New Delhi: Ahead of a merger slated to kick off in June, Air India Ltd and Indian Airlines Ltd have appointed consultants to revalue their assets, a process that is expected to nearly double the value of assets of both airlines. The expanded asset base could help the new airline, which is buying 112 planes in the next five years, potentially raise more debt to fund operations.
Immovable assets such as land and buildings have so far been reflected on the airlines’ balance sheets at historical cost value and account for just 1% of total market value, say company insiders.
The revaluation is likely to raise the value of fixed assets of the merged entity by Rs8,000-10,000 crore.
Air India’s assets stood at Rs3,381 crore through March 2006—the latest period for which data is available.
The assets of Indian Airlines, which since last year runs its service under the Indian brand, were about Rs1,600 crore on 31 March 2005, said a company spokesman.
The merger of the two carriers was approved by the Union cabinet in February after which the two companies were to jointly register as a new company and integrate their accounts within 16 weeks.
The revaluation of the assets is also likely to help the merged company if it floats its shares on the stock markets. Air India chairman and managing director V. Thulasidas said revalued assets will add depth to Asia’s fourth largest airline if it does decide to go public. “Perhaps when we go for an IPO (initial public offer), it will help us in getting a much better market valuation,” he said, adding, however, that such a share sale is unlikely before 2009.
The valuation will correct historically-low prices of assets. One of the lowest values, for instance, is for Air India’s headquarters in Mumbai’s Nariman Point. The Air India building, among Mumbai’s first skyscrapers built in 1974, is valued at Re1, while realtors estimate its value at some Rs1,500 crore.
“That’s the most tangible, most valuable landmark they (Air India) have,” said Rajeev Batra, executive director of advisory services at audit firm KPMG. Indian Airlines’ land assets are valued on the books at just about Rs21 lakh.
The revaluation exercise gives the airlines an opportunity to reassess their properties not just in India but across the world. Indian, which flies largely domestic routes, for example, has a vast, domestic land bank while Air India’s assets are mostly outside the country. These include long-term leases of prime properties in London, New York and residential properties in Hong Kong, apart from slots at highly competitive airports such as New York’s JFK international airport and London’s Heathrow airport.
This will be the first time in decades that such a massive exercise will be taken to ascertain the actual market value of these immovable assets. “It was never necessary (to evaluate them before) as we have had very high credit ratings,” said Air India spokesman and company secretary S. Venkat, who will also be the company secretary for the new merged carrier. The assessment of these assets, which does not include owned or leased aircraft, will be completed within the next two months.
Industry experts say this will allow the airlines to present a stronger front when they negotiate with financial institutions, more so when they seek to fund their aircraft buys. Some of the 112 planes that Air India and Indian are buying will replace ageing aircraft in their fleets.
“They would definitely need to source funding for the new aircraft. And this will make their balance sheets look more healthy,” Batra said. He also said it will allow the state-owned airlines to align themselves with International Financial Reporting Standards, which are being rolled out across the world, including in India, and require fair value of assets.
Separately, bureaucrats at the ministry of civil aviation, who did not want to be named, said that Thulasidas, a 1972 batch officer of the Indian Administrative Service (IAS), is likely to head the merged airline for another year.
Thulasidas had been given an extension last December. Indian Airlines chairman and managing director Vishwapati Trivedi, another IAS officer from the 1977 batch, is likely to be the second-in-command at the new airline. An offical announcement is expected after approval from the Appointments Committee of the Union cabinet.