The real value of all Indian airlines put together: Re 1

It was once believed that the bumblebee was not designed to fly, since it apparently did not have the necessary aerodynamics (wing size, body shape and size) to do so. This theory has since been disproved, but the same cannot be said about Indian aviation.

Indian aviation has even less reason than the bumblebee to fly. With humongous debts, high costs structures and unviable business models, they have been trying to compete on fares - and have largely failed.

Despite the recent bit of false cheer in the markets due to the return of Jet Airways and SpiceJet to profitability in the first quarter of 2012-13 (Q1, April-June), the fact is even with Kingfisher down (but not quite out), and Air India flying on a wing and a prayer (after the pilot strike's after-effects), neither airline actually made a real profit without sharp financial engineering.

In the case of SpiceJet, the airline wrote-in many extraordinary items as current income - among them warranty claims of Rs 12.9 crore, a one-off sale-and-leaseback deal worth Rs 39 crore - but failed to account for some interest costs and foreign exchange loan exposures. According to Mint, excluding these items, the airlines would have been in the red - though not by much. Instead, the airline reported a profit of Rs 56 crore in the quarter ending June 2012.

If India's airlines cannot make a decent profit even when two of the six main airlines are down (Air India and Kingfisher), it indicates that the business is fundamentally unviable.AFP

In the cast of Jet, the profit of Rs 24.7 crore is overshadowed by a sale-and-lease-back deal that brought in more than twice as much - Rs 52.4 crore. The plus sign at the bottomline also had much to do with not providing for foreign exchange losses of Rs 288.7 crore, reports The Economic Times.

Clearly, if India's airlines cannot make a decent profit even when two of the six main airlines are down (Air India and Kingfisher), it indicates that the business is fundamentally unviable. Naresh Goyal, boss of Jet, told ET as much: "investors want the fundamental problems of the sector to be resolved first and they are watching the sector closely."

One metric explains it all even better. Collectively, the Indian aviation sector has loans of over Rs 1,10,000 crore, according to a Reuters report. But their market worth is probably only a fourth (or less) of that.

While it is difficult to value companies like Air India, IndiGo and Go Air, since they are not listed, it is easier to do it with Jet Airways - the market leader by a whisker.

The full market value of Jet is Rs 3,264 crore - while its debt is Rs 13,775 crore. If anyone wants to buy Jet Airways, Naresh Goyal should be willing to sell at Re 1.

Air India's debt is Rs 67,000 crore - which again means the government should be more than willing to sell for Re 1, if only the unions and politicians will allow for this.

As for Kingfisher, no one in the world with his head screwed right should be willing to buy it even for Re 1, for against a debt of over Rs 7,000 crore, its current market valuation is Rs 759 crore. That's 1:10.

The market valuation of SpiceJet is Rs 1,576 crore and it is possibly the only airline with a lower debt load that it can carry. The reason is that it has not opted to buy too many aircraft, and, as the June quarter sale-and-leaseback deal shows, it is selling whatever it does own to show a profit.

IndiGo may be the exception to this rule, but we don't know if it really has a superior balance-sheet till we see it.

The reasons for this state of affairs are well known: high fuel costs, poor business models, a premature flight to lower fares without low-cost airport and other infrastructure, and low equity investments by the promoters. This is why they are drowning in debt.

Jet Airways has a net worth (equity plus reserves) of Rs 1,180 crore largely because it had offset its negative reserves of Rs 625 crore with Rs 1,720 crore of revaluations. Its liabilities exceed its assets, and it badly needs an equity infusion to make debts manageable. Bringing in equity means selling his stake effectively for Re 1.

India has already lost the game in aviation, and the entire aviation industry - at least the known parts which are listed or in the public sector - has been destroying value consistently.

We can sell Air India, Jet, SpiceJet and Kingfisher for Re 1 and still feel pity for the person who shells out that rupee.

There are only two ways to rescue Indian aviation.

One is to allow one or two of our airlines to shut down - so that the rest can survive. The other is to treat it like Indian railways, where we accept that running unprofitable airlines is a social good and forget about the losses. But the government is in no position to do this.