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Tim Clark is known to pick his words carefully. The 71-year-old President of Emirates has spent over half a century in the cut-throat aviation industry. Not surprisingly, when he speaks, people stop to listen. In early October, he was asked by an Indian media organisation what the impending sale of Air India would mean to his company. Clark, a Briton by birth, had bluntly said it would affect Emirates, quickly adding: "As times change, you adapt and adjust. But this one is a bit of an outlier. They should have had a national carrier the size of Singapore Airlines, or look at Emirates."
Less than a week later, on October 8, the decision to sell Air India to the Tata group for Rs 18,000 crore (equity plus debt) was announced. (Read interview of Tuhin Kanta Pandey, Secretary of the Department of Investment and Public Asset Management, below for more details.) The deal gave India's most diversified business house the airline, its low-cost carrier Air India Express, the Air India brand name, and a strong network with over 6,000 slots in domestic and international markets.
A Happy Man: Immediately after the news broke out, Ratan Tata in a tweet expressed his jubilation over Air India coming back to Tata Group.
With a fleet of 128 aircraft (according to Air India's website) and another 25 belonging to Air India Express, the buyer would appear to have hit pay dirt. However, juxtapose that against the accumulated losses of close to Rs 78,000 crore, debt in excess of Rs 61,000 crore and a bloated workforce, and a turnaround looks tough. It's not as if Clark does not know all this. With a hub in Dubai, Emirates flies to pretty much every part of the world and is known for everything Air India is not—high-quality service, spotlessly clean aircraft and sound financials, among other things. Yet, he is worried.
Puzzled? Here's why. The Tatas—who already have a full-service as well as a low-cost carrier (Vistara and AirAsia India, respectively)—can now arguably aim for a sizeable chunk of the international market along with domestic. That could lead to a host of other airlines, including Emirates, losing share in an important part of their market. But first, the Tatas need to overcome Air India's horrendous legacy of bureaucratic tangles, expensive aircraft buyouts, and an ill-conceived merger with then Indian Airlines. The Tatas declined to participate in this story. A company spokesperson told Business Today: "We have been declared the winner of the bid. We look forward to working with the government of India to complete the process over the next few months. We will be able [to] comment further only later."
To put it mildly, Air India is in a bad place. It has been in the red since 2007-08 and consumer perception of its network and service quality is poor. Year after year, the government has infused money, adding up to over Rs 1.10 lakh crore. Losses are being funded by debt and the disinvestment process has concluded after much huffing and puffing—bidders such as InterGlobe Aviation took a good, hard look and then changed their mind, only delaying the process. What worked this time is a somewhat innovative deal structure. The Tatas will assume the debt relevant to the core aviation business, with the larger chunk of debt and fixed assets (including a large land bank) staying with the government (see accompanying graphic). Aviation industry veterans Business Today spoke to (some anonymously) were unanimous that turning around Air India is difficult but not insurmountable. The view is that the Tatas have had a record of staying the course and Air India will need that kind of time.
The priority will be to fly all the aircraft to bring in the incremental revenue and cover costs
Partner, Trinity Aviation Consultants
Gagan Dixit, aviation analyst at Elara Capital, points out that among the immediate things to be addressed include "reducing costs by relooking at the MRO (maintenance, repair and operations) and lease contracts, realigning the route network, and offering VRS for surplus employees year after year". He adds that there is an immediate need for additional capital infusion to make operational several grounded aircraft that need repair and overhaul.
Aviation industry executives think around a third of Air India's fleet could be grounded. "The old planes need to be overhauled and there has to be a complete relook at the cost structure," says an ex-Air India official. According to K.G. Vishwanath, Partner, Trinity Aviation Consultants and earlier head of commercial strategy and investor relations at Jet Airways, grounded aircraft not only means lower revenue, but also fixed costs, which have to be incurred. "The priority will be to fly all the aircraft to bring in the incremental revenue and cover costs," he says.
