Free Reports

Under Current Terms Only LIC is Likely to Buy Air India

Apr 11, 2018

28

India's three main airlines, IndiGo, Jet Airways and SpiceJet, have made it clear that they are not interested in buying Air India, in the current form it is being offered in. (As I finished writing this column, a Reuters journalist tweeted to suggest that the Tatas are also unlikely to bid for Air India, as well. Guess, nostalgia, doesn't always work). The government of India wants to:

A) Sell 76% of Air India.

B) 100% of Air India Express, the low-cost arm of Air India.

C) 50% of SATS, a gateway solution and food services provider. Against this sale, the government, wants the buyer:

    a) To take on two-thirds of the debt of Air India. As on March 31, 2017, the total debt of the company was at Rs 48,447.37 crore. Two-thirds of this works out to Rs 32,298 crore.

    b) The buyer also needs to give a guarantee that none of the permanent employees of the airline will be sacked for a year. After that the buyer can offer them a voluntary retirement scheme.

In return, the buyer, along with the aircrafts of Air India, will also get 2,543 international landing slots negotiated with many countries, over the years. The landing slots is for what any airline will want to buy Air India. The real estate of Air India, which includes the famous Air India building in Nariman Point, will continue to remain with the government.

What also works for the prospective buyer is that Air India has 12% market share in the domestic market in India. While, this has fallen from a 100% market share once upon a time, when private airlines were not allowed to operate in India, it needs to be taken into account that only 3% of Indians have travelled by air. Hence, the potential is immense. India is one of the last big airline markets that remains untapped.

Also, the airline has a 17% share in flights in and out of India.

All these factors work for the buyer. But there are other factors which don't. As mentioned earlier, the airline had a debt of close to Rs 48,447 crore as on March 31, 2017. Two-thirds of this debt has to be picked up by the buyer.

--- Advertisement ---
5 Solid Safe Stocks to Keep You Afloat During This Market Crash

With over 15 years of blue chip experience backing her up...

Research Analyst, Tanushree Banerjee, has discovered 5 solid Safe Stocks that she believes, could guide you towards profits in these uncertain markets.

To find out which stocks she is talking about...

Click here...
------------------------------

The working capital loans constitute Rs 31,088 crore of this debt. This is a little lower than the amount of debt that the government wants the prospective buyer of Air India to pick up. It is worth asking how has this debt accumulated over the years? The airline loses money every year and in order to continue operating it needs to borrow.

The banks lend money to the airline because it is ultimately deemed to be lending to the government and a government doesn't usually default. A private enterprise in the place of Air India, would have had to shut down by now.

The larger point is that by asking a prospective buyer to take on two-thirds of the debt, the government basically wants the buyer to take on the overall accumulated inefficiency of the airline.

Rs 33,298 crore is a lot of money and is basically a deal breaker as far as the sale of Air India is concerned. This kind of debt it could even bring down the airline that decides to buy Air India. (In fact, we had said the same thing in a column which appeared on January 15, earlier this year).

Other than the working capital loans of Rs 31,088 crore, the remaining Rs 17,360 crore is basically loans that have been taken for buying aircrafts. If this portion of the loan is passed on to the buyer, there is at least some justification given that there are airplanes that were bought using the loan.

Also, any prospective buyer will adjust for these loans before deciding on the price it wants to buy for Air India. But on the whole, the debt will drive away most prospective buyers.

Further, it is worth remembering that airline has lost a lot of money over the years and it continues to lose money. The airline lost Rs 41,657 crore between 2010-2011 and 2016-2017. These losses have continued in 2017-2018 (for the period between April to December 2017). Take a look at Table 1.

Table 1:
Domestic (Rs. in lakh) International (Rs. in lakh)
Traffic Revenue 505,964 1,044,676
Total Cost 676,231 1,334,296
Source: Loksabha Questions PDF

Table 1 tells us that between April to December 2017, the airline lost a further Rs 4,599 crore. This basically means that the accumulated losses of the airline between April 2010 and December 2017, stand at Rs 46,256 crore.

