Who will take the Maharaja?

The Government wants to sell Air India, or at least bring in a strategic partner.

But why would anyone want the supposedly bloated Maharaja that is state-run, has a mountain of debt (₹52,000 crore) and is invariably in the news for all the wrong reasons?

There are other factors too. The airline has many unions (the Dharam Adhikari Committee set up by the Government to look at HR issues after the merger of Indian Airlines with Air India, received 56 written representations from unions), an ageing staff that has an average age between 48-50 years and a bloated wage bill (the median salary is between ₹30,000-50,000 a month, almost 35-50 per cent higher than what others, especially low-cost airlines pay). A future employer may not be amused by the absence of a hire and fire policy and a worker friendly leave policy.

“As a brand, Air India has a recall similar to State Bank of India or Life Insurance Corporation,” says N Chandramouli, CEO, TRA Research.

“Its portly Maharaja mascot is well-recognised. But in spite of all this, it has issues such as debts, service quality, fleet issues and competition from other brands. Hence, anyone who buys such a brand will have to deal with legacy issues,” adds Chandramouli.

“Even though Air India is not a defunct brand, it will find it difficult to attract suitors. People integration, for instance, will be a tough call for anyone who buys Air India and the Government will have to make it attractive for potential buyers,” says Chandramouli.

Varun Gupta, MD, American Appraisals, a division of brand valuation and transaction advisory firm Duff & Phelps too maintains that while there are no second thoughts on Air India’s brand recall, it may not immediately translate into revenue.

But these drawbacks become mere irritants if one looks at what a potential investor in Air India is likely to get. For starters, Air India has a land bank of almost 100 acres in Mumbai airport and another 80 acres in Delhi. Besides, it has 31 hangars throughout the country, including state-of-the-art hangars in Nagpur, Thiruvananthapuram and Hyderabad. In 2007, when the Air India-Indian Airlines merger took place, the land bank was valued at ₹8,000 crore.

Prospective buyers will also be attracted by Air India’s slots in airports around the globe including in New York, Chicago, London, Narita (in Japan) and Seoul. In Mumbai itself, the airline has 18 morning departure slots. While the value of these slots is not known, consider this. Jet Airways netted $70 million for the three slots at the Heathrow airport it sold to Etihad Airways in 2013. Owner of slots can schedule a landing or departure during a specific time period.

Further Air India has a fleet that includes some brand new aircraft like the four Boeing 787 Dreamliners that will be delivered between July and October this year, and another three Boeing 777s, which will be delivered between January and February next year.

“Any investor who picks up Air India just needs to plug and play as it has a skilled workforce of 1,600 pilots and over 2,000 engineers. It also has 105 aircraft, offices in most cities in India and in several prime locations abroad,” points out an Air India employee.

“Air India’s existing routes, parking slots, code share arrangements, MRO and fleets may be lucrative to potential buyers,” notes Gupta of American Appraisals.

So do Air India’s strengths outweigh its weaknesses? How can the Government attract credible buyers?

Amber Dubey, Partner and India head of aerospace, KPMG, suggests that one option could be to keep the assets and liabilities in the books of Air India and lease its aircraft and slots to a Special Purpose Vehicle (SPV). “Seventy four to 100 per cent equity of the SPV can be sold to an Indian strategic investor on the basis of the highest annual lease rental quoted,” Dubey says.

He cites the model adopted for Delhi and Mumbai airports, where assets and liabilities continue to be on the books of Airports Authority of India; and the airports’ assets have been leased for a fixed period to the lessees who quoted the highest lease rental in the form of shares of gross revenue.

Amber is further of the opinion that the airline’s real estate should be leased out to the highest bidders and its subsidiaries should be sold off at the earliest.