Monday, March 12, 2018

Air India divestment: Will the national carrier finally get sold?

After the government's announcement of disinvestment of Air India, many players have expressed interest in acquiring the national carrier. In a recent development, a consortium of three airlines: Jet Airways, Air France – KLM and Delta Airlines have submitted an expression of interest in acquiring debt-ridden Air India. Before this, the government has received interest from IndiGo, a low-cost leading domestic airline, and an unidentified foreign airline.

The national carrier has been struggling on the back of operational inefficiencies, high employee cost and high level of net debt (Rs 54,715 crore) incurring huge losses for long.

Repeated attempts to restore efficiency have not yielded results and the government had to finally decide on privatising it along with five of its subsidiaries - Air India Engineering Services, Air India Air Transport Services, Air India Charter Limited, Airline Allied Services and Hotel Corporation of India. However, the contours of the stake sale are yet to be finalised. Subsidiaries are expected to be hived off separately, which will help pare mammoth consolidated debt.
To expedite the disinvestment process, the government has also relaxed the FDI (foreign direct investment) norm allowing foreign investment up to 49 percent in Air India through the approval route. This is expected to widen the universe of bidders thereby making disinvestment easier and faster and probably in FY19 itself.

We believe the Indian aviation industry is in a sweet spot, clocking double-digit growth in domestic passenger for last 42 months and the trend continues with the industry witnessing 19.9 percent (YoY) growth in January 2018. This is expected to generate lot of interest in Indian aviation industry from foreign players.

There are multiple reasons Air India is generating significant interest. Firstly, Air India has domestic passenger market share of around 13.3 percent and international traffic share of 44 percent. Acquiring the airline would give immediate access to high-growth Indian markets.

Secondly, Air India will strengthen its partners’ reach and give access to highly coveted prime slots on the foreign soil. Reportedly, Air India has eight pair of slots at London Heathrow (LHR) and some others airports in the USA and Europe.

Thirdly, the buyer will get access to aircraft parking/hangars facility in most of the important domestic and international airports. Lastly, Air India has the biggest MRO (Maintenance and Repair Operations) set up in India for all engineering repair requirements for aircrafts.

Our back-of-the-envelope calculations indicate that if Air India is valued using EV/ EBITDA multiple of 10x and EV/ sales multiple of 1.5x (both discount to that of the leader, IndiGo), the company will fetch Rs22,075 crore and Rs34,954 crore, respectively. The blended value (by giving 50 percent weight to each method of valuation) works out to Rs 28,500 crore.
12/03/18 Nitin Agrawal/moneycontrol