The high cost of postponing the Air India sale
The repercussions of postponing the Air India sale could be severe, entailing very high costs. Here’s why
The government says the Air India divestment will be reviewed at a later date, but they haven’t specified a timeline. The repercussions of postponing the sale could be severe, entailing very high costs. Here’s why:
1) Crude oil prices are elevated and that’s going to hurt badly:
Brent crude prices are hovering around $75 a barrel and this is burdensome for airlines. We saw how higher fuel costs clipped the wings of listed airlines in the recently concluded March quarter. If it wasn’t for the help from other income, both IndiGo (InterGlobe Aviation Ltd) and SpiceJet Ltd would have reported pre-tax losses. Jet Airways (India) Ltd posted a huge loss at the Ebitda (earnings before interest, tax, depreciation and amortization) level itself. Simply put, with crude oil prices firm, the stress on Air India’s profit will likely escalate.
CAPA India pointed out in a report earlier this month that Air India is expected to lose a total of $1.5-2 billion over FY19 and FY20. “These losses will need to be funded by the Indian taxpayers. And this is in addition to the $4 billion of public funds that have been used to subsidise the airline since 2012,” reckons CAPA.
2) The rupee is depreciating:
The rupee is weakening against the dollar. This leads to an increase in the costs for airlines, as some elements of costs are dollar-denominated. Air India too will be affected by this factor.
3) Threat to market share:
Air India has consistently lost market share. Its domestic market share has dropped from 19.8% in January 2014 to 12.8% in May 2018. Things could get even worse. According to CAPA, India’s airlines are scheduled to take delivery of an unprecedented 120-125 aircraft in FY19 alone, and more than 500 aircraft over the next five years. A good proportion of these deliveries will be deployed in the domestic market. Air India has plans to induct just nine aircraft, on lease, primarily for replacement rather than expansion, added CAPA. “As a result, Air India will continue to lose market share and relevance, dropping well below 10%,” predicts CAPA India.
4) A delayed Air India sale could translate into lower valuation:
In the backdrop of a deteriorating cost environment and further loss of market share, if Air India’s profitability worsens, the total loss from the delayed sale would not only be the annual losses but also include a haircut on the valuation, says Shannon Attari, partner and aviation restructuring expert at Attari Capital.
Sure, the decision on the Air India divestment was not an easy one to begin with, especially in an election year. However, burning more cash in anticipation that there will be an investor in the future, when the initial sale offer was a flop, may not be the smartest idea.
As this column mentioned last week, the best thing to do now is to break the mammoth firm into sizeable portions for investors and put it up for grabs. Simply put, the government should take what it can today and cut its losses.