New Delhi: IndiGo is interested in acquiring Air India’s international operations and turning them into a low cost model followed by some international airlines on long haul routes. When the founders of India’s largest domestic airline said this on a conference call with analysts this evening, it was clear that the portly Maharaja - Air India's famous brand icon - as we know it will cease to exist if IndiGo were to buy a part or even whole of Air India’s airline operations. Brand Air India, long known for full service operations – with all the bells and whistles like complimentary meals, frequent flyer programmes, airport lounges etc on foreign as well as domestic routes – will likely have to be completely rebranded as a low cost, long haul airline.
IndiGo Founders Rahul Bhatia and Rakesh Gangwal also made it clear during the call that they were primarily interested in Air India’s international operations, that they would not want to take on debt other than the working capital loans and they wanted the government to completely exit from Air India (international operations or international plus domestic operations) if they were to buy the airline. Air India has about 17 percent share of India’s international air traffic, or not even a fifth.
“We won’t continue to operate the same way (international operations of Air India). We will redo whatever was being done before…..there will have to be fundamental structural changes and we will have to make investments in acquisition plus refocusing (the business). We will try and offset this against the revenue we expect to generate and difference should be by a wide margin,” Gangwal said.
Both Bhatia and Gangwal emphasized the importance of launching low cost international operations for IndiGo, saying this would be done with or without Air India. The duo also reluctantly said that in case the government did not offer just the international business of Air India but the entire airline, they would consider the offer. But it was clear that IndiGo’s eyes are firmly set on acquiring Air India’s wide body fleet, its lucrative flying rights, slots at congested international airports and then running a low cost operation of it all. It doesn’t seem to be salivating at Air India’s domestic business, which is also known to be high cost and inefficient though it is an intricate hub-and-spoke model offering unmatched connectivity.
Remember, Bhatia and Gangwal have made their plans clear today even though there is no clarity from the government’s side on whether it will at all consider breaking up Air India into parts to suit the buyers’ interests. As of now, IndiGo is the only known bidder interested in Air India – there may be others but their names have not been made public. The Tata Group, which was the first party sounded out by the government when it decided to sell off Air India, has not yet indicated this way or that whether it would be at all interested in buying a piece of the airline it had promoted initially.
Here’s what Bhatia and Gangawal said:
1) India’s international air traffic has some of the largest untapped potential anywhere in the world since air traffic hubs reside in near-by countries like Dubai, Abu Dhabi, Doha, Singapore, Bangkok. Even London, Paris and Frankfurt – not near enough to India geographically – have developed hubs based on India traffic but our own airports have not been able to derive benefits from India’s overseas travelers. IndiGo would get entry into some closed international markets besides many other lucrative routes on Air India buy. The international business of Air India that IndiGo is eyeing resides in the main airline as well as subsidiary Air India Express. This leaves the domestic operations, other subsidiaries like Alliance Air, engineering and ground handling subsidiaries etc.
2) IndiGo is not willing to take on the entire debt of Air India, which stands at over Rs 50,000 crore. But it could take over debt associated with working capital of the international operations, lease commitments and employee costs. Gangwal said this would then also be accompanied by cash already generated by Air India for future ticket sales. Additional working capital would be raised but not be leveraging the balance sheet – Gangwal said any additional working capital requirements would be funded through internal accruals and anyway, these wont be “anywhere near” what Air India has been needing in the past
3) Another thing which became clear from the concall is that whether the government sells Air Indi by breaking it up into parts or by asking any bidder to take the core flying operations including domestic, IndiGo would want the government to exit completely. It is not interested in entering a joint venture with the government remaining in Air India either as a majority or even a minority shareholder. Complete ownership to turn around the Maharaja to the IndiGo structure.
4) Gangwal sought to allay widespread fears of a large scale retrenchment/sackings at Air India, saying “it is dead wrong an idea” when asked if Air India can be successful by laying off employees. “We will make changes to the employee structure and bring in the IndiGo culture…..if I were an Air India pilot or frontline employee, wouldn’t I want a successful, profitable airline?” An analysis by ICICI Securities’ Anshuman Deb last week said Air India’s employee costs were 12 percent of its overall cost structure in FY15 and FY17, similar to IndiGO’s at 11 percent. “The key takeaway is that the operational cost structure of Air India (ex-debt servicing and depreciation) has already seen a turnaround, while there is significant scope remaining to improve, especially on items like landing charges, maintenance and other expenses. A lot of these costs emanate from sub-optimal route network and sub-optimal fleet deployment. Further operational efficiencies can be achieved from improving the passenger load factor (PLF) and on-time performance (both lowest among big airlines),” Deb noted.
During the call Gangwal also noted wryly that the entire selloff process could take anywhere between 12-18 months while repeatedly pandering to the nationalistic sentiments by referring to foreign airlines creating hubs abroad which were benefitting their respective countries, not Indians. He also did not forget to mention that if a foreign airline were to bid for Air India, then too the eventual scenario will play out to India’s disadvantage since that airline will again create hubs in its own domestic market.
As of now, the government has merely demonstrated its willingness to look at offloading stake in ailing Air India: The Cabinet has given its in-principle nod to the stake sale and a group of ministers has been constituted to look into it. With IndiGo jumping in that early in the race, when others may still be mulling their options and when even the seller is not clear in what form will Air India be offered, has it got any distinct advantage in the race? Only time will tell.
Updated Date: Jul 06, 2017 20:23 PM