Air India sale: Two goldmines, one landmine and a joker in the pack

Some subsidiaries of the national carrier put on sale have immense future business potential, while others may potentially sink their buyers

The Modi government may have found no buyers for Air India for the moment but that hasn’t stopped it from putting some of its subsidiaries on sale. The government has now reportedly decided to sell four Air India subsidiaries that include its passenger and cargo-handling business, MRO (maintenance, repair and overhaul) business, hotels and its regional airline. At the moment, only the cargo-handling business delivers profits for India’s national airline. A closer look at the others shows that they could turn out to be potential goldmines for buyers in the times to come.

The goldmine: More planes, more passengers, more cargo

Air India’s only profitable subsidiary reportedly on sale — Air India Air Transport Services Ltd (AIATSL) — hasn’t just been performing well over the last few years, but is poised to take advantage of India’s booming aviation sector in the times to come. In 2016-17, it clocked a profit of over Rs 334 million, earning Rs 6.2 billion in revenues from its handling operations. Both its revenues and profits dipped as compared to the previous year, but the company hasn’t run a loss since it started operations as a separate subsidiary of Air India in 2013. 

AIATSL’s present scope of business includes lucrative contracts from Air India and other government organisations such as the Agriculture & Processed Food Export Development Authority (Apeda). According to its latest annual report, it signed contracts with Air India and its associated companies that would have fetched it Rs 4 billion in 2017-18. It earned Rs 860 million from Apeda, handling its agricultural produce in 2016-17. Over the last couple of years, AIATSL has also increased revenues from third parties in its core business of handling. In the process, it has marginally reduced its dependence on Air India. More than half its revenues were from handling passenger luggage and cargo for third party airlines. It earned Rs 2.9 billion from its core handling business from its parent company. The details of the terms of AIATSL’s sale are not clear yet, but a bundling of these multi-billion-rupee contracts could be a major attraction for potential buyers. 

What further makes AIATSL a veritable goldmine is the policy cushion provided by the Modi government with the National Civil Aviation Policy 2016. The policy states that every major airport would have at least three ground handling agencies on contract, including an Air India subsidiary (in this case AIATSL). The policy further states, “In case of third party ground handling, Air India’s subsidiary or joint venture will match the royalty or revenue share offered by the other ground handling agency. If there are more than one ground handlers, Air India will match the lowest royalty/revenue offered by the other ground handlers.”

While the policy was formulated when the contours of Air India disinvestment were not known, it is unclear how the government would extend this exclusivity to potential buyers to make the deal more irresistible without risking legal consequences posed by other private players in the ground handling business. Even without such saccharine-laced clauses to induce potential buyers, AIATSL’s future looks promising for those looking to get their hands on it. According to International Civil Aviation Organisation (ICAO), there were 946,379 domestic and international departures from all Indian airports in 2016-17, a growth of 45 per cent since 2012-13. Even more impressive was the buoyancy in the number of passengers, which touched 125 million – up 74 per cent during the same period. The Sydney-headquartered Centre for Asia Pacific Aviation (CAPA) estimates that almost 500 new aircraft will be delivered to India’s airline operators over the next five years, which makes it “the greatest volume of aircraft induction in the history of Indian commercial aviation.” More passengers mean more aircraft, which, in turn, means more departures, and which eventually translates into high demand for professional ground handling services at all Indian airports. It’s not just passenger traffic, but also cargo handling that has boomed in India. More than 931,000 tonnes of cargo were handled at Indian airports in 2016-17, a growth of 55 per cent from 2012-13. If the amount of cargo being handled at Indian airports increases at the same rate as in the past, the volume of cargo and the cargo handling business would double in less than a decade. And all of this would mean good business for whoever buys AIATSL, with the company already having contracts for handling perishable cargo with 23 foreign airlines in addition to an equal number of domestic airlines and charter flight operators. Unlike Air India, AIATSL doesn’t have any debts in its books. If anything, it has to receive Rs 3.6 billion from the national airline and its group companies.

Another goldmine: Global shift in aircraft maintenance to Asia

While Air India’s ground handling business looks good, another attractive subsidiary on sale is the company’s MRO business run under the name Air India Engineering Services Limited (AIESL). Unlike the ground handling business, AIESL hasn’t been profitable ever since it was spun off as a separate business in 2013-14. But it’s the future of the aircraft maintenance industry that could make it a prized possession in times to come. Its revenues have zoomed to Rs 7.4 billion in 2016-17, up fourfold since 2014-15. These are impressive figures in an industry with huge capital investment requirements and long gestation periods. Even as its revenues have grown fourfold, losses have just about doubled to Rs 5 billion during the same period. While this may look discouraging to potential buyers, analysts are optimistic about the future of the MRO industry in India, in which airlines currently flock to either Dubai or the US for 90 per cent of their aircraft maintenance work. A 2017 report by New York-based consulting firm, Oliver Wyman, states that by 2027, there will be a global shift in MRO activities from North America. An indicator of the bright future of the MRO industry in India is the increase in the number of new aircraft over the next decade. 

