Tatas, SpiceJet's Ajay Singh launch financial bids for Air India

The government is seeking to sell 100% of its stake in the state-owned national airline Air India (Representative Image)

The Tatas took another step today to be at the helm of Air India, an airline started by J R D Tata way back in 1932 as Tata Airlines. Sources in the group confirmed that it had put in a financial bid for Air India.

Sources confirmed that SpiceJet promoter, Ajay Singh, has also put in a financial bid. A WhatApps sent to Singh remained unanswered.

The confirmation from the Tatas came shortly after DIPAM Secretary, Tuhin Pandey tweeted, “Financial bids for Air India divestment received by Transaction Adviser. Process now moves to concluding stage.”

The Tatas currently have a stake in two airlines---- AirAsia India, which is a low-cost carrier and full service carrier Vistara. There is no clarity on which of the two airlines companies will be the vehicle for the bid.

An Air India employee, when appraised of the news said “AI is saved, it goes back to its owner.”

The next step

It is not yet clear how long the transaction advisor will take to evaluate the financial bids and when exactly the government will announce the eventual new owner of AI. The general feeling is that evaluating the financial bids will take at least three to four months and the transfer of assets of AI to the new owner even longer.

The government is selling 100 per cent of its equity share capital in the state-owned airline, including Air India’s shareholding interest of 100 per cent in AI Express Ltd and 50 per cent in Air India SATS Airport Services Private Ltd.

In February 2021, the civil aviation minister had informed the Rajya Sabha that the national carrier’s total debt as per provisional figures of 2019-20 (April-March) was Rs 38,366.4 crore after transfer of debt amounting to Rs 22,064 crore to a special purpose vehicle (SPV).

However, officials aware of the details told CNBC-TV 18 earlier this month that the debt had risen to around 43,000 crore.

Hitting airpockets

Air India’s divestment process started in December 2020 with the government seeking expressions of interest (EoI) from perspective bidders. The government had already been taking steps to ensure that this divestment process is successful. In October last year, the government decided not to predetermine Air India’s debt levels and leave it to the market to decide.

“We are doing this because it is an uncertain environment. The debt level which was pre-fixed has now been unshackled, and therefore, Enterprise Value (EV) bidding can take place. This construct opens up a range of bidders while it also brings skin in the game,” DIPAM Secretary Pandey had said at that time. EV is the sum total of debt and equity.

Besides, whatever EV a bidder quotes, it will have to give a minimum 15 per cent of that in cash to the government.

“Fifteen per cent is the minimum cash consideration, but that does not mean that the bidders cannot quote higher cash than that. They can even take 100 per cent. If they offer more than 15 per cent, it will lead to less debt but it will not get any preference for bid evaluation. For bid evaluation, the higher the EV, the better the bid and the highest EV gets it,” Pandey said.

Earlier this month the Central Board of Direct Taxes (CBDT) said that the buyer of a state-run company can carry forward losses of the erstwhile state-owned company and claim up to 30 percent tax rebate annually.

Holding structure

Industry watchers feel that Alliance Air, Hotel Corporation of India, AI Airport Transport Services and Air India Engineering which are currently subsidiaries of Air India will be transferred to the AI Asset Holding Company.

“They will be transferred at Fair Market Value or Par Value Fair Market Value after revaluing all the assets at today’s price or what the share price of the asset is today,” an industry watcher explained.

AI Asset Holding Company will hold all the debt in excess of normal working capital which will be serviced by sales of assets being transferred from Air India while the remaining will be met out of budgetary support.

When the bidding process for AI started, US-based fund Interups AI and a Seychelles-based fund had tied up with some Air India employees. But both of them dropped out from the race for various reasons including Interups’ bid being rejected as it was submitted electronically.

Winning slots

Besides, coming back to the helm of Air India, the Tatas are possibly also 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 Heathrow airport that it sold to Etihad Airways in 2013. The owner of the slots can schedule a landing or departure during a specific time period. After AI’s divestment, the new owner will also get about 1,500 trained pilots and about 2,000 trained engineers.

In addition, there is the brand value of the airline which traces its origins to 1932. Industry watchers recall that Grant Thornton in 2011-12 had put the brand value of Kingfisher airline at over Rs 4000 crore so they argue that AI’s brand should get a much higher valuation.

With India largely being an origin and destination market and due to the COVID scare passengers preferring non-stop flights to their final destinations rather than transiting through a hub in the Middle East, Far East or Europe, the new owners of Air India will have the advantage of having a fleet of Boeing 787 and 777 aircraft that currently operate non-stop flights to Canada, the US, the UK and Australia.

In fact, Air India is the only carrier from the Indian and Australian side which is mounting non-stop return flights between India and Australia which is a big plus for the large Indian diaspora living there. In May this year, Air India had a fleet of 173 aircraft including 13 Boeing 777-300 Extended Range, three Boeing 777-200 Long Range, 27 Boeing 787-800 and 27 Airbus 321-New Engine Option.