The broad consensus is that $7-8 million will be needed to refurbish each of around 50 Air India planes. That outgo will be around $400 million (around Rs 3,000 crore) but the same can be staggered over a few years. Almost an equal amount is estimated to be payable to current lessors and component suppliers, and if you add salaries and one-time tax payments, the funding requirement will be close to $2 billion (around Rs 15,000 crore) over the next few years.
The Good 'Ol Days: Ratan Tata with his mentor, Jehangir Ratanji Dadabhoy Tata.
Then, Vishwanath expects the Tatas to renegotiate deals with lessors and his belief is that they will play ball when they see a potentially large business. "You now have a strong promoter, and there is a good chance that leasing costs will drop 20-25 per cent. That goes straight to the bottom line. And on higher revenues per plane, things can change quickly." The other big possibility is to negotiate with Boeing, since its India business has been dented by the shutdown of Jet Airways. Industry officials point out that since IndiGo, the market leader with 55 per cent share, sources its planes from Airbus, the Tatas could open a dialogue with Boeing. "Since [Boeing] needs the business and with a brand like the Tatas, a lot can come of it. If the [Tata] group can manage its costs, they can quickly reverse the current situation where the airline is losing Rs 20 crore per day," says an investment banker.
Now, the Tatas' aviation portfolio will have two full-service carriers (Air India and Vistara), apart from two low-cost carriers—Air India Express that flies short-haul overseas as well, and AirAsia India. Investment bankers believe that at some point a merger of these two businesses could happen—Air India and Vistara at one end, and Air India Express and AirAsia India at the other. "It will be interesting to see how Singapore Airlines fits in [it holds 49 per cent in the Vistara JV with the Tatas] over the long term," one banker says. Finally, there is also the opportunity to synergise airline operations with other group companies. This could have TCS helping in overhauling Air India's booking systems and, of course, Indian Hotels working on the catering. The latter has been in a joint venture (51:49) with Singapore Airport Terminal Services Limited, known as TajSATS Air Catering.
Overall, the prognosis is good. "The Tata group will be more agile against competition on technology, resource allocation, airfares, deciding on route selection and also ordering aircraft," says Elara's Dixit. "Air India may eventually emerge as a strong competitor to rival airlines." The Air India brand will be with the new owner for five years and then it is left to the Tatas to decide.
There is little debate that Air India has ceded to competition in the international market, most notably to Middle-East carriers, but doing well here could correct its financials. For a well-run airline, the profit margins here can easily beat domestic travel by at least 1.5X. "In any country, people prefer to take the national carrier, but in the case of Air India, it was never positioned as the right product. With non-stop flights to key international destinations out of India on a new-look airline, it can easily correct much of the negative perception," says Vishwanath.
At this point, a person looking to fly non-stop from Delhi to New York, for instance, is largely restricted to Air India and United. However, if he opts for a stopover in the Middle-East, he is able to fly direct from there to New York and almost anywhere in the US, including Seattle, Orlando, Dallas, Washington DC, Chicago, etc. The story is the same with Europe or Africa. "If Air India can offer a high-quality non-stop flight to New York and San Francisco, it can quickly bring in the business traveller despite charging a premium fare, while the leisure traveller can stop over in Dubai or Qatar. Not only will the business traveller pay a premium, but the segment gives you capacity utilisation round the year," explains Vishwanath.
For the likes of Emirates and Qatar, the dependence on India in terms of traffic is nothing to scoff at. Joseph Fernandes, CEO, IndiJo Consulting, estimates this proportion to be at least 35 per cent. "If there is a convenient option in the form of Air India or Vistara, the traveller will switch," he says. India and the US have an open sky policy agreement or no limit on the number of flights between the two countries, but the airlines still struggle. (In contrast, a bilateral agreement will allow an equal number of flights between two countries with India stumbling in most cases simply because we don't have that many airlines.) "If United increases the number of flights, their rivals in the Middle-East will immediately increase capacity or drop fares. In that sense, it becomes very difficult to compete with them," he adds.
