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Tata group hints may withdraw from Air-India bid

The Tata group, which has bid for a strategic stake in Air-India in tandem with Singapore Airlines, is now hinting it will withdraw, leaving no takers for the money-losing airline.

"There is definitely concern in our minds on the kind of value we have in mind and the numbers floating around," a senior Tata executive said.

"The airline is just not as valuable as it is perceived by most people. If our valuers continue to get such signals, we'll just have to see what do to, go ahead or not?"

But some analysts suggested the consortium of the cash-rich Singapore Airlines and the Tatas, India's second-largest industrial group, could be hoping to drive down expectations of how much the stake sale will fetch, analysts said.

The Indian government plans to sell 40 per cent of the airline to a strategic partner, 10 per cent to employees and another 10 per cent to the public and financial institutions. Estimates of Air-India's total value span a huge range, starting from $2.13 billion to a conservative $500 million.

Arun Shourie, the minister in charge of privatising state-run companies, recently said that the government will be forced to abandon the sale if "vested interests" continued touting unrealistic valuations for the airline.

The Tatas said they too were concerned about rising expectations, while Singapore Airlines has been silent except for releasing a terse statement on August 2 confirming it was still in the race but had not submitted a final offer.

"The figure of Rs 100 billion quoted by opposition lawmakers is quite ridiculous," said an analyst with a global investment bank.

Air-India's woes

Air-India owns a fleet of just 23 aircraft, with four more on lease. It flies to 34 foreign destinations and 11 domestic cities.

Unable to invest in new aircraft, the loss-making airline's market share has slipped to just 20 per cent of India's international traffic of 4.8 million passengers a year.

Air-India has posted losses for six years in a row and is saddled with debt of Rs 3.3 billion.

Its bloated workforce of 650 employees per aircraft -- compared with the global average of 350 - is backed by eight labour unions, which have said they support privatisation but will fiercely oppose job cuts. India's stringent labour laws also make firing permanent employees difficult.

Furthermore, the Indian government will continue to hold at least 40 per cent of the airline. Analysts said this could also lower the airline's value, in particular because India's left-leaning civil aviation minister Sharad Yadav is unlikely to be a sleeping partner.

He sacked Air-India's independence-seeking managing director in June amidst wide-spread criticism, and believes India's airlines should operate on a socialist "no-profit, no-loss" principle.

Main value

Air-India's main value lies in its bilaterals or flight entitlements, according to industry analysts. But with its limited fleet, Air-India is able to use just 20 per cent of India's entitlements from air pacts with other countries.

The long-haul carrier has either loaned its bilateral rights to other airlines like Lufthansa and Virgin Atlantic, which are eager to grab a bigger share of the growing Indian travel market, or entered into code-sharing agreements with other airlines to increase its network.

For instance, it has done so with Malaysian Airlines and Singapore Airlines for taking passengers to the US west coast.

Air-India also owns substantial real estate, which can unlock shareholder value in future, and the government's plan to sell Air-India's hotel chain subsidiary to retire part of its debt are at an advanced stage, officials said.

"Air-India is sitting on a potentially good market," said the representative of a European airline. "The key word here is potential. It should expect a reasonable price but not a good one."

The privatisation ministry is also aware that any bidder would be concerned about the government continuing to meddle in the affairs of the airline on the strength of its high stake.

"We are open to the idea of Tata-Singapore Airlines increasing its ownership of Air-India to 49 per cent once they get the 40 per cent," privatisation secretary Pradip Baijal said. "They can come out with a rights issue to raise their stake."

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