BRINGING HOME THE FAMILY JEWEL

The sale is a boost for the Centre’s privatisation plan. For Tata Sons, Air India buy will mean a third airline in its stable. The deal gives it access to over a hundred planes, thousands of trained pilots & crew, and lucrative slots around the world

Air India may see turnaround as debt eases by 75%

With the bulk of Air India’s debt and liability being taken over by the government of India (GOI), it should become far easier for Tata Sons to turn around the finances of the airline. Less than 2 per cent of Air India’s cumulative net loss on a consolidated basis in the last 10 years was due to operating losses; the rest was due to interest on debt and depreciation allowance for the aircraft purchased by the airline to expand its fleet.

Air India reported an operating profit of ~1,787 crore in FY20 on a consolidated basis but reported a net loss of ~7427 crore due to interest and depreciation costs. The airline interest and depreciation costs were ~4,419 crore and ~4,795 crore in FY20, respectively. In fact, Air India has reported operating profit in three of the past five years due to the combination of growth in revenues and benign prices of aviation turbine fuel. Air India audited finances are not available for FY21.

The airline’s FY21 numbers are not comparable to past numbers because of lockdowns globally because of Covid-19. According to the government data, Air India reported net sales of ~12,139 crore and a net loss of ~9,779 crore in FY21.

Air India clocked a cumulative net loss of nearly ~65,600 in 10 years ended March 2020 but the cumulative operating loss during the period was only ~917 crore. The rest was accounted for by interest (~34,900 crore) and depreciation allowance (~21,200 crore).

According to the scheme of divestment, only a quarter of Air India’s debt would be transferred to the new owner; the rest would be liability of the government.

Air India had total debt of around ~62,300 crore as of March 2020 on a consolidated basis. Of this, only ~15,300 crore would be borne by the new owner. Tata Sons is acquiring Air India for an enterprise value of ~18,000 crore, of which ~2,700 crore is the cash to be paid to the government.

The airline had an enterprise value of ~61,000 crore at the end of March 2020, according to the data from Capitaline. Enterprise value of an unlisted company is the sum of its equity or net worth and total debt minus cash & equivalents on its books.

According to analysts, such a sharp reduction in Air India’s debt should make it easier for the airline to achieve a financial turnaround under the new management. “The substantial reduction in the debt size will help bring down the financial cost,” says Vipula Sharma, Brickwork Ratings, director-ratings and head infrastructure Ratings.

The airline had fixed assets worth nearly ~59,000 crore as of March 2020. These included aircraft worth ~32,000 crore; the rest was accounted for by assets, such as land and buildings and office equipment. The figure excluded accumulated depreciation of around ~10,000 crore.

Under the divestment process, the government would transfer Air India’s non-core assets, such as land, buildings, and its stake in in-house hotel chain, ground handling and aircraft maintenance, repair and overhaul (MRO) subsidiaries to Air India Asset Holding — a GOI enterprise. The assets being transferred to AIAHL are worth ~14,871 crore. Tata Sons would get the aircraft fleet and Air India’s network, including landing rights and parking slots at major airports across the world.

According to the government data, Air India’s core airline operations — being transferred to the Tatas — accounted for 85 per cent of its consolidated net sales of ~32,440 crore in FY20. The core operations clocked revenues of ~27,547 crore in FY20.

Air India is the biggest owner of aircraft fleet in India, even ahead of industry leader Indigo. Its fleet had a book value of ~32,121 crore at the end of March, against the Indigo fleet’s book value of ~25,468 crore.

Analysts say this should give an edge to the Tatas, while expanding Air India global footprint after the acquisition.