'Air India deal sweeter than expected'

The proposed Air India deal offered by the government is sweeter than expected, said a senior executive of a private airline.

He said that given the number of aircraft owned by Air India and its low-cost subsidiary Air India Express, a buyer can recover a major portion of the investment by adopting sale and lease back of airplanes.

Under the popular sale and lease back arrangement, an airline acquires the aircraft at an attractive price and sells the aircraft to a lessor at a profit. It then leases it back for its own use.

As per the bid document, Air India has an aircraft fleet of 121 aircraft (excluding 4 B747-400 aircraft) as on November 2019, mainly comprising Airbus and Boeing aircraft, out of which 65 are owned or on finance lease.

Air India's low-cost subsidiary Air India Express has a total of 25 Boeing 737-800 NG aircraft of which 10 are owned and 7 on finance lease. The remaining 8 are on dry lease.

"The government has addressed most of the issues taking feedback from prospective investors during road shows. The debt issue has been addressed to the extent that it may raise eyebrows," a top government source said.

Following the release of bid document, Civil Aviation Minister Hardeep Singh Puri on Monday said that debt on the books of Air India at the time of transaction would be frozen at Rs 23,286.5 crore which is equivalent to the written-down value of the combined assets of Air India and Air India Express.

While many industry experts described the bid terms as a bold move by the government, concerns remain over substantial interest from private parties to bid for the state-owned airline which has many legacy issues.

"As far as interest level of private parties is concerned only time will tell. There are many factors which will decide this. If external factors turn adverse then participation may not be as expected,"said an industry insider.

Multiple sources said that Tatas and Hindujas could evince interest in buying the carrier. IndiGo remains a strong contender but sources pointed out that the airline has reasonably expanded its network internationally and hence may not acquire an entity which is completely different in terms of aircraft type and functioning.

Foreign airlines such as Etihad and Qatar Airways could tie up with local players to place their joint bid to buy out the public sector carrier.

The Modi government's move to sell Air India and its subsidiaries had failed in 2018 as not a single private party evinced interest. While it had earlier offered 76 per cent stake in the airline along with management control, the government has offered to sell its entire stake in the airline this time.

As the government proposed to hold 24 per cent stake in the company and corresponding rights, many prospective buyers had apprehensions about interference and hence stayed away from the bid process. High amount of debt and adverse macro environment such as high fuel prices were cited as major reasons for the no-show.

"This time the government is willing to go the extra mile to ensure whatever the buyer wants they will probably agree to it," said Rajan Mehra, CEO of Club One Air and former India head of Qatar Airways suggesting that there would be enormous interest from private companies to buy Air India.