The release of the Air India preliminary information memorandum (PIM) on Monday was received with a flurry of activity. As predicted, the sale of Air India is actually a
sale of parts. What is being divested is a 100 percent stake in Air India, Air India Express and a fifty percent stake in AirIndiaSATS (the ground handling arm).
What is not being divested is Air India Engineering Services Limited — the engineering arm; Airline Allied Services (AASL) — the regional airline serving Tier 2 and Tier 3 cities; Hotel Corporation of India (HCI); and Air India Air Transport Services Limited (AIATSL) — the ground handling arm.
The PIM is not quite the document that was anticipated.
What the PIM does not reveal is as important as what it does
Any information document should leave a reader in a better position on understanding the quality of the business and the intricacies. The PIM is not such a document.
Some of the main takeaways from the document are:
The buyer(s) must have a minimum net worth of $500 million. If the bid is via a consortium, the lead member to hold at least 26 percent.
On the issue of debt, the buyer is to assume $3.3 billion of debt in exchange for three separate companies. Liabilities are ring fenced but exclude trade payables that are likely to rise in the months to come. The debt will be backed up by assets but no unencumbered assets are involved. Indeed, some assets have multiple liens. Finally the debt includes government guarantees, which go away once the new bidder takes over. But the structure for this is unclear.
On the operations front, the Air India brand is to continue. A fleet of 146 aircraft, which includes 16 grounded aircraft, 13 unions, about 10,000 full-time employees and 21,000 total employees.
There is no clarity on autonomy to be able to rationalise manpower rather line items that highlight staff benefits. The percentage of staff retiring within the next five years seem to indicate that there will be restrictions. Once again ambiguity prevails.
Finally, on the financial front, the combined losses for the three entities are around $1.1 billion in FY19. Two subsidiaries in play, Air India Express and AirIndiaSATS, are profitable but the scale of losses at the core airline eclipses any such gains.
Are buyers at hand?
Reading through the PIM one can’t help get the sense that there must be parties that have already indicated interest. Because prima facie the document does not do much to entice investor interest.
Warren Buffett once indicated that when he comes across annual reports and managers that are "
candid in the same way that a manager of a subsidiary would be candid with us, and talks in a language that we can understand, it definitely improves our feeling about investing in such a business and the reverse turns us off to some extent." For a document that will go out to the global investor community, the effort could have been a lot better. The consultants are happy
The disclaimer at the beginning of the 220 page PIM states,
“Any partial reading of this PIM may lead to inferences, which may be at divergence with the conclusions based on the entirety of this PIM.” Yet 220 pages later, it is only the consultants that come away smiling.
Standalone the document does not give a comprehensive picture of the asset(s) at play. It essentially requires folks to come in and supplement the information provided with their own data and sources and arrive at a conclusion. For a transaction as complex as Air India including the political, social and economic consequences, the document does not cover these comprehensively.
What also comes across clearly is the issue of skin in the game. Not interlinked with the system, any inputs that are put forth are for the most part theoretical as they don’t carry the burden of failure.
To this end, there are several items that have been put out on a piecemeal basis. For instance, graphs that highlight employee costs and employees per aircraft — two misleading metrics taken entirely out of context. A graph on fleet highlights 16 aircraft grounded but fails to disclose why. With 13 unions involved, the document does not highlight the word “union” even once. The list goes on…
Also read: The consequences of using standalone metrics in aviation
There are information memoranda where reading the document end to end coupled with a reading of annual reports for the past five to ten years and a fair understanding of the industry helps one to arrive at a decision on the quality of the business. The PIM is found wanting on this front.
An extremely complex transaction
What has been clear from the get-go is that Air India is an extremely complex transaction. Political and social issues aside, it not only involves buying the assets but then separating them out, renegotiating terms and the involvement of patient capital that has the wherewithal to stomach losses till the time restructuring benefits kick in.
And the government is crystal clear on its intention of privatising Air India. It does not help that this comes at a time when there is a global growth slowdown, several other national carriers are up for sale and a
tax collection shortfall. Politically the transaction, if it goes through, is a huge talking point for the government. The reverse is equally true.
Already influential folks like Subramanyam Swamy have more or less committed to filing a public interest litigation (PIL). Other PILs are likely to follow.
For a buyer, this means added aggravations and exposure to India’s legal system (and associated costs) where surprises cannot be ruled out. Remember, the
NCLAT judgment against the Tatas, India’s largest conglomerate.
That said, the structure of the sale can make for a strong legal argument so one can presume that the government and the committee tasked with the sale of Air India has indeed been looking at scenarios and planning accordingly.
Finally there is the issue of buying the airline just for the assets. This too is viable but complicated.
Because the Air India brand is to continue, a group structure where the assets can be reshuffled within the group portfolio is a hot topic among aviation investors. This is a structure that is currently used by the parent company of British Airways, Singapore Airlines, Lufthansa and more recently Ryanair.
But overlayed with geopolitical dynamics, de-hyphenation of India’s foreign policy, FDI flows and their impact,
SOEC norms and the fact that it is still faster, more economic and easier to start a new airline — several questions remain.
The transaction is not for the faint-hearted. It is one that calls for embracing complexity. For addressing culture, costs and cash flow. And then competing in a cut-throat environment.
Whether investor appetite exists for such an endeavor remains to be seen.
Legendary investor Charlie Munger once said “We have three baskets for investing: yes, no and too tough to understand.” Air India for now falls in the third category. Satyendra Pandey is the former head of strategy at a fast-growing airline. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. Read his columns