On the sale of Air India

With airline valuations having corrected further, bidders need to factor in far higher levels of operational improvement to justify even a nominal bid for the asset. It’s little wonder everyone has stayed away from this flight. The all-important question now is, as Adam Smith Institute’s Tim Worstall suggested in Forbes a year ago, “If no one wants to buy Air India, should Air India exist?”

D’ye think they’ll accept a bid of 1 Rs? be possible to strip some assets, no?

32 comments on “On the sale of Air India

  1. From what I’ve read the main (only?) asset being slots at most international efforts but that has to be set against a massive staff cost, bolshie unions and huge debts.

    Then there’s the political risk: India has a reputation for nationalist and socialist politicians who love petty regulations and regulators. Added to that it is the country that perfected Baksheesh.

    Keep your 1 Rs and sanity.

  2. If AI assets are less than liabilities, then only sensible bid is one in which you ask to be paid for taking the carcass away.

    Probably realistic financially, but politically …

  3. The assets (aircraft) are probably worth slightly more than the debt against them, but if the planes were sold the debt would have to be repaid at a premium (mostly export credit agency backed debt so taking the planes out of India means that the debt is repayable). Still there would be some unencumbered 15+ year old 747’s, worth a bit more than scrap.

    I doubt the slots in India are worth much. They are only valuable if the local authorities allow a free market in landing rights. Not sure that exists in India.

    The real problem is the Indian government, the status as the Indian flag carrier (and the potential for government meddling) and the 24% retained interest. Oh, and the bribes to get things done.

    Another unhelpful feature for some purchasers is the membership of the Star Alliance. I could see this being a deal breaker for members of other global alliances (shifting shared operations out of one alliance into another isn’t easy).

    Having said that, there is actually a reason for considering it. Plenty of airlines have moved large parts of their back office operations to India. Instead of outsourcing it to one Indian firm, why not have that back office work outsourced to Air India. Oh OK, there is still the government issue, Air India’s unions, and you don’t want the Indian operation killing the rest of your business.

  4. Alex,

    It’s the slots at places like Heathrow and JFK that are really valuable.

  5. Alex, I don’t know if AI would actually own it’s aircraft outright. Any valuable assets are the slots outside of India. Go to T4 when a flight from India lands – just don’t park up in the car park, it’s utter carnage.

  6. @AndrewM

    Yes, it’s huge. And, apparently ~40% of the employees are likely to retire in the next five years.

    Any purchaser is also going to have to inherit debts of around $5bn.

    All according to an Economist Espresso article on May 31st

  7. “It’s the slots at places like Heathrow and JFK that are really valuable.”

    True, but they don’t have many. And an individual slot is probably worth less than a new plane. I think the going price is about $50 million.

  8. “Alex, I don’t know if AI would actually own it’s aircraft outright.”

    Most of them they either own subject to mortgages or they lease in on full-payout finance leases – the difference is technical, but essentially the same thing. I have arranged a few deals for Air India, but it was 25 years ago. Flag carriers in developing countries typically buy aircraft from Boeing and Airbus with export credit agency supported financing. These are typically 12 year loans for 85% of the cost price (typically inflated by the manufacturer to include a lot of parts and extras). https://www.exim.gov/what-we-do/loan-guarantee/transportation/finance-lease-structure

  9. Actually I looked at their accounts for 2016: deeply in hock to local banks (no doubt some government pressure to lend), and the annual report has 80 pages of audit qualifications. Bargepole.

  10. Air India ought to be a good buy because India is about half way to everywhere. If you want to fly to East Asia you can fly direct or if it is small enough, you have to change. Why not in India? If you want to fly to Australia or New Zealand, you have to change. Most people do it in Hong Kong or Singapore.

    India should be offering a lot of flights to places like Africa, Central Asia, smaller parts of South and East Asia, South-East Asia and Oceania. It would be a logical place to change. Instead that is going to Dubai or the Emirates and Singapore.