If there is a convenient option in the form of Air India or Vistara, the traveller will switch
Not many airlines can offer the convenience that Air India under the new owner could boast of. "With control of both Vistara and Air India, the Tata group could enjoy monopoly on long-haul routes to improve margins and network coverage along with the advantage of bilateral rights. Air India also has the advantage of access to landing rights at all major international airports," says Dixit of Elara Capital. There's more. "With a majority stake in three domestic carriers (Vistara, AirAsia India and Air India), the Tata group will cumulatively enjoy the second largest domestic market share at over 25 per cent. They can use this as a feeder to international operations, which would negatively impact market share of the Middle-East carriers." For instance, a traveller can board an Air India flight from Aurangabad to Mumbai or a Vistara flight from Ranchi to Delhi before boarding a non-stop (again Air India or Vistara) flight to London, Paris, New York or San Francisco. If all works out well, it will leave the other domestic carriers behind on the international story; a serious handicap being their fleet, which typically does not allow more than 5.5 hour long-haul flights.
Air India, according to its website, has the Boeing 777-300 ER and 787 aircraft, both ideal for long-haul and non-stop flights. Vishwanath says it opens up the avenue to fly direct from Indian hubs to destinations like New York, San Francisco, Chicago, Melbourne or Sydney. "Typically, you have to get there through a connection at Singapore or Kuala Lumpur in the east or Paris, London, Frankfurt, Amsterdam or Dubai. This is where the B777–300 ER or even the B787 (Dreamliner) can be very useful and can open up a new market for Indian travellers seeking non-stop flights and also for those flying through India," says Vishwanath.
Understandably, there is optimism in the air. Jitender Bhargava, former Executive Director, Air India, thinks the airline will finally be allowed to perform. "Airlines in the Middle-East gained since Air India was not growing. Now, the negativity surrounding capacity will go and real growth in India-originating traffic can be a reality," he explains. To his mind, the perception about Air India related to just losses and debt, but never its assets. "Now the Tatas have access to network, long-haul aircraft, pilots and aircraft maintenance engineers. All this comes with no meddling from the government. Just building the network can put them in a very strong position." Apart from all this, there is also the airline's frequent flyer programme with invaluable customer data. Combine that with the Tata group's own investments in its super app TataNeu, and the extent to which data can be put to good use is limitless.
Airlines in the Middle-East gained since Air India was not growing. Now, the negativity surrounding capacity will go and real growth in India-originating traffic can be a reality
Former Executive Director, Air India
Of course, challenges abound. Air India will entail cash, time and a serious understanding of the business. Both Vistara and AirAsia India have been in the red and the group needs to pick the right team and let them be. Air India was run by bureaucrats and there was little stability at the top. Besides, the Tatas, too, have struggled with some big-ticket acquisitions like Corus, where the steel cycle and labour problems set them back for a while; and VSNL, where many a business disruption saw the company struggling.
The enormity of what lies ahead is something the Tatas would be acutely aware of. There is no question of taking on Emirates or Qatar. Instead, focus on doing the little things right. The Air India brand name needs to be taken a lot more seriously. Veteran advertising man Prabhakar Mundkur, who worked on the Air India account at JWT, says the airline can reach out to two groups. "The Indian traveller considers it hep to wear a sherwani and his wife is proud to show off her ethnic jewellery. He is the kind who likes to show that he is a connoisseur in wines and western food, but is dying to be proud to fly Air India," he describes. Meanwhile, the international flyer is "the occidental tourist who is swept by the orient. For him, India is exotic, spiritual and full of folklore and, in one word, overwhelming".
Indeed, Air India had that mysterious aura to it in a bygone era. The hope all around is that the Tata group will bring the mystique back.
DIPAM Secretary Tuhin Kanta Pandey says the strategic sale of the national carrier was a big learning experience.
