A steady line-up of potential investors of the avian kind have been on the India circuit for the past two months. International airlines and aviation-focused global funds are doing the rounds of Mumbai, Bangalore and Chennai to ‘look at’ Kingfisher Airlines, Jet Airways, SpiceJet and Go Air. All the four desperately under-capitalized carriers have been waiting for fresh investments for several years. The government decision to allow FDI by foreign airlines was the turning point of the year.
Even as they waited for the decision, the first three had notched up losses that run into millions of dollars while the last has been able to stem the red only by limiting growth. A chat with some of these investors gives an insight into expectations of the amazing entrepreneurs who own and control India’s airlines. Most of the conversations were off the record, but I have tried to piece together a status report on the negotiations. Every comment was corroborated by more than one investor. Not surprisingly, in each of these cases, it is not the airline board or professional management, but the owner who is setting the ground rules. Despite going through a bruising couple of years, each of them has set high expectations- in fact everyone (except Vijay Mallya) is holding out for a 50% to 60% premium on current price. This is probably why no deal has been done yet. But there has been a steady stream of interested parties keeping investment bankers like Edelweiss Capital (acting on behalf of Kingfisher Airlines) busy. By all accounts, 2013 is likely to see a complete reorder of airline ownership in India.
Here’s a gist of what each of the Indian airline czars has at stake-
Naresh Goyal, 9W
On offer- A stake in a network carrier with 101 wide and narrow body planes and market share of about 27%. Access to a network spanning 74 destinations (21 international)- 9W flights connect one city every five minutes. A strategic investor (like a Gulf carrier) could get immediate access to dozens of Indian cities.
Negotiating points- Goyal willing to divest only up to 24.9%, and is offering one board seat. Will not give up operational control. Huge debt of $2.3 billion and a confused model that is not fully low cost. Price a sticking point too.
Vijay Mallya, IT
On offer- Equity stake AND operational control of a full-service network airline. Albeit one that is currently suspended and operating license on the verge of being cancelled. Has a fleet of about 30 aircraft in India (number dwindling every week) all Airbus A320s and ATR 72 turbo-props. Has slots and an presence at various airports and about 4,000 employees still on the rolls. Still has goodwill among some passengers. Can be revived if the re-capitalised. Offers a strategic investor access to the Indian markets.
Negotiation points- The key point is the $1.46 billion debt. A lot hinges on whether (to what extent) lenders will renegotiate this and/or the interest rates. Investors are looking for write offs and a five to ten-year moratorium on payment. Mallya is unable to promise any of this. If the new investors take 48%, his stake falls to below 30%.
Concern also about the investments needed to get the (grounded) planes back in the air. They estimate maintenance cost of at least $1m per aircraft. Most have been canibalised to get other aircraft back to their lessors.
Kalanithi Maran, SG
On offer- A smart, low cost carrier with a fleet of 48 Boeing 737 and Bombardier Q400 turboprops. Margins improving and lower operating costs compared to the other airlines in the fray.
Negotiation points- Price, price and price. Maran and the Sun group are clear that future growth in India and the region will be mostly in the LCC space. The airline is evaluating a huge fleet expansion plan and needs capital to be able to do this. He is not willing to sell cheap.Most likely of all the four airlines, to go for a financial investor rather than a foreign carrier.
Jeh Wadia, G8
On offer- A small fleet of 13 A320s operating to 22 destinations in India. Has applied for permissions to start international operations, like the other larger LCCs. Debt in control because of smaller scale of operations. 73 planes on order, including the fuel-efficient A320 Neos, can scale up quickly.
Negotiation points- Price and control. Nusli and Jeh Wadia are clear that the business is not very scalable in the current high-cost environment that India is. Will sell only at the right price. Plan is to start with a partnership going up to a complete bail out.