At present, there are 449 aircraft operated by India’s airlines. Most of these are predominantly narrow-bodied. The Oliver Wyman report predicts that the number of aircraft operated by India’s airlines will touch 1,066 by 2027. By 2019, India, China and other nations in the Asia Pacific region will operate more aircraft than any other region in the world. India’s domestic MRO industry, which was valued at $1.9 billion in 2017, will almost double to $3.5 billion over the next decade. Oliver Wyman states that while India’s MRO industry will grow by 6.7 per cent annually, China will grow much faster. But rising labour costs and infrastructure constraints in China could push airlines to nations like India and others in East and South East Asia. The report notes, “As fleets grow in each region, the average aircraft age will change, with most of the world’s aircraft getting younger. But in China and India, the fleets will age as aircraft stay in service to meet increased demand, leading to greater emphasis and importance for aircraft maintenance programs. Regionally, as fleet growth shifts to Asia and other developing economies, MRO spend will also shift to those regions. By 2027, the combined MRO demand in the Asia Pacific, China, and India will be more than double that in North America.” In many ways, the biggest challenge for India’s nascent MRO business, and therefore for AIESL, will come from China whose global market share over the next decade is projected to rise 1.5 times while India’s is projected to remain stagnant despite good growth. The Modi administration, through the National Civil Aviation Policy 2016, has sought to avoid this situation and allow India’s fledgling MRO industry to achieve its full potential in an era when exciting economic and aviation sector growth is happening in India and its neighbourhood. In 2016-17, India abolished customs duty on tools used by MRO facilities in India. Among other things, it now allows foreign aircraft brought to India for maintenance to stay for six months and even permits them to fly in and fly out with passengers on board before and after maintenance work, respectively. Earlier aircraft flying in and out of India had to do so without anyone on board denying them an additional revenue stream. Visas for foreign MRO experts would now be expedited and airport royalties payable by MRO companies have been waived for five years. AIESL, which has five MRO facilities at major airports across India, including Kolkata, Mumbai and Hyderabad, would stand to benefit immensely from this mix of favourable external factors and the government’s benevolent policy cushioning. Unlike, the ground-handling business, AIESL has an unsecured debt of Rs 6.6 billion, but its revenues, favourable net worth and entrenched infrastructural strength in a sunrise industry ensure that it won’t go the Air India way in the years to come.

The landmine: A jinxed hotel business

While AIATSL and AIESL could turn out to be goldmines for their potential buyers, the path to the national airline’s disinvestment is also paved with some landmines. The most prominent among them is the Hotel Corporation of India (HCI), another one of the subsidiaries reportedly on sale. The divestment of Air India’s hotels has been jinxed at the outset, when Arun Shourie successfully hived off three of its properties to private players in 2002-03. These included the Centaur Hotel near the Mumbai Airport, Centaur Juhu in Mumbai and the Centaur Hokke hotel in Rajgir. The Centaur Mumbai Airport deal was considered controversial and landed up in courts. The Sahara group which re-purchased the hotel from Batra Hospitality Private Limited, a few months after it was sold to Batra by Air India, claimed an amount of Rs 23.5 million from Air India. The airline, after a protracted legal battle, finally won the case in 2015 when the Bombay High Court rejected Sahara’s claims and directed it to pay Rs 19 million to Air India. The Centaur Juhu deal also went into arbitration and was settled sometime in 2013.

While Air India’s hotel divestment and management process over time paints a gloomy picture, things were looking up for HCI, which operationalised its lounge at Terminal 3 (T3) of Delhi’s Indira Gandhi International Airport in 2013. During the first year of its operation, Air India’s T3 lounge showed a modest profit of Rs 17.5 million. In 2014-15, its profits rose to Rs 26 million. With Delhi Centaur on the threshold of demolition, Air India will be left with only the Centaur Lake View in Srinagar. And even the Srinagar property is not without its share of controversies. While Shourie had proposed selling the Srinagar property too, the then Mufti Mohammad Sayeed-led government in Jammu & Kashmir expressed its willingness to take it over. According to the HCI documents, “core issues were identified & assets of the Centaur Lake View Srinagar were valued by an asset valuer who submitted the report to the government.” However, no decision on the issue was taken by either the state or the Central government. 

Meanwhile, there were simmering differences between the company and the Kashmir government over the hotel. The J&K government demanded Rs 433 million from the hotel as part of its dues, according to a cost-sharing agreement signed in 1982. Air India, meanwhile, filed a counter-claim, demanding Rs 470 million from the state government as part of its dues according to the agreement. The company noted in its regulatory filings, “Since there are divergent views, the matter has been referred to the Ministry of Civil Aviation for settlement.” With the involvement of J&K government in running the hotel not going anywhere, a decision was taken in 2008 to run the hotel on a management contract basis. Tourism Finance Corporation of India was chosen as the management consultant for selecting private parties for running the hotel. Three bids were received, of which two were found to be eligible. A task force was formed to which the details of the two bidders were forwarded. The task force felt that the financial terms of the contract needed to be reviewed. After the financial bids were reviewed, only one party submitted the financial bid and was chosen for the job of running the hotel in November 2011. The company was BD & P Hotels Limited, a subsidiary of DB Realty, which was owned by 2G scam-accused Shahid Balwa. 

