So, what is Air India worth? As the government goes on with the sale process, likely to get completed this time next year, the Opposition will join in a chorus against the sale, alleging a sellout. A Congress spokesperson talked of, last year, how the airline was worth Rs 5 lakh crore and, a few days ago, West Bengal chief minister Mamata Banerjee called it the ‘jewel of our nation’. On the basis of its current financials, the haemorrhaging Air India is worth nothing. Indeed, even Indigo, India’s most profitable airline—profits of $248 mn in FY17—has an equity value of $8.6 bn (see graphic). Southwest, the world’s most profitable airline—it has been making profits for 44 straight years, the latest being $3.5 bn—is worth $33.1 bn (Rs 2.2 lakh crore). No airline is worth Rs 5 lakh crore. As in any thing, Air India’s worth will be different to different buyers. For one, given the huge potential of the Indian market, buying an airline with a 12% share in the domestic market and 17% in the to/from India market, will be important since a greater market share means less discounting. The real value, of course, will be in Air India’s international operations since recreating this can take a decade, or more, for most airlines such as IndiGo or Vistara looking to make a mark in the overseas market—IndiGo, once seen as a potential buyer, seems to be backtracking now.
While it is difficult to value the ‘brand’ called Air India, the bilaterals and airport slots Air India has in most major markets probably capture this best—a brand’s value, at the end of the day, is the time/effort it takes for a competitor to catch up by creating a similar network. In US/Canada and Europe, Air India has 72 landing slots each, 70 in the UK, 280 in the Gulf and the Middle East, etc. All of this has to be juxtaposed with Air India’s massive debt and poor operational metrics. The information memorandum the government has just put out talks of a combined debt of Rs 33,400 crore that will be left of the books of Air India and Air India Express, but Kotak Institutional Equities says this does not include the cost of another 11 aircraft bought after March 2017, the contingent liabilities and the funding of FY18 losses—once this is done, Kotak estimates a debt level of Rs 46,200 crore. (Air India’s buildings are to be retained by the government along with 24% of the equity and around Rs 17,000 crore of debt). In addition, as Kotak points out, Air India’s operational metrics are very poor. Its operational costs are Rs 4.74 per available seat kilometre (ASKM) versus Rs 4.33 for Jet, Rs 3.6 for SpiceJet and Rs 3.16 for IndiGo. Based on Air India’s current metrics, even after the government takes on a large part of the Rs 50,000 crore debt, the airline is not worth much on a purely financial basis. At even an EV/EBITDAR of 10—Kotak says most airline peers trade at values of around 7-8—the equity value of Air India is negative.
09/04/18 Sunil Jain/Financial Express
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While it is difficult to value the ‘brand’ called Air India, the bilaterals and airport slots Air India has in most major markets probably capture this best—a brand’s value, at the end of the day, is the time/effort it takes for a competitor to catch up by creating a similar network. In US/Canada and Europe, Air India has 72 landing slots each, 70 in the UK, 280 in the Gulf and the Middle East, etc. All of this has to be juxtaposed with Air India’s massive debt and poor operational metrics. The information memorandum the government has just put out talks of a combined debt of Rs 33,400 crore that will be left of the books of Air India and Air India Express, but Kotak Institutional Equities says this does not include the cost of another 11 aircraft bought after March 2017, the contingent liabilities and the funding of FY18 losses—once this is done, Kotak estimates a debt level of Rs 46,200 crore. (Air India’s buildings are to be retained by the government along with 24% of the equity and around Rs 17,000 crore of debt). In addition, as Kotak points out, Air India’s operational metrics are very poor. Its operational costs are Rs 4.74 per available seat kilometre (ASKM) versus Rs 4.33 for Jet, Rs 3.6 for SpiceJet and Rs 3.16 for IndiGo. Based on Air India’s current metrics, even after the government takes on a large part of the Rs 50,000 crore debt, the airline is not worth much on a purely financial basis. At even an EV/EBITDAR of 10—Kotak says most airline peers trade at values of around 7-8—the equity value of Air India is negative.
09/04/18 Sunil Jain/Financial Express
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