Now that's a lot of money. Other than the airline borrowing money to keep itself going, the government has also pumped in money into the airline over the years. Take a look at Table 2.

Table 2:
Year Equity Infused Rs. in (crore)
2011-12 1.200
2012-13 6,000
2013-14 6,000
2014-15 5,780
2015-16 2,500
2016-17 1,713
2017-18 (till date) 1,800
Total Cost 26,545.21
Source: Loksabha Questions PDF

This infusion is a part of a restructuring plan which provides Rs 30,231 crore of equity infusion from the government into the airline, until 2021. It is clear that the restructuring plan is not working given that the airline continues to lose more than what the government has invested in it, over the last few years.

This isn't surprising given that the cost of operation of the airline is very high. As a recent report by Kotak Institutional Equities points out, the operational costs of Air India are Rs 4.74 per available seat kilometre, in comparison to Rs 4.33 for Jet Airways, Rs 3.6 for SpiceJet and Rs 3.16 for IndiGo.

The airline also has a huge number of employees, backed by powerful trade unions which can be a huge nuisance. As on January 1, 2017, the airline had 18,049 employees. In comparison, IndiGo had 14,576 employees as on March 31,2017. IndiGo also employed 8,225 employees on a temporary/contractual/casual basis. Indigo has 40% share in India's domestic airline business. Air India has 12%.

Also, 37.6% of Air India's employees are retiring over the next five years. The trouble is that no prospective buyer will be willing to wait for five years, so that the airline can then have the right number of employees. Any quick turnaround will only happen if the buyer is allowed to fire employees.

The larger point here is that the airline is clearly not a family jewel that the government considers it to be (like all other public sector enterprises). It is basically a dangerous wound which has been bleeding the government and continues to bleed it. This bleeding needs to be stopped and it can only be stopped if the government decides to be a lot more flexible about the terms on which it is willing to sell the airline.

In fact, the government is more likely to attract bidders if it tries selling different parts of the airline, separately. For starters, the domestic business and the international business of Air India, need to be offered separately. In fact, even Air India Express, which primarily has flights to the middle east should also be offered separately. This might attract different buyers.

Further, the buyer should be allowed the flexibility of the doing what he deems fit to run the airline. The government cannot sell the airline and then want to continue running it through the backseat, by implementing terms and conditions.

Also, if this means that a few thousand Air India employees lose their jobs, then so be it. They have had a good time at the expense of the taxpayer, for many years now. This is as good a time, as any, to end it. If the government continues to run the airline, it will have to continue pumping money into it. This is money that is taken away from many other important areas like education, defence, health and agriculture. Further, the debt that the airline takes on will also eventually end up in the books of the government.

Under the current terms, the only institution that is likely to buy Air India, is the Life Insurance Corporation(LIC) of India. Given its past record under different governments in buying public sector enterprises, it won't be surprising if the financial institution is forced to come to the rescue of the government and pick up a stake in the beleaguered airline. Funnier things have happened.

Regards,
Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

PS: The editor of the Profit Hunter premium newsletter, Apurva Sheth, has just leaked a major stock recommendation for Profit Hunter Pro readers... subscribe now so you can get in on the trade before the price goes up!

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Why Deficits "Don't Matter" April 20, 2018
Bill takes a look at the Doom Index, and how the retail investors are disillusioned by the Fed's easy money policies...
Why India is Short of Cash Again April 19, 2018
It is basically a supply problem with not enough currency going around in the financial system.
America: The Next Venezuela April 19, 2018
A classic catastrophe is developing in Venezuela. It's a financial disaster leading to social, political, military, and health disasters. This same process is also well underway in America. Bill discusses the same in today's diary...
Bitcoin Works! April 18, 2018
Bill Bonner talks about how Bitcoin fell hard to start the year. But as the cryptocurrency begins to recover, some are predicting a second major run.

