India's debts, there has already been interest in buying a stake in the beleaguered airline.

An Air India passenger jet flies into Mumbai Airport. Daniel Berehaluk / Getty
An Air India passenger jet flies into Mumbai Airport. Daniel Berehaluk / Getty

The Indian government's plan to privatise the struggling flag carrier Air India could help the country's aviation sector to soar.

A group of ministers has been tasked with determining the finer details of the process, after India's cabinet recently approved the privatisation of loss-making Air India “in principle”.

“This is a long overdue decision and will be one of the most significant structural reforms in Indian aviation,” according to a research note by analysts at Capa India, an aviation advisory and research firm.

Air India is laden with debts, totalling about 500 billion rupees (Dh28.36bn). The airline has long struggled and it is widely seen as a bold move by the prime minister Narendra Modi's government to have taken the decision to sell off a stake in its national airline. Capa warns that it is not going to be an easy journey and that the government would have to write-off billions of dollars of debt in order “to make Air India an attractive investment opportunity for investors”.

“We see this government being prepared to take such a decisive step in the interests of cutting its losses and creating a stronger Air India and a healthier aviation industry. If the balance sheet is cleaned up in this way, significant interest can be expected in the carrier.”

India's aviation sector is expanding amid rising incomes, as more Indians opt to fly.

India is one of the world's fastest-growing aviation markets. The number of passengers travelling by air within India last year surged by 23 per cent compared to the previous year to reach close to 100 million. But it is also a hugely competitive, indeed cut-throat market with several low-cost carriers operating alongside full-service airlines such as Air India in the battle for passengers.

Despite Air India's debts, there has already been interest in buying a stake in the beleaguered airline. Indigo, India's largest carrier by market share, within a day of the plans for a stake sale being announced, expressed its interest in forging a deal.

Some reports in the Indian press have suggested that Tata, the Indian conglomerate that owns Jaguar Land Rover and has interests spanning from steel to retail, has been mulling over the idea of investing in Air India. Tata already has a significant presence in India's aviation sector, with its joint partnership with Singapore Airline in the Indian carrier Vistara, and it also tied up with Malaysia's AirAsia to launch Air Asia India.

In fact, Air India was founded by JRD Tata, the group's former chairman, in the 1930s when it was known as Tata Airlines before it was nationalised some 20 years later.

So far, Tata has not commented on the matter.

On a conference call with investors on Thursday, Rahul Bhatia, the co-founder of budget carrier Indigo, said the company was not looking at acquiring all of Air India's subsidiaries, which include maintenance and hotel operations.

“We are interested in the airline operations of Air India,” he said. “And, more specifically, we are focused narrowly on Air India’s international operations and Air India Express. That is what we have communicated in our one-on-one discussions with government officials.

“Air India’s international operations … would provide rapid entry into restricted and, in some cases, closed international markets.”

But Mr Bhatia noted “an acquisition of Air India’s international operations would require significant restructuring”.

The government has yet to decide on how large a stake will be sold off. Air India, which is often referred to as “the maharaja”, after its moustachioed mascot, has the second-biggest fleet of planes in the country and is India's largest international carrier.

“As the talk of privatisation of Air India is going forward many people are discovering the hidden value of Air India,” says Satish Modh, who has three decades of experience in aviation and worked on a turnaround plan for Air India before becoming the director of the VES Institute of Management Studies and Research, in Mumbai.

Air India has been “a favourite whipping boy” of the media, he says. But Mr Modh argues it has many attributes that could make it an attractive investment opportunity.

“The airline brings with it many airport slots, offices and skilled employees as well as assets worth hundreds of crores of rupees.” A crore of Indian rupees is equivalent of over US$150,000.

“Air India is the only airline in India that has jet shop facilities for aircraft engine maintenance, structural and landing gear repair facilities, avionics and accessories workshops and several hangers in key locations manned by skilled aircraft engineers and technicians.”

An IPO could be a viable option for the airline, Mr Modh says.

“Ten per cent of its shares should be sold to Air India's current and past employees and then list the airline on the stock market. Let the market discover the true value of Air India”.

Still, Air India is well-known for its bloated staff numbers.

“Air India is nothing more than a crony filling state jobs programme,” says Saj Ahmad, the chief analyst at StrategicAero Research. He says that while lay-offs could make business sense following a stake sale, the government might try to discourage an investor from cutting jobs.

“The challenge with Air India is firstly getting an investor,” says Mr Ahmad. “After that, they can worry about job cuts.”

There are certain factors that could hamper interest from foreign investors.

Kingfisher Airlines, which was owned by the flamboyant tycoon Vijay Mallya, collapsed in 2012, after racking up huge amounts of debt amid a turbulent operating environment in India. It never managed to turn a profit after its launch in 2005.

“While the stunning collapse of Kingfisher will be fresh in investors' minds, they will equally be aware that Air India is debt laden and the Indian aviation market is not profitable like other mature markets,” says Mr Ahmad.

Meanwhile, Capa says Indigo's interest in Air India is “surprising” since details have yet to be revealed as to exactly what is on offer.

“No other Indian carriers have the balance sheet or resources to bid directly for Air India,” according to Capa.

“An independent assessment of Air India’s assets and liabilities is essential in order to be able to structure the offer. It is also important that foreign airlines be permitted to invest up to 49 per cent in line with the sectoral FDI caps, and not be prevented from participating as has been reported in some cases."

But Capa does believe there is the potential for a successful turnaround when it comes to Air India.

“Despite its challenges, Air India has a strong brand, an extensive network, significant experience, valuable access to airport infrastructure and slots, and an ideal geographic location for a global hub. With a clean balance sheet and a clear commercial direction, Air India has the potential to evolve into a truly world class network carrier.”