By: Rajat Mishra
After many difficult moments, the disinvestment of Air India is finally done. For the Tata group, which bought the airline for Rs 18,000 crore, life has come full circle; the salt-to-software conglomerate had set it up in the 1930s.
In a freewheeling conversation, Tuhin Kanta Pandey, Secretary of the Department of Investment and Public Asset Management (DIPAM) and the man who, arguably, pulled off the most complex privatisation exercise, opens up on how it was done. Edited excerpts:
What were the inherent complexities in the sale of Air India?
The first complexity was in how to structure the deal. This was because of the debt being large, apart from the many subsidiaries that existed. We had to decide what the right package was or ensure [that] the bidder was interested. Within this, we had to be clear on areas such as how much equity would be picked or the extent of debt to be absorbed. The complexity was in ensuring it would be acceptable to all.
We also decided that the condition of operational freedom should be accepted as part of the terms and conditions. So, this was a different kind of a sale, where running the company well was top priority. For all of this to be fulfilled, we gave the bidders equal opportunity to express their levels of interest.
What were the challenges that you faced during the transaction?
The biggest challenge was to find the right structure. While DIPAM was driving this transaction, we had the civil aviation ministry, which had an equal responsibility of bringing in a lot of other enablers because Air India is under them. Then there was Air India itself that had to respond to it in various ways. In the past, we did other transactions, including strategic disinvestments, but the companies to which we were selling equity were eventually government controlled in some form. So that was a far more controlled process and was much easier.
What are the learnings from the Air India disinvestment?
The learnings are tremendous for all the teams not only in DIPAM, but in other ministries as well. Also, we were doing it for the first time since no privatisation has happened in the last 19 years.
A big learning was about how to structure the process and how to handle the transaction during a time of Covid-19. This was a multilateral process and in many respects an arm's length process as well. Finally, we could say that we managed to take this through a competitive process and came to an outcome that was extremely favourable.
Was there any Plan B for Air India if this process had not worked out?
In a way this was Plan B because Plan A did not succeed in 2018. During this process, we never thought about Plan B. I think we were working very hard to have an outcome of an existing process or just the culmination of something.
How did you ensure that the transaction took place in absolute confidence?
We had to maintain a balance of openness and confidentiality. There will be those to whom this would seem like a contradiction. In reality, it is not and in any open bidding process, you come out in the open, you put down a set of criteria and then you invite people. Whoever is able to meet those conditions will qualify. We did exactly all of this.
So anybody who qualifies should be able to get an equal opportunity, in terms of access to information or anything else. So, it is important that we have to be neutral. We did everything to let the bidders do their best.
Did the transaction have a code name?
Yes, code names were given because transaction advisors needed to maintain secrecy. So, they used these code names whenever they discussed the bidders.
Was there any point during the Air India sale when you felt it was getting a little difficult?
We were a little perplexed when we had to shift to enterprise value in October 2020. Also, we had to extend the dates in the midst of Covid-19. The question was, 'how are we going to move forward?'
So, this was a very critical stage because we did not succeed in 2018 and, unfortunately, when we started again, Covid-19 struck. That really was a big jolt to the aviation sector.
Air India's land holdings are not a part of the transaction and they will be monetised. Can you share some details?
There are several assets. For instance, there is an Air India house and an office in Nariman Point [in Mumbai] apart from colonies and flats in many cities. So, you have these various non-core assets whose book value is Rs 14,780 crore. To sell the land would be fairly complex because you have to go through a bidding process again.
Now, everyone is looking towards the Life Insurance Corporation of India (LIC) IPO. What are the inherent complexities that you see there?
LIC's IPO is very different. It has nothing to do with a strategic sale like Air India. This is something which we have been doing for years—we have listed more than 20 companies in the past six years. I must say LIC is a complex transaction of a different kind. To produce embedded value is a new thought process and it involves a lot of things such as getting in the subsidiaries and that means a full consolidation of accounts is required.
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