Govt’s plan to list Air India is a chimera

Air India has such high levels of debt that the value of its equity is most likely to be negative, or zero at best


If privatization doesn’t work, then the government should consider putting Air India on the block for whatever it is worth, realize what it can and shut the rest of it down.
If privatization doesn’t work, then the government should consider putting Air India on the block for whatever it is worth, realize what it can and shut the rest of it down.

The government is considering inducting banks as strategic investors in Air India Ltd, which will be followed by a listing, according to a Mint report.

Is listing the loss-making airline even feasible? Air India has such high levels of debt that the value of its equity is most likely to be negative, or zero at best.

“Listing Air India is going to be a challenge given its gigantic debt and its impact on valuations,” says Dhiraj Mathur, partner and leader (aerospace and defence) at PwC India.

At the end of March 2015, the airline had debt of around Rs50,000 crore. Its indebtedness hasn’t reduced, according to news reports. The Mint report says the government wants banks to convert working capital debt of around Rs28,000 crore into equity. This will still leave the company with a debt of over Rs20,000 crore.

Note that Jet Airways Ltd, a company with similar revenues and better profitability, has an enterprise value (market capitalization plus net debt) of about Rs12,750 crore. Even if investors are willing to value Air India at the same levels as Jet Airways, it would mean a negative equity value of over Rs9,000 crore.

Many have suggested, including the Economic Survey of 2017, that the solution is to privatize the airline. The argument goes thus: if one or more strategic investors infuse a large amount of equity, which will wipe out the remaining debt on Air India’s books, this can significantly change its fortunes. After all, the airline has an interest burden of about Rs4,000 crore each year. However, a moot question is whether any strategic investor will be interested in the debt-laden company at all.

If privatization doesn’t work, then the government should consider putting Air India on the block for whatever it is worth, realize what it can and shut the rest of it down. That would in turn also take into account the Prime Minister’s professed policy of minimum government.

“There is no reason for the government to continue to own and control Air India,” says Mathur of PwC India, adding that the world over, governments have privatized national carriers.

For perspective, Air India continues to run huge losses even at times when most others have managed profits. For fiscal year 2015, its operating revenue was Rs19,801 crore. It made an operating loss of Rs642 crore and a net loss Rs5,860 crore. According to reports, the airline managed an operating profit of Rs100 crore in FY16 thanks to lower fuel costs. Still, the huge interest cost meant net losses remained high at around Rs3,587 crore, according to reports.

In comparison, Jet Airways reported a net loss of Rs1,813 crore in FY15 and a net profit of Rs1,173 crore in FY16.

To be sure, listing has its benefits. According to Mathur, once a company is listed, the accountability increases, as it will automatically have to adhere to the governance structures prescribed for listed firms under the Companies Act and the Securities and Exchange Board of India.

But unless Air India does something about its debt, listing will be a pipe dream, say analysts. “The debt is huge and it can’t list with that amount of debt,” said an analyst with a domestic institutional brokerage firm.

What’s more, banks are understandably wary about the proposal to convert debt into equity, without any commensurate move to turn around Air India’s operations. It’s worthwhile noting here that not long before Kingfisher Airlines Ltd went bust, a part of its debt was converted to equity as well. The signs are ominous.

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