IndiGo's Air India buy will make sense only if it maintains 2 airlines, teams up with a global player

New Delhi: India’s domestic aviation market leader has expressed an “unsolicited” interest in picking up equity in Air India. IndiGo has shown its interest despite there being no clear roadmap for the national carrier’s disinvestment till now. And the interest has come right after the government made an informal proposal to the Tatas to buy Air India. The Tatas, lacking information on Air India’s financials and the extent of disinvestment, are still waiting to throw their hat in the ring. Now that IndiGo has jumped the queue and expressed its interest, it is clear that the Tatas would have a competitive bid, as and when Air India invites bids for disinvestment and if the Tatas are still interested in it. An official close to developments said that IndiGo, already a domestic market leader with some international presence, is ideally placed to acquire Air India. “It has a narrow body fleet and is soon going to acquire an ATR fleet. With Air India, not only will IndiGo get undisputed leadership in domestic operations at over 50 percent market share, it will also get the numero uno position in the international market where Air India is the biggest with about 17 percent market share”. The only catch, this person said, was if IndiGo decides to keep the low cost and full service models entirely separate, as two individual entities. But how will it manage the multiplicity of fleet types? Remember, the IndiGo leadership has forever stressed upon the single fleet type of the airline when asked about its consistent low cost operations. An IndiGo spokesperson declined to comment. [caption id=“attachment_3759019” align=“alignleft” width=“380”]  Reuters[/caption] But global aviation consultancy CAPA said it was “surprised” with IndiGo’s unilateral expression of interest when the airline does not yet know the details and the deal structure. It said that given IndiGo’s unprecedented expansion plans and the fierce competitive environment in a structurally challenged industry, bidding for Air India will be a “strategic mistake”. “IndiGo’s unrestricted cash position is in line with its liquidity requirements and won’t be enough to bid for Air India, unless promoters dilute their own stake, which is unlikely. However, a new entity created for Air India’s bid, which potentially partners with a foreign airline and is legally and operationally separate from IndiGo, will make it a different case,” CAPA said. So essentially, IndiGo will need to do two things to make an acquisition of Air India work: strictly keep the full service and low cost airlines separate and perhaps take a foreign airline as a partner in its bid for Air India. Will Qatar Airways, which has been keenly interested in partnering IndiGo, play ball? On its own, Qatar Airways has also been circling the Indian market trying to enter India now that 100 percent foreign owned airline is a possibility under the new FDI dispensation. IndiGo has been one of the most aggressive and successful players in the Indian aviation sector with an unbeaten track record of profitability. It has 430 Airbus A320 Neo aircraft on order from FY17, the highest among all Indian airlines. IndiGo is the only airline which has been consistently profitable in a market where almost every other airline has seem red ink splashed all over the balance sheet. The surprise expression of interest for Air India comes when India’s domestic air passengers market grew 17.6 percent year on year to cross the 10 million mark in May; passenger growth has been in double-digits over the last 34 months. In this market, IndiGo’s passenger growth was 25.6 percent in May, far higher than industry growth. IndiGo is obviously betting on Air India in a bid to get certain monopoly, at least in the domestic market though it is still the market leader by a wide margin. Of late, though, IndiGo has been throwing up surprises. A few weeks back, it suddenly announced the decision to get ATR72 aircraft to participate in the government’s ambitious regional connectivity scheme (UDAN) when all along, the airline’s management has maintained that single fleet is its credo. Only IndiGo seems to have any capacity for this audacity though. CAPA said other domestic airlines (apart from IndiGo) don’t have the balance sheet or the resources to bid for Air India. But what about the Tatas, the original owners of Air India with a deep emotional connect to the airline and who had earlier, twice tried to buy a stake in Air India? The source quoted above said that after the tentative exploring of interest by the government, the two sides have not met again. The Tatas seem to be clear that they will bid for Air India only after the government lays down some rules: Will it disinvest majority equity to a private partner or exit the airline fully; what is the fate of the airline’s huge debt and how much is the government willing to write off; are foreign airlines barred for bidding for Air India. In one of its suggestions, CAPA has said government will have to take close to $9 billion or almost Rs 58,000 crore (at current exchange rate) haircut to make Air India attractive for prospective buyers. Will the government be willing to wrote off the entire debt on the airline’s books? “Post the balance sheet clearup (we) expect significant interest in Air India. We expect the government to ensure the disinvestment process is ring fenced from vested interests ( as it happened in 2002/03), foreign airlines are allowed to invest up to 49 percent and not barred…. independent assessment on Air India’s assets and liabilities is carried out as this is critical to take decisions. Most importantly, the process to structure SPVs (special purpose vehicle) for transferring non-aircraft debts and assets shouldn’t consume the final outcome,” CAPA said.