Valuing Air India
There has been ongoing serious debate about the proposed strategic sale and the valuation of Air India. The Finance Minister has stated that Air India will be up for strategic sale by March 2020. There arises a problem out of the strategic sale: How do you value an Airline which has so many intangible assets acquired over the years such as slots, codeshare agreements and bilateral entitlements. Has the government really considered the valuation of these intangible assets. In this article we would focus on slots and how they are valued with special reference to Air India
A slot is defined as ‘permission to use the full range of airport infrastructure necessary to operate an air service on a specific date and time for the purpose of landing or taking off’. That includes not just the runway but the terminal building, the taxiways, parking stands and departure gates. All airports are categorized by the International Air Transport Association (IATA) as Level 1 (non-coordinated airport), Level 2 (slot facilitated airport) or Level 3 (coordinated airport).
The national airline has 3,739 domestic slots and 2,543 international slots available per week as on December 31, 2017. In the Gulf and Middle East region alone, the carrier has around 280 slots available at various airports, including Abu Dhabi, Jeddah, Tel Aviv and Muscat. During the same period, Air India Express had 555 slots at different domestic and international airports.[i] Air India has many such international and domestic slots. How much are these slots worth?
Trading slots
Airlines are allowed to sell their slots if they no more use them. Airline slots are worth a huge amount of money. Heathrow slots are worth huge amount of money, highest value being for early morning and lunch time departures. In 2016, Oman Air has purchased a slot for a record price of $75 million from Air France/KLM. Air India, on the other hand, has approval and continues to hold four daily slot pairs at London Heathrow. They fly the following flights with these slots:
· 1 BOM-LHR/LHR-BOM using a Boeing 77W daily
· 2 DEL-LHR/LHR-DEL using a Boeing 787 daily (one to be swapped to a 777 in January 2020)
· Four times a week AMD-LHR/LHR-AMD using a Boeing 787
· Three times a week BLR-LHR/LHR-BLR using a Boeing 787[ii]
Also, Air India holds many slots at Level III airports which include Heathrow, Birmingham, New York JFK and Washington which value.
With the existing slots Air India can either raise the money through bond sale or leasing the unused slots. Recently, Virgin Atlantic has raised £220 million (Rs. 2000 crores approx.) through a ground-breaking bond sale secured against its take-off and landing slots at Heathrow.[iii] Also, Air India can lease the unused slots at the existing market rates. [iv]
The pertinent question remains “Has the government considered the valuation of these slots?”. The type of auction which is proposed is first price sealed bid auction wherein the Transaction Advisor receives bids in sealed envelope and the highest bidder is declared the winner and must pay the bid amount to acquire the firm. Under collusion of the bidders as well in the case of conflict of interest with the transaction advisor Air India could be highly undervalued and Air India could be sold at loss. Instead the government could go Share Issue Privatisation(SIP) which is quite common over the world. Share Issue privatizations(SIP) is the offloading of equity stakes to the public either in stages or in a lot. The benefits of this equity route include fair pricing , superior valuation and increased market capitalisation.
[i] https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/air-indias-over-6200-slots-for-flights-could-be-a-key-attraction-for-bidders/articleshow/63534783.cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
[ii]https://blog.virginatlantic.com/heathrow-slots-the-insiders-guide/
[iii] https://www.iaireview.org/scheda_legal.php?idl=2206
[iv] https://simpleflying.com/jet-airways-old-heathrow-slots-lease/