The Air India deal: What's likely to attract potential suitors

There are at least six compelling reasons for its rivals to consider making a strong bid for India's flagship carrier

The buzz around the Air India privatisation plan is getting stronger by the day. So far, no data room has been created for potential bidders to make their own assessments. Yet a range of airlines — domestic and international — have already expressed their interest in making a bid. Based on media reports, there are at least three sets of suitors: Tata-Singapore Airlines, Jet-Air France-KLM-Delta, and IndiGo-Qatar. After Delta’s name surfaced, the two other major US carriers, United and American Airlines, have apparently also begun sniffing around.

Exactly how many of them will emerge as serious bidders will be known once the bidding process is announced later this month. As it tends to happen, a strong line-up of suitors will most definitely have an impact on the size of the bids. And therefore, the government is hoping that it is a case of more the merrier.

So the question to ask is what makes Air India an attractive acquisition for each set of bidders? After all, how seriously they eventually bid for it will depend on just how critical the deal is for their long-term strategic interests. Here are five factors that will drive interest among suitors:

1. India has emerged as one of the fastest-growing domestic aviation markets in the world. The country is now the third-largest domestic market, behind the US and China, in terms of its air traffic. According to IATA’s 20-Year Air Passenger Forecast•, Asia Pacific will be the biggest driver of demand from 2016 to 2036, with more than half of the new passenger traffic coming from the region. That alone will raise the stakes for any airline with global ambition.

2. Despite the huge growth potential, the airport infrastructure is severely cramped. Most major airports are operating almost at full capacity. And therefore, growth will be restricted. Look at what that means for a three-year-old airline like Vistara. As a late entrant, it is unable to expand because Mumbai, Delhi and Bengaluru airports do not have slots available during the peak hours. Between IndiGo, Jet and Air India, they have bagged most of the morning and evening peak-hour slots. And one of the major shifts that has happened in recent years is that the majority of passengers now travel on work. And for them, convenient timings combined with low fares — and the opportunity to return to base that same evening has become a critical determinant of which airline they choose. So without acquisitions — be it Air India, GoAir or even SpiceJet, there is no way that Vistara will be able to break into the belly of the market.

3. The constraints aren’t just in airport infrastructure. Both engineers and pilots are in short supply. As a result, IndiGo ends up sending its aircraft to Sri Lanka for maintenance. Air India’s in-house engineering team and its maintenance, repair and overhaul subsidiary will be seen as valuable assets to own. Also, IndiGo would be concerned about the rising attrition among its roster of 2,200 pilots. Some of them end up joining the Gulf carriers and see it as a logical career progression. They get to fly wide-bodied aircrafts on longer-haul international flights. Whereas flying short-haul means pilots typically have to usually work a gruelling 6 days a week.

4. Given India’s strategic location in Asia and its large, growing outbound market, there is every reason for both Singapore Airlines and Delta to bid aggressively. The capacity utilisation of Singapore’s large fleet of wide-bodied A380 aircraft and pilots have been hit ever since Emirates struck a partnership with Qantas. Passengers flying out of Sydney or Melbourne in Australia en route to Europe had the option to use the Emirates hub in Dubai, thereby bypassing Singapore. For Singapore, Air India could offer them an opportunity to deploy its A-380 fleet to the US and Europe, using Delhi or Mumbai as a hub. The Gulf carriers have simply dominated the traffic from India to the US and Europe, using their hub in Dubai and Abu Dhabi. For Delta, this will be a smart to team up with a local partner like Jet and KLM-Air France in Europe to snatch back the initiative.

5. Air India’s domestic network, covering almost 55 destinations, offers a formidable advantage in tapping the growing demand from tier-II and -III markets and funnelling some of it for its international network. However, for IndiGo, it could lead to larger questions about a domestic monopoly situation, given that its combined market share could be around 53 per cent.

6. Finally, Air India Express, its low cost carrier, has done well so far to tap the traffic from the Gulf and South East Asia from its HQ in Kerala.

The terms of the deal aren’t yet available. And the devil will be in the details, especially the airline’s past liabilities. But, on balance, when the government invites expressions of interest, it is more than likely that suitors will line up for a chance to take a good look at India’s flagship carrier.

The writer is co-founder at Founding Fuel