Prisoner’s dilemma

Is there a risk of undervaluing Air India?

The divestment of Air India is turning out to be a classical case of a prisoner’s dilemma. There are only two bidders for AI, but there are a host of issues that have been introduced by the civil aviation ministry which may be viewed differently by the bidders. Ever since the divestment of AI was announced, the civil aviation ministry has been “active”: signing bilateral and codesharing agreements with countries and airlines. And over the last two to three weeks the ministry has also suspended its managing director and announced an improvement in the balance sheet of AI, showing lower loss levels. These are not expected to have an impact on the valuation of AI during divestment. But does the same hold true for bilateral and code-sharing agreements? After a lull of over two years since the divestment of AI was initiated, the civil aviation ministry has more than doubled its seat-sharing arrangements. But the catch is that more than 50 percent of these agreements are unutilised as AI simply does not have the carriers to handle this traffic. The civil aviation ministry has been frank about the need for new aircraft but the finance ministry has been equally candid about the paucity of funds! So why hurry now, especially after two companies, the Tata-Singapore Airline combine and the Hindujas, have been shortlisted for the divestment of AI?

The civil aviation ministry may well feel that there are no hidden agendas and that an improved balance sheet for the airline along with a spate of bilateral and codesharing agreements only gives AI more time and revenue after the new management takes over. A good case for expecting a good valuation. But does the bidder see it that way? This would all depend on the flexibility and the terms and conditions these agreements have. A bidder could see codesharing on a profitable route as a loss, as he too might have operated on this route and made money; while a bilateral agreement on a lucrative route can be seen as the need for additional aircraft, thereby increasing capital costs for the new management. Once the initial capital cost goes up, down goes the valuation as the break-even revenues required would be higher or the time taken for the same could be higher. These are issues that the bidders have to ponder. The interesting part is that each bidder individually cannot risk ignoring aviation ministry’s line and must not undervalue. But what if the the two prisoners meet? Has the civil aviation ministry thought of this possibility?