Wanna Fly Away With Me?: Air India looking for buyers

February 24, 2020

3 min read

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What's going on here?

The state-owned airline company Air India is up for sale for the second time since 2018. The Indian government is offering 100% of the company (full privatisation) along with the $3.3bn worth of debt that Air India has amassed.

What does this mean?

India’s Prime Minister, Narendra Modi, is aiming to sell the loss-making Air India with a view to improving India’s balance sheet. However, this is not a new objective. Modi attempted to sell off 76% of Air India (with the government keeping the remaining 24%) along with its $5.1bn debt in 2018. Yet the Prime Minister´s plans were given a shocking rejection as no bidders stepped forward.

Modi’s new Air India pitch to potential investors includes:

  • Reduced debt (from $5.1bn to $3.3bn) – the government will take on the rest; 
  • Full privatisation (100% of the company is for sale rather than 76%);
  • A stake in the low-cost Air India Express and AISATS (an airport services company).

However, despite these new and improved conditions, there is still one big BUT to the new offering which has not changed since 2018: foreign airlines can only acquire 49% of the Air India. This means that the focus is on Indian airlines to make a bid before the deadline on 17 March 2020.

What's the big picture effect?

Acquiring Air India could be a breakthrough moment for some of the smaller competitors in the Indian aviation sector. Air India has some attractive assets: 146 aircraft (56% of which it owns) and lucrative international and domestic airline slots (slots for parking and landing at airports). In addition, India has been the fastest growing aviation market for four consecutive years since 2016 and is projected to be the world’s third largest by 2024. However, since no foreign investors can bid for a controlling majority stake (over 50%) of Air India, attention is being turned to Indian airlines and their respective market shares and growth strategies. India´s market-leader IndiGo (47% market share) would seem like the most likely bidder, with smaller competitors such as SpiceJet (14.8%), Go Air (10.7%), Air Asia (6.2%) and Visitara (5.1%). Buying Air India would add a potentially game-changing 12% market share to any successful buyer.

Despite the potential for growth, Indian airline companies are being cautious, and with good reason. In April 2019, Jet Airway, which at the time had an 8.9% market share, went bust. The demise of India’s oldest private carrier has highlighted the consequences of strategic errors in an era of heavy competition and climbing fuel prices. This means that Indian airlines are careful about the amount of debt they take on. Even India’s market leader IndiGo was put off from bidding for Air India in 2018, fearing the risk of taking on more debt than it could handle.

Moreover, Jet Airway’s collapse reflected some of the challenges to the Indian aviation sector’s path to profitability. Fierce market competition has seen the price of international flights become exorbitantly high, whilst other issues such as high fuel costs, limited airport capacity and poor policy weaken all market participants. This has created a disparity in flight prices; in 2018, the average wage in India was $0.59 per hour, whilst the average price of a domestic flight was $45.74, making flying unaffordable for the majority. 

To add to these concerns, the Indian government has not addressed employee unions. A deal-breaker in 2018 was the condition that any buyer of Air India would have to retain its 27,000 employees for a year, a major drawback to any bidder’s objective of restructuring the loss-making airline. However, if a compromise can be agreed with the government and the unions, then it would significantly sweeten the new offering.

Report written by Will Holmes

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