So, what is Air India worth? As the government goes on with the sale process, likely to get completed this time next year, the Opposition will join in a chorus against the sale, alleging a sellout. A Congress spokesperson talked of, last year, how the airline was worth Rs 5 lakh crore and, a few days ago, West Bengal chief minister Mamata Banerjee called it the ‘jewel of our nation’. On the basis of its current financials, the haemorrhaging Air India is worth nothing. Indeed, even Indigo, India’s most profitable airline—profits of $248 mn in FY17—has an equity value of $8.6 bn (see graphic). Southwest, the world’s most profitable airline—it has been making profits for 44 straight years, the latest being $3.5 bn—is worth $33.1 bn (Rs 2.2 lakh crore). No airline is worth Rs 5 lakh crore. As in any thing, Air India’s worth will be different to different buyers. For one, given the huge potential of the Indian market, buying an airline with a 12% share in the domestic market and 17% in the to/from India market, will be important since a greater market share means less discounting. The real value, of course, will be in Air India’s international operations since recreating this can take a decade, or more, for most airlines such as IndiGo or Vistara looking to make a mark in the overseas market—IndiGo, once seen as a potential buyer, seems to be backtracking now.
While it is difficult to value the ‘brand’ called Air India, the bilaterals and airport slots Air India has in most major markets probably capture this best—a brand’s value, at the end of the day, is the time/effort it takes for a competitor to catch up by creating a similar network. In US/Canada and Europe, Air India has 72 landing slots each, 70 in the UK, 280 in the Gulf and the Middle East, etc. All of this has to be juxtaposed with Air India’s massive debt and poor operational metrics. The information memorandum the government has just put out talks of a combined debt of Rs 33,400 crore that will be left of the books of Air India and Air India Express, but Kotak Institutional Equities says this does not include the cost of another 11 aircraft bought after March 2017, the contingent liabilities and the funding of FY18 losses—once this is done, Kotak estimates a debt level of Rs 46,200 crore. (Air India’s buildings are to be retained by the government along with 24% of the equity and around Rs 17,000 crore of debt). In addition, as Kotak points out, Air India’s operational metrics are very poor. Its operational costs are Rs 4.74 per available seat kilometre (ASKM) versus Rs 4.33 for Jet, Rs 3.6 for SpiceJet and Rs 3.16 for IndiGo. Based on Air India’s current metrics, even after the government takes on a large part of the Rs 50,000 crore debt, the airline is not worth much on a purely financial basis. At even an EV/EBITDAR of 10—Kotak says most airline peers trade at values of around 7-8—the equity value of Air India is negative.
At 11, it is just Rs 3,780 crore—to command a valuation like that, Air India will have to improve its operations dramatically. A 15% reduction in employee costs, on the other hand, gives Air India an equity value of Rs 12,500 crore at an EV/EBITDAR multiple of 11. So, there is considerable value to be got if the new buyer can significantly turnaround the airline. This will considerably boost the value of the government’s residual 24% stake. Not having enough flexibility to fire Air India’s employees could be a deal-breaker since the turnaround is centred around the employees. How much the government can convince labour unions—with ESOPs/VRS—is not clear but the fact that the information memorandum talks of 37.6% of employees retiring over the next five years indicates the government knows it is a big issue. The lesser the flexibility, the lower the bid. It is difficult to hazard a guess as to what the government will get, but even the most generous estimate is $2-2.5 billion for the 76% divestment. Will Rs 13-15,000 crore be seen as a sellout? The Opposition will certainly make it out to be one. In which case, prime minister Narendra Modi will have to hold his nerve if the sale is to go through. What he does need to do, meanwhile, is to impress upon the Opposition that the government is pumping in Rs 4,000-5,000 crore every year to fund the airline’s losses. If the losses remain at this level for even the next five years—though there is no reason why the bleeding should stop after that, particularly if oil prices rise—that’s Rs 25,000 crore in total or around Rs 20,800 crore in today’s value assuming a 10% discount; losses of this level for 10 years mean a present value of Rs 33,800 crore. That is, even if the government gets nothing for Air India, it will be Rs 20,800 crore richer! A Rs 15,000 crore bid, in that case, will be equivalent to at least a Rs 35,800 crore one if you look at a 5-year period and Rs 48,800 crore over a 10-year one.