Equitymaster requests your view! Post a comment on "Under Current Terms Only LIC is Likely to Buy Air India". Click here!

6 Responses to "Under Current Terms Only LIC is Likely to Buy Air India"

Akshay

Apr 12, 2018

Hi Vivek, I have been reading your articles since the time you wrote for DNA money. Also maybe consider the Brand value of AIR INDIA



Like 

Gautam M

Apr 12, 2018

After a long time a sensible analysis done by Mr Vivek. Govt needs to be more flexible in terms. It was clear from day 1 that no buyer would take the working capital debt that was accumulated due to multi year losses. Govt must go back to drawing board to revise the terms of the offer. Also employee handling is a tricky thing. You cannot be too harsh on these as otherwise the noise generated will itself drown this deal. Buyer needs to provision the VRS cost while bidding for the deal. That would be a sensible approach to go forward.

Like 

S.K.LIMAYE

Apr 11, 2018

Your comment that some Rs31,000 crore plus debt is due to working capital and equating it to inefficient employees hurts me as a retired employee. You have not gone into the reasons as to why this working capital debt ballooned. Before buying of entirely debt funded aircrafts , much more than needed , IA never had such problem . In fact we were making small profit and mind it net profit. After that huge loan was taken and a merger of two totally different airlines was made BY THE GOVERNMENT (whatever party whichever minister ) , meeting the interest obligation started eating into revenues generated and to keep afloat working capital loans had to be taken meaning more interest payment and subsequently more loans ! This is how the mountain got built. Mr Kaul , please tell me in what way were the employees responsible for this ? Were they consulted before placing orders for double the number of aircraft required ? Were they consulted as how to fund the purchase ? If this equity infusion was done at that time to pay for the aircraft then all this mess would not have been there. Last but the least . During 2008-12 when the airlines the world over were struggling to survive the recession , the two national airlines were sorting out the merger issues !

Like (1)

Rajiv Ranjan Prakash

Apr 11, 2018

As far as my knowledge is concerned Spicejet would be the only player which could bid for Air India and buy AI for a song.Other companies might have been asked by the Govt nit to bid for AirIndia. This seems like the same case as happened just like disinvestment of Hindustan Zinc and other PSUs have been sold earlier. Donot forget that spicejet has bailed out by the govt just to please Ajay Singh who has a BJP connection has not been ruled out.I think this episode is fixed by the Government. Mr Vivek you are all against Govt organisation but always keep mum on private organisations.like ICICI'Axis Bank and other Pvt organisations.You never spoke or written about corporate Government issues in Pvt companies.I agree that Govt staff might be currupt but they could be regulated.but pvt organisation is looting our countries like anything.which was clearly felt during demonetization.I think you should write about how to correct the system not about how to privatise the govt and PSUs.

Like (1)

Purushottam Acharya

Apr 11, 2018

Sir,

Thanks for this article on Air India. I am a regular reader of articles from your Diary.

As you have rightly said, Government continuing with loss-making Air India is really a huge drain on our scarce national resources and at the expense of honest tax-payer's money.

It is really a workable suggestion you have given, of "selling different parts of the Airline". Government should explore this option. Also I feel that Government should come out with a VRS offer to employees retiring within next 5 years. The facility of free air travel passes to existing and retired employees and their families should be withdrawn immediately. There is absolutely no justification for continuing with such costly perquisites to employees of such a huge debt-laden Organization.

Thanks once again.
With Regards,
Purushottam Acharya

Like (1)

Vinod Mahajan

Apr 11, 2018

It is ridiculous to suggest that LIC can come to the aid of the Govt.Buying shares of some companies is entirely different from running an airline.If LIC is to pick up a stake in Air India ,it means that the policyholders have to bear the losses that LIC incurs in Air India.This is completely unjustified.

Like (1)
  
Equitymaster requests your view! Post a comment on "Under Current Terms Only LIC is Likely to Buy Air India". Click here!