Air India stake sale: Traffic rights, airport slots are the biggest draws

Experts say Air India’s privatisation needs to be done in a timely manner to prevent erosion of value
Access to the Indian market and slots at constrained airports like Delhi and Mumbai will be the key attractions for Indian and foreign airlines to invest in Air India, say experts. Bidders will, however, seek a clarity on debt restructuring and the level of government control in the carrier before making a bid.

On Wednesday, the Union Cabinet gave an in-principle nod for a stake sale in Air India. Decisions on the quantum of disinvestment and allowing foreign participation in bids is yet to be taken. Modalities regarding debt restructuring, demerger and sale of its subsidiaries have also not been finalised so far.  

Despite these grey areas, prospects of a potential stake sellout have drawn the interest of various players- first from the Tata group and now from IndiGo. A Qatar Airways spokesperson said the airline can not comment at this stage. So what really is driving the interest in Air India.

"The attraction of investing in Air India lies primarily in its air traffic rights on international routes and peak hour landing slots. Investing in Air India could, therefore, enable the (investing) airline to participate in India's strong long-term air traffic growth and Air India could also feed traffic into the investing airline's international route network," said Corrine Png, founder & CEO of Crucial Perspective, a Singapore-based transport research firm.

Domestic air traffic and international traffic rose around 23 per cent and 9 per cent respectively in 2016. Airports in all metro cities are facing huge capacity constraints and this has been a barrier for growth for newer airlines like Vistara.

According to air travel intelligence company OAG, Air India has a seat capacity share of 13.4 per cent and 10.4 per cent on domestic and international routes respectively. The national carrier has a market share of 11.2 per cent and 10.5 per cent on domestic and international routes respectively. This excludes Air India Express and Alliance Air figures.

"I do not see much interest from domestic airlines since Air India's domestic market share and brand quotient has been steadily waning over the last few years. But there will be serious interest from foreign carriers. Apart from traffic rights, these carriers will get Air India's customer base and good feeder network, given the domestic connectivity of Air India," said K G Vishwanath, founder of Trinity Aviation Consultants.

The areas of concern for investors primarily relate to its non-aircraft debt, employee contracts and liabilities related to pensions and retirement benefits- all of which would attract a serious consideration on the part of investors looking to make a bid for the State-run airline.

Experts cite the example of Italian carrier Alitalia where lenders converted a portion of debt into equity as a part of a revival plan in 2014. But the airline which is co- owned by the Abu Dhabi-based Etihad has been unable to downsize its workforce and cut salaries and is now facing bankruptcy.

'The ability to attract serious bidders would depend on the size of the equity stake and how much management control the investor(s) would have in the future strategic direction of Air India. The airline's balance sheet would need to be cleaned up and beefed up in order to increase its attractiveness," Corrine Png said.

Aviation industry sources believe that the government may spin off Air India's ground handling and MRO units as well as the Air India Express before selling its stake in the airline. Air India is the only Indian airline to have its own engine overhaul unit and has maintenance facilities around the country. But its MRO has a limited third party business now.

According to Air India's internal estimates, the combined enterprise value of its the ground handling, MRO units and the Air India Express stands at around Rs 8,000 crore and sale proceeds could be used to hive off the airline's debt.

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