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Hidden assets lure big suitors to Air-India

When bids closed for a juicy 40 per cent chunk of state-run Air-India last week, some of the world's biggest aviation names were in the queue.

On the face of it, the loss-making international airline with its restricted network and small fleet is not a buyer's delight.

But analysts say the landmark privatisation could provide Air-India's suitors a strategic regional hub, a foothold in the huge and growing Indian travel market, a popular brand name, crucial bilateral flying rights and less visible assets like real estate which could unlock value.

Singapore Airlines, in tandem with India's Tata group, Dubai's Emirates, and Air France in league with Delta Airlines lined up to play the role of a strategic partner to the Indian government in Air-India.

Big airlines apart, the Hindujas, the Britain-based expatriate Indian family, and another expatriate tycoon, steel billionaire Laxmi Niwas Mittal, have also joined the race.

British Airways said that it would only be a technical adviser to the Mittal-led bid.

A wild card bid came from the Indian Pilots' Guild.

The quality of the suitors surprised many, because Air-India has racked up losses totalling Rs 10 billion ($214 million) and Rs 38 billion in debt.

Valuations of the airline's assets or the price tag on the portion that is up for sale were not available from analysts or the government. The government has said that it wants to see the bids first for the portion offered for sale.

Analysts say there are several factors luring the airlines.

Emirates, which already has a 40 per cent stake in neighbouring Sri Lankan Airlines, will achieve a dominant position in South Asian skies if it wins a stake in Air-India.

Similarly, for Singapore Airlines, it makes sense to treat India as a regional base for East to West traffic.

A regional hub would be of extra value for Singapore Airlines, which made a vain attempt to break into the domestic airline market in alliance with the Tatas in the mid-1990s.

A hub in South Asia would be equally attractive for Air France, which already shares a loose alliance with Air-India with mutual aircraft parking rights and code shares.

"Singapore Airlines or Emirates can use India as a regional hub for feeder traffic. It is ideally suited geographically to play that role," said Savio Gomes, chief executive officer of Enterprise Value Enhancement, a Bombay-based consultancy helping the union.

Bilateral rights a big draw

The Indian carrier's unused bilateral rights also form a valuable asset, say analysts.

Air-India's current rights allow it to fly to 96 destinations though it flies to just 19 because its fleet has no more than 23 aircraft.

Though international conventions may not permit an investor airline to use these rights on their own, the flight entitlements can be used to achieve a turnaround for Air-India.

The bilaterals can also be loaned to others, as in the case of Virgin Atlantic Airways which has borrowed Air-India's unused traffic rights to break into the profitable India-UK sector.

World travellers boost market

The growth in the Indian market is another big attraction for Air-India's suitors.

The number of international air travellers from India has been growing at 8 per cent every year, despite an economic slowdown which saw domestic traffic stagnating.

India's reforming economy is leading to growing business links abroad and leisure travel to foreign destinations.

The booming software sector, which sends out 80,000 professionals every year to the United States alone, accounts for a huge chunk of travellers.

"There is a lot of interest in India's civil aviation sector and investors have been waiting for it to open up," said Manish Jain, assistant vice-president with SBI Caps advisory services, which has the Hindujas' mandate to study the state-run airline.

Foreign airlines such as British Airways and Lufthansa have been clamouring for more flight entitlements and landing rights in India.

Lufthansa, its planes full and stuck at 15 weekly flights to India, has been asking for an increase to 21 flights.

"The reason why foreign airlines are so interested in Air-India is because it represents a big market," Air-India spokesman Jitendra Bhargava said.

Besides these factors, Air-India is sitting on assets like real estate and aircraft maintenance and engineering facilities which are expected to be valued by J M Morgan Stanley, the global advisers assisting in the airline's sale.

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