However, employee unions of the hotel opposed to the takeover by a private firm moved the J&K High Court, which in turn granted a stay order. Air India had to invoke the ‘force majeure’ clause in its contract with Balwa’s firm and the agreement was terminated. While the contract was cancelled, the J&K government again expressed its interest in running the hotel. This time Omar Abdullah was heading the state government. Air India, left with little option, accepted the Abdullah government’s offer. Centaur Lake View Srinagar, along with its employees, was transferred to the J&K government. The employee's unions, which were part of the discussions, meanwhile were unwilling to work under the J&K state government. With opposition from the unions against being transferred to the state government growing, Air India continued to run the hotel through HCI. The UPA government, meanwhile, rekindled its interest in running the hotel instead of transferring it a third party. In 2011-12, an amount of Rs 30 million was sanctioned to Centaur Lake View Srinagar “to upgrade the unit & bring it at par with other star hotels in the state.” In 2012-13, another Rs 50 million was sanctioned for the hotel’s renovation. Among other things, the money was used to renovate the hotel's kitchen and for water-proofing its rooftop. The hotel meanwhile continued to bleed money. Its accumulated losses between 2007 and 2015 stood at Rs 420 million. It remains unclear how viable will it be for any buyer to take over and manage properties that are embattled in various political and legal battles.

The wild card: Connecting small cities in India

By the look of it, Airline Allied Services Limited (AASL), which runs Alliance Air connecting smaller cities in India, displays the same financial traits as HCI. It has been running losses from as far as the eye can see. In 2016-17, it posted a loss of Rs 2.8 billion on revenues of Rs 3.8 billion. Had it not been for government subsidies its losses would have been half a billion rupees higher. Since 2012-13, its losses have more than doubled while its operational revenues, which rely heavily on passengers of smaller Indian cities, have grown by 19 per cent. It receives more money in the form of government subsidies than it did in the past. Its airline, Alliance Air, which primarily operates the smaller Aerei da Trasporto Regionale (ATR) turboprop planes, has seen its aircraft lease and maintenance charges rise by a third since 2012-13. In 2016-17 it spent Rs 2.6 billion on lease and maintenance of its ageing ATRs, which was substantially higher than its fuel costs. Even as the total departures across India have risen by 45 per cent since 2007-08, Alliance Air’s departures have declined by 10 per cent. It is also probably the only one among India’s scheduled airlines that is making fewer departures than it did a decade ago. In 2007-08, Alliance Air’s ATR fleet clocked 370 million kilometres and dipped to 324 million kilometres in 2016-17. Its passenger-carrying capacity has declined by 84 million available seat kilometres (ASK). Its cargo operations have all but collapsed even as the number of passengers it carries has virtually stagnated. From over 9,000 tonnes of cargo in 2007-08, Alliance Air ferried less than 100 tonnes in 2016-17. It owes its parent company Air India more than Rs 13 billion in short-term debt, whose repayment period is unknown. Evidently, if the past of Alliance Air is anything to go by then potential buyers would be in a serious dilemma buying this regional airline.

But things have changed radically for Alliance Air after the Modi government introduced the UDAN scheme for connecting tier-2 and tier-3 cities in India by air. The airline was given eight routes in the first round of the UDAN scheme and it operationalised all its routes by June 2017. Among others, it included connecting the national capital Delhi to cities like Pathankot, Ludhiana, Bhatinda, Bikaner and Shimla. The UDAN scheme seems to have invigorated an airline whose ground activities were stagnating not too long ago. According to information available with the Directorate General of Civil Aviation (DGCA), Alliance Air clocked more than 15,000 departures in the first six months of 2018 alone. This was substantially more than its departures in the whole of 2016-17. It carried almost a million passengers between January and July in 2018 – up 52 per cent over what it carried in the whole of 2016-17. Its passenger-carrying capacity in the first six months of 2018 was 549 available seat kilometres (ASK) -– substantially higher than the whole of the last financial year.  In fact, there has been a significant uptick in its operations ever since it operationalised its routes under the Modi government’s UDAN scheme. In June 2017, Alliance Air had clocked just about 1,264 departures carrying around 31,000 passengers. By December 2017, both its departures and passengers doubled. This trend continued well into 2018 and looks set to continue as more Indians take to the skies from smaller towns.

With Alliance Air having won two more routes in the second round of UDAN and the government planning another push with an international UDAN scheme, things seem to be looking up again for one of India’s first airline to connect smaller and underserved cities in India. While this is an impressive turnaround from an aviation perspective, the impact of UDAN on the financials of the airline is still a grey area. CAPA’s South Asian Aviation Outlook released in April 2018 noted, “Incumbent airlines including IndiGo, SpiceJet, Jet Airways and Air India, are showing more interest in taking advantage of the concessions available under the Regional Connectivity Scheme (UDAN) to operate services to smaller towns and cities. However, the viability of under-capitalised, independent regional operators remains a concern.”  That should be good news for potential buyers looking to get an early mover advantage in India’s nascent regional connectivity aviation business by buying an established national player like Alliance Air.