What went behind the sale of Air India?

Forum Gandhi Mumbai | Updated on October 21, 2021

Daily meetings, roadshows, responding to over 200 questions contributed to the success of Project Royal

A team of over 20 national and international aviation experts, answering more than 200 written questions from investors and daily meetings for over 365 days is what went behind concluding the successful sale of Air India to Tata Sons.

The Tata Sons recently purchased Air India and its allied assets for over ₹18,000 crore. This was the government’s third attempt to divest the debt-strapped national carrier.

Sources close to the sale process, codenamed ‘Project Royal’, told BusinessLine, the government was determined on selling Air India, after two unsuccessful attempts. “After the disappointment of the second round, the very next morning we were sitting across the table to discuss what went wrong and what needs to be changed,” the source said.

Investor reservations

In the previous round, the government was holding back a 24 per cent stake in the airline, “this did not go well with the investors,” he said.

The other thing that pinched investors was the issue of debt on Air India’s books. “If your debt is oversized then equity value can never be negative. Equity value can be zero at the most, it can never be negative. If your debt is oversized or becomes oversized later, you may right-size it now, but later by the time the transaction goes through, it becomes oversized again and your transaction fails,” he said.

“Various investors were looking at operational flexibilities in the previous rounds and the government was not so forthcoming at that point in time. So, this time round, the government gave almost complete freedom to the incoming owner,” the source said.

A team of over 20 national and international investment bankers, with expertise in aviation were appointed. EY was appointed as the exclusive investment advisor.

Emphasising assets

The government held multiple roadshows to showcase the rich assets that the airline brought with it. “We did a lot of roadshows globally, and in India. We convinced investors on the benefits of the airline,” the source said.

There was a huge misconception among investors about the risks, “We didn’t deny any of those misconceptions. We did extensive diligence, we facilitated an extensive information flow and management meetings over several months. Then we came out with detailed documents where everything was laid out in front of bidders. So, there was no scope for unpleasant surprises later on,” said another official who was part of the negotiations.

Another issue that was being seen as a liability was the employees. “It was very wrong of people to think that the employees were a liability, because these are trained pilots and crew who have worked for the company for years. Not only that, these pilots and engineers are trained on wide-body aircrafts and in India, there are very few airlines that could utilise such skill,” the source said.

A plus point that worked for the airline was its sheer fleet size. Today, Air India has 141 state-of-the-art aircrafts, which are well-maintained. “Air India is 70 to 80 per cent of the revenue from offshore operations,” the source said. Not only that, it has the best in class network and prime slots, along with bilateral.

Over the past several years, the Tatas have infused thousands of crores in its existing airlines, Vistara and AirAsia. The Tatas understand that the aviation industry needs that cash burn. “The investor had a choice, to start a fresh airline, expand its existing airline and burn cash or take over the 141 aircrafts with the routes and the network, and make a quicker profit at lesser cash burn. Obviously, the Tatas understood that the pace it needed to expand Vistara was not possible, without another few years of cash burn,” said the first source.

Published on October 20, 2021

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