    The problem is, as everyone has said, their Unions.

  11. “Why not in India? If you want to fly to Australia or New Zealand, you have to change. ”

    Because I’m happy to pay more to go via KL or Hong Kong, hell, I’d even consider LA before I’d go via India.

  12. If you buy it, you get the liabilities as well as the assets. Better to sit back and buy specific assets as the bankrupted company is liquidated.

  13. SMFS,

    I think the problem would be the airports in India. Changi is the best airport in the world, Hong Kong is very good, as is Doha and Dubai is okay. Etihad is okay in the air, though not the best, but Abu Dhabi is an absolute shithole, trying to get back through security is like trying to force your way through the Black Hole of Calcutta (smells like it too). Consequently, Etihad is simply not an option for us when booking UK flights from Australia.

    The only airlines we look at are: Qatar, Emirates, Singapore, Qantas and Cathay. We have flown Qantas to HK and picked up a Virgin Atlantic flight.

  14. “Better to sit back and buy specific assets as the bankrupted company is liquidated.”

    Unlikely that would happen while under Indian government ownership, and if it did there are unlikely to be any bargains. The aviation industry has a global market for planes, parts, slots. Don’t expect anything to go cheaply.

    Politicians and unions are too close.to let it go.under even though that is what is needed. Easier to kick the can down the road, throw in a few hundred million, freeze hiring and hope for some retirements.

    Just like every other government owned flag carrier.

  15. “if it did there are unlikely to be any bargains.”

    So you simply don’t buy anything. Buying the company is a clear mistake. Buying the pieces is subject to the marketplace.

  16. A fascinating side angle to this sale is that is about a lot more than just a bust airline. Air India has a massive art collection. And it’s been stolen, mostly by it’s former executives.

    Just Google “Air India Stolen Artwork” and you’ll see why the company has basically gone bust, because they were probably borrowing money against the value of it all.

  17. “Air India has a massive art collection” The article values it at 750 crore, which I make about 75 million sterling, which is a lot but scarcely material on a balance sheet with 48 widebody aircraft at say $150m apiece and 70 narrowbody aircraft at $30-60m each. Still it shows what a mess the company is in.

  18. Looked at the numbers a bit more and they are just a shit airline. Their load factors (around 75%) are OK, but not great, but their use of aircraft is pretty poor.

    They fly about 36,000 passengers a day, approximately 12,000 international and 24,000 domestic, and their fleet has about 12,000 seats on narrow bodies and 12,000 seats on widebody aircraft. Assuming narrow body aircraft are used on domestic flights and widebody aircraft are used on international flights (which isn’t quite trie), that is 2 passengers per seat per day on domestic flights and 1 passenger per seat per day on international flights.

    Bear in mind that Ryanair and Easyjet planes fly 8-10 routes per day (and even BA shorthaul fly 6-8), then only getting 2 passengers per seat per day (even allowing for days out for maintenance) is pretty poor.

  19. Alex, looking at those numbers, shouldn’t domestic Indian flights be the equivalent of the bulk of Ryanair/easyJet international routes? And if SMFS is right and India is about halfway to anywhere, then it’s still at least 8 hours from anywhere.

    Basically, it looks as if normal airline metrics are irrelevant, since geography and the economics of air travel are stacked against AI, unless the domestic economy really takes off, and that’s well beyond any owners’ control.

  20. David Moore – “Because I’m happy to pay more to go via KL or Hong Kong, hell, I’d even consider LA before I’d go via India.”

    Sure. Me too. But this is not a question about what Air India does, but what it should be doing. What it could be doing. It has a great advantage in its geographical location but it cannot use it. For domestic reasons.

    DocBud – “I think the problem would be the airports in India. Changi is the best airport in the world, Hong Kong is very good, as is Doha and Dubai is okay.”

