Home / Opinion / Views /  Opinion | Speaking in silences: What the Air India memorandum doesn't say

The Air India preliminary information memorandum was released this Monday. It highlights the government’s decision towards strategic disinvestment whereby a 100% stake in Air India, Air India Express and a 50% stake in Air India SATS (the ground handling arm) is up for sale. The memorandum is full of information and numbers and clearly points to the fact that this is a complex acquisition and not one for the faint-hearted. But the memorandum also speaks in silences. As such what it does not say is as important as what it does.

Broadly, the terms laid out include that the buyer will assume $3.3 billion dollars of debt in exchange for three separate companies. This debt will be backed up by assets. But then the government guarantees go away once the new bidder takes over. How this plays out is yet to be seen. The Air India brand is to continue with 21,364 employees directly or indirectly involved in the venture. To bid, there is a minimum net worth requirement of $500 million and if the bid is via a consortium the lead member shall hold at least 26%. The document also highlights the market share, revenue, capacity, financial metrics and scope for improvement.

Interestingly (and perhaps shockingly) there are 16 aircraft that are listed as grounded. Details of these are not available but industry sources indicate this is for want of spare parts. Which points to the cash-flow situation. Details on the frequent flyer program are missing – which could have been a booster given that it is one of two Indian airlines offering such a program. The number of unencumbered assets is few and far between and it seems some assets have dual liens on them. Most importantly, issues pertaining to staff costs, the thirteen unions and ability to attack those costs are glossed over.

For success in airlines, one has to have a competitive cost base. This is true regardless of the nature of airlines. And even more critical in emerging markets where price is a key determinant of demand. On the cost front, Air India has shown a trend over time where in the best years (FY16 and FY17) its costs of delivery were just about covered by revenues. In other years these diverged significantly leading to cumulative losses as the airline was flying each seat at a loss.

A successful bid for Air India is essentially a claim on the future. On the future traffic potential, on future cash-flow and on future market dynamics. This is the point being sold. India no doubt holds significant traffic potential and this will only mature. On cash-flow based on a valuation of six to seven times earnings, it is clearly Air India Express that is the jewel in the crown. And on future market dynamics, these have to be read in the context of the broader market which includes foreign policy changes, geopolitical cycles, the rise of populism and environmental concerns, liquidity issues, the situation in the Middle East and global discontent and de-coupling of traditional partners and parameters.

And finally for potential bidders, with the amounts and complexity in question there is always the option of capitalizing a new airline and starting from scratch. This is something that should have been addressed. But in looking for answers one only finds silence.

Legendary investor Warren Buffett famously says, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." In the case of Air India given the preliminary information, investors as of now are left guessing on both counts.

The article has been written by Satyendra Pandey, former head of strategy and planning at GoAir and an independent aviation consultant.

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