Air India sale: Here's the dark horse that can turn the contest on its head

This US-based fund had earlier attempted to take up AirAsia Berhad's 49% stake in AirAsia India for $50 million

Air India sale: Here's the dark horse that can turn the contest on its head
Air India planes at the Indira Gandhi International Airport. Image courtesy: Wikimedia Commons

Department of Investment and Public Asset Management (DIPAM) secretary Tuhin Kanta Pandey tweeted on December 14 that the Air India strategic sale received "multiple expressions of interest".

Though the government stopped short of divulging details about the suitors, there have been numerous reports claiming that the Tata group, which had given birth to Air India, has gone all out to take its child back under its wing. A consortium of Air India employees has partnered with a Seychelles-based fund to bid for the airline, and budget carrier SpiceJet is also believed to have thrown its hat into the ring. 

However, there is a fourth player -- a veritable dark horse -- that may change the course the bidding takes, and even beat the goliath in the form of Tatas. 

That player is the US-based fund Interups Inc that says it is ready with Rs 13,500 crore to invest in Air India and plans to pump in as much as $9 billion in the Indian aviation sector over the next five years, according to reports in Moneycontrol and The Economic Times. 

An Air India Boeing 787-8 Dreamliner. Image courtesy: Wikimedia Commons/John Taggart

The fund invests in stressed assets and according to its chairman Laxmi Prasad, the company is already in the process of investing Rs 1,800 crore in another airline, the Economic Times report said.    

Interups Inc is a US-OTC (over-the-counter) listed organisation and has a market capitalisation of $28 million, according to Moneycontrol. Yet, it has not been able to win a single company so far despite bidding for several bankrupt companies in India like Lavasa Corporation, Asian Colour Coated Steel and Reliance Naval.

Interups has also offered Air India employees 51% stake in the consortium that acquires the airline without the need to invest any capital. 

Also read: Why Air India failed to sell twice before and what's working now

According to a Business Standard report, Interups is also planning to raise funds by splitting some its infrastructure-related assets into an aviation Infrastructure Investment Trust (InvIT), with the underlying assets in the form of air routes, ground-handling, repairs, training and so on. The firm also looks to cut the cash-strapped Air India's baggage by monetising the assets that come with the airline and overhauling the existing management structure. 

"We can monetise aircraft in the fleet through sale and leaseback and the money earned through it can be used to clear aircraft debt. We will monetise other assets too. We will need to fund the working capital, which can be arranged easily," Prasad was quoted as saying by The Economic Times. He plans to park Air India's assets in InvITs and monetise them, Moneycontrol reported. 

An InvIT is an investment vehicle that is created to hold income-generating and operational infrastructure assets like roads, power transmission lines and so on. These assets have long-term contracts and strong counterparties that provide a steady cash flow over the long term – typically 15-20 years, Live Mint explained. 

InvITs are a lot like mutual funds. The only difference is that instead of owning financial securities, InvITs own and manage real infrastructure assets.

Prasad pointed out that the Air India offer would not have been attractive in 2018, but the Covid-19 pandemic had sharply driven the valuations of aviation assets down across the world, making this the best time to invest. He was of the opinion that with passenger traffic growing exponentially and with Air India owning some premium landing rights across the globe, it is set to a top performer in the domestic and international sectors. 

The preliminary information memorandum (PIM) for the strategic disinvestment of Air India points out, "AI (Air India) is India’s flag air carrier with a significant market position in international and domestic operations. AI along with AIXL (Air India Express) has ~ 50.64% share of the international traffic to/ from India among Indian carriers and ~ 18.4% share including global airlines (ex India) as of Q2 FY20."

The two airlines together controlled around 12.7% of the Indian domestic market in Q2 of FY20. As on August 25, 2020, the two airlines together had over 150 planes in their fleets. While Air India Express flew entirely on the Boeing B737-800, Air India had a mix of wide-body Boeing aircraft and narrow-body Airbus aircraft. 

Also read: Air India employees bid for ailing carrier with Seychelles-based fund as partner

Air India covered 56 domestic and 42 foreign destinations as on November 1, 2019. It is member of the Star Alliance and offered 75 additional destinations through a secondary network of codeshare operations under 25 codeshare agreements (including those with 14 foreign Star Alliance carriers, 10 non-Star Alliance foreign carriers, and with Air India Express), the PIM noted. It carried 22.1 million passengers and had operational revenues of Rs 25,508.8 crore in FY 2019. 

Air India could end up having an owner that few expect. Image courtesy: Twitter/@aaiagtairport

Air India Express flew to 13 domestic destinations and 20 foreign destinations, predominantly in the Middle East. Unlike its struggling parent, Air India Express has been performing far better, even in this time of the pandemic. The budget carrier reported its highest-ever net profit of Rs 412.77 crore in FY20, according to a Hindu Businessline report. This is its fifth consecutive year of profit.

The two airlines also enjoy attractive slots at top domestic airports that are growth-constrained due to airport infrastructure issues, the PIM pointed out. This is a significant advantage compared to a new player, or an existing player looking to expand into the Indian aviation market, the PIM added. The two airlines also enjoy important slots at major foreign airports.

Interups had started as a tax practice and after the global financial crisis of 2008, moved into investing in gold as a tax-saving product. It currently has over 27,000 retirement assets customers. There is more than $1.8 billion under its tax advisory.  

Interups had attempted to take up AirAsia Berhad's 49% stake in AirAsia India for $50 million, but AirAsia India's majority shareholder Tata Sons turned the offer down as it held 'Right of First Refusal' on AirAsia Berhad's stake. 

After two failed attempts -- in 2000 and 2018 -- to sell its stake in Air India, the government is now seeking to fully privatise the debt-laden and loss-making national carrier, which has also made the headlines for various wrong reasons, from scams, mismanagement leading to a mountain of losses to employee unrest, unionised culture, red-tapism, poor adherence to safety protocols among others over the years. 

Along with a 100% stake in Air India, the government had also offered to offload 100% stake in the well-functioning budget carrier Air India Express and 50% stake in the ground-handling unit AISATS. The national carrier was put on the block on January 27, 2020, but the bid deadline saw repeated extensions in the wake of the Covid-19 pandemic wreaking havoc in the aviation industry throughout the world. The 2020 offer had been considerably sweetened as compared to the 2018 deal. It was further sweetened when the government allowed bidding on the enterprise value, instead of the equity value of the airline, giving the potential investors the flexibility to choose the amount of debt they want to absorb. 

Prasad had said that he had bid for Air India to safeguard the interests of the employees and his move is in the interests of the government and indeed the nation.   

If Interups succeeds to win Air India, it would be another story of a little-known entity taking control of an Indian aviation behemoth, after the consortium of London-based financial advisory firm Kalrock Capital and Dubai-based businessman Murari Lal Jalan gave the once-high-flying Jet Airways a new lease of life.

(Display image courtesy Wikimedia Commons/calflier001)