    But Changi is not the best airport in the world by an act of God. It is the best airport in the world because Singapore wills it to be so. The government knows the airport is important and so one of the first things they did was to lay out a great airport and an impressive road into town. Hong Kong knows its airport is important and it is one of my favourite airports in the world. The railway into town is great. It is friendly.

    There is nothing there that India could not do if it wanted to. Does it want to? Not really. But a privatised Air India might. The first thing they would have to do is what Hong Kong, Malaysian Airlines, Eitihad et al have all done – hire a White guy who knows his business.

    Someone has given India a great advantage but they are determined not to use it. Someone else should buy Air India and make good use of it.

  21. Doha Airport cost US$17 billion and was six years late. It is the sort of hub that would be needed to attract people away from the established options, but I don’t think many private airlines could fund that sort of investment, even the most established ones.

  22. DocBud – “Doha Airport cost US$17 billion and was six years late. It is the sort of hub that would be needed to attract people away from the established options, but I don’t think many private airlines could fund that sort of investment, even the most established ones.”

    That is true and if you want to take on the Big Players you need deep pockets. But Doha and Dubai show what India could have been doing. They have nothing going for them except location. They are sand pits made of cat litter, run by people I regard about on par with something I stepped in on the street. All they have is a lot of oil money – and their location. So their rulers seem pretty sensible about using that oil money to do something about their position in the world.

    Now if India had started this back in the 1950s, as Singapore did, it would be a lot cheaper. Is it easier to get money step by step rather than in one big leap. They also have problems in the same way that Dubai does with things like corruption and incompetence. But all Dubai does is hire Indians to do what they can’t do at home. Indians and a lot of Filipinos. Why not let them clean toilets and man security booths in New Delhi or Bombay rather than in Doha?

    Personally I have rarely seen anything as bad as the petty corruption and incompetence in South Asian airports anywhere else. So they really do have problems. But a decently run airline could do something about that.

  23. “Bear in mind that Ryanair and Easyjet planes fly 8-10 routes per day (and even BA shorthaul fly 6-8), then only getting 2 passengers per seat per day (even allowing for days out for maintenance) is pretty poor.”

    Irrelevant – The problem is that you are not looking at the terms under which you’ve borrowed money If you have borrowed that 75 million pounds, and figuratively speaking, the Gambino family are demanding a huge level of interest, you are screwed if you then discover the underlying asset is not there if/when they let you forfeit it..

    Consider how Richard Branson was mortgaged to god knows what simply to finance Virgin Atlantic, with a handful of ex-Pakistan Airlines 747’s, upon the back of little more than the Rolling Stones and their 1980’s back catalogue, and you see what I mean. He sold Virgin Records for something like 500 million, felt he had been robbed in the process, and that helps illustrate the leverage that is sometimes at work here.

    Agreed, they might be just a shit airline, but underpinning that shittiness are a whole load of hidden factors that add up to why they are up for sale. If you don’t have the assets which you say you do, you are dead.

    75% for a long haul airline is pretty damn good, by the way. Long haul operation is always low compared to the likes of Ryanair. It is not a useful comparison.

  24. “75% for a long haul airline is pretty damn good, by the way”

    Air India isn’t predominantly a long haul airline. It merged with Indian Airlines in 2007. These days they should have load factors of over 85 per cent to be competitive.
    And their aircraft utilisation is dreadful.

    I don’t get the rest of your points. The rate of interest they are paying – Libor + small margin.on their EXIM debt and +2 per cent on the unsecured is not onerous. The problem is that the assets are not being worked hard enough.

  25. “Someone else should buy Air India and make good use of it.”

    No.

    The India market might be a good place to expand into. But not at the cost of buying Air India.

  26. “I don’t get the rest of your points.”

    Their financial reserves are clearly not what they say they are. It’s been invested in bizarre outlets like kooky art, that have subsequently been embezzeled by the executives. From this, do you feel like investing any of your own money with them?

    “The rate of interest they are paying – Libor + small margin.on their EXIM debt and +2 per cent on the unsecured is not onerous. The problem is that the assets are not being worked hard enough.”

