How the Air India disinvestment should be carried out
Air India should be reorganized into smaller entities, restructuring and building these entities will ensure maximum value during sale
Unsurprisingly, Air India’s strategic disinvestment has failed to entice investors. To ensure the company is viewed as an attractive investment opportunity, the entire sale process and terms need to be reworked.
For a start, the company should be reorganized into seven entities: (1) Aviation—passenger and cargo (includes Air India Express and Alliance Air); (2) Leasing—all owned aircraft assets; (3) Airport services—ground handling (already created); (4) Hotels (already created); (5) Maintenance, repair and overhaul (MRO, already created); (6) Loyalty programme—flying returns; (7) Legacy—to include excess assets, human resources and liabilities not critical to other entities.
Restructuring and building these entities will ensure maximum value during sale and minimize financial loss to the government. Further, it will ensure that services provided between entities are competitive and comparable to market rates.
The aviation entity’s restructuring should include a detailed study on traffic and routes to optimize ticket pricing and load factors. Realignment of code-share agreements to create new feed traffic and increase yields would go along with this.
There must also be a reduction of the aircraft mix from 11 aircraft sub-types to not more than three sub-types. A look at India’s leading airline, IndiGo, is instructive. It has only one aircraft type, leading to lower cost and complexity.
Competitive service contracts with other entities for leasing the entire aircraft portfolio, MRO services, airport services and loyalty programme should be signed.
The human resources part of the restructuring will be politically tricky but financially essential. All critical employees must be rehired into the aviation entity “at market levels”; this is crucial for any investor.
A dynamic and nimble management with relevant aviation experience—not characteristic of public sector enterprises plagued by bureaucracy—will be necessary.
All excess assets (the Mumbai office, Delhi land assets, etc.) and excess employees must be moved to the legacy entity. All liabilities of approximately ₹50,000 crore must also be moved to the legacy entity; it is important to sell the company debt-free. This will ensure the buyer has freedom to buy the company as per its own capital structure requirements, thus allowing for a wider bidding audience.
The restructured aviation entity, with ₹22,000 crore in revenue (a conservative estimate) should have ₹5,500 crore in Ebitdar (earnings before interest, taxes, depreciation and rentals). The sale will immediately stop the majority of the financial loss, with proceeds reducing the legacy debt burden.
The leasing entity, airport services entity and hotels entity should be monetized following the aviation entity’s sale. The equity value of the leasing entity lies in the value of the owned aircraft. The currently profitable airport services entity earns 50% of its revenue from third parties, making it a desired acquisition for strategic players.
The MRO entity and loyalty programme entity have significant untapped value which can be realized through a restructuring and expansion of services offered to the aviation entity and other third-party customers. MRO facilities are the best in India, boasting of a brand new facility built by Boeing in Nagpur.
Indian MRO service providers could be interested in partnering for an equity stake prior to sale, which would also add much needed financial discipline. Alternatively, Boeing and Airbus could be interested in creating a regional MRO centre.
The loyalty programme’s subscriber and credit card user base must be increased and should also allow for greater avenues of loyalty point redemption (online shopping sites, for example). This can be easily accomplished with the aviation entity’s appealing route network and ease of using loyalty points for tickets.
As noted earlier, excess assets, human resources and liabilities should be transferred to the legacy entity. The MRO and loyalty programme entities can be sold in three to five years, after building their customer bases, to maximize equity value and returns to the government.
Finally, the disinvestment process can be concluded by winding down the legacy entity. The existing legacy debt of ₹50,000 crore can be reduced to ₹15,000 crore (an approximately 70% reduction) by sale of the other entities. This can be further reduced by sale of excess land, offices and other assets around the world, with the government taking a small haircut on the remaining debt amount. All human resource assets in this entity should be re-employed in other government enterprises as feasible.
The numbers mentioned are high-level guesstimates based on the limited information available. That said, the path detailed is designed for minimal financial loss to the government and tailored to Air India’s unique situation. It will make Air India an attractive investment for potential bidders, with the obstacles of excess employees, above-market contracts and other legacy costs being realigned.
A similar approach has been implemented in the restructuring of a North American legacy carrier, and Asian, European and Middle-Eastern flag carriers. So, although not easy to execute, this has been done—and can be done here.
Shannon Attari is an aviation restructuring expert and investment banker.
Comments are welcome at email@example.com.
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