    Complaining about low aircraft utilisation is irrelevant if your company has no money with which to finance daily operations. As in, cash. Having a good aircraft financing deal with someone is of no relevance if you don’t have any money on hand, today, to basically buy fuel and pay your staff, and if you have to borrow to do that, banks don’t like dealing with broke people. Air India, if you believed them had a 75 million pound art collection as part of it’s underlying assets.

    Except, well, erm, it doesn’t.

    Branson sold his record label for precisely this same reason, British Airways were badmouthing him, insisting that he had to pay upfront for fuel because his aircraft were leased (They were.) and Virgin as a company was otherwise worthless. (Pop singer Boy George was their only recent money earner, and he was spectacularly into Heroin at that point.)

    Consequentially, he had to sell off an asset – Virgin Records – as a one-off deal to refinance and visibly demonstrate the corporate group was flush to the tune of half a billion quid. The banks would then talk to him. It broke his heart because he felt he’d stabbed the record label’s co-founders in the back: They had nothing to do with the airline, and had even warned about how risky it was.

    “Air India isn’t predominantly a long haul airline. It merged with Indian Airlines in 2007. These days they should have load factors of over 85 per cent to be competitive.”

    Airlines divide themselves up into short and long haul operations for precisely this reason of clarity though. Air India’s Long haul flights are enormous (The US, for example.) and so it is little wonder their utilisation potentially seems low. Have Indian Airline’s statistics been kept compartmentalised in this way? If not, and everything has been mixed together, it is a final illustration of how abysmally run the company is.

    ————–

    “The India market might be a good place to expand into. But not at the cost of buying Air India.”

    Well said.

  27. “Complaining about low aircraft utilisation is irrelevant if your company has no money with which to finance daily operations”

    Do keep up wityh the story. Air India had £1.2 billion of current assets in its 2016 accounts. It has no shortage of cash because the Indian government keeps stumping up cash to cover its losses £330 million in 2016, £570 million the year before. The problem is that it barely produces any cash from operations, and thus has little in the way of profit to pay its interest charges, but it would still take quite a few years for it to go under without government support. If you research a bit more, Air India is in the middle of a planned $3 billion bail out. The government clearly wants to avoid the remaining half of that bail out by selling it off to some mug punter with deep pockets.

  28. “Air India had £1.2 billion of current assets in its 2016 accounts. It has no shortage of cash because the Indian government keeps stumping up cash to cover its losses £330 million in 2016, £570 million the year before.”

    Understood and offered as vindication to my argument:

    Air India strikes me having dried up due to a liquidity crisis, which is why I wrote about Branson: Thing is, what element of those 1.2 Billion in “assets” is literally a liquid asset? That you can offer to creditors today? Branson literally sold his record company and had 500 million in cash in the bank, in cash, and he did it figuratively by selling one of his body parts.

    “Air India had £1.2 billion of current assets in its 2016 accounts. It has no shortage of cash because the Indian government keeps stumping up cash to cover its losses £330 million in 2016, £570 million the year before”|

    OK – , I did wonder about including but deleted a line about the idea that the Indian Government is lending money to them at sweetheart rates.Your revelations would turn out that this is the case and it is a disaster, but it is also relevant to my point.. The government is a lender of last resort and it it only makes me more skeptical.

    For that is also my argument. In that this confirms this company is garbage because it has no real world bank credit. Any true assets that they claim (Like their art collection) are then questionable. That is a real “Oh Sh*t” moment, which I am in fear about.

    It really can then come down to a scandal like this. Something that kicks the lid off of a lack of underlying capital and broader institutional rot.

    From there: What else in their corporate structure is dodgy? What else about this enterprise can you trust?

    That’s my point.

  29. The reason the Indian government is shovelling in cash is because if Air India defaults on any borrowings at all, they will cause a cross-default on their EXIM and other ECA backed borrowings which are guaranteed by the government, who would thus be on the hook for billions.

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