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Debt-heavy Indian Airlines likely to angle for IPO at a premium

Amberish K Diwanji in New Delhi

The Cabinet Committee on Economic Affairs' decision to infuse funds into the cash-strapped Indian Airlines is part of a move to ensure that as and when the company brings out its initial public offering or IPO, it will be at a premium.The airline, with assets running into billions, has an equity base of just Rs 1.05 billion while its debt amounts to Rs 24.17 billion. This, thus, give an awful debt/equity ratio of 22.5 to 1.

"The airline just needs a cash flow to reduce its debt and increase its equity. This becomes particularly crucial since we are supposed to go to the market. Today, will the public put money into the company if the government hesitates?" asked an Indian Airlines official.

As per the Kelkar Committee report, on the basis of which the government plans to divest its holding in Indian Airlines, the IPO will be made in phased manner and the first offering was scheduled for the second half of 1999-2000. "This does seem unlikely given the political upheavals, but it will not be delayed much further," said the official, who stressed that the Kelkar Committee report was a wonderful road map for the airlines' planned divestment.

Moreover, as per the guidelines of the Securities and Exchange Board of India, a company must show a profit for three consecutive years, or at least show profits for two years with the third year also showing the same trend, if it wishes to charge a premium for its shares.

"Indian Airlines profits for 1997-98 were (Rs) 472 million, and for 1998-99 it was (Rs) 105 million. The same black margins will continue," the official pointed out, adding with such profits and low equity, the earning per share is enviable!

As per the Kelkar Committee report, the government should reduce its holding to 49 per cent, Indian Airlines employees should hold 10.6 per cent, and the remaining 40.4 per cent should be with the public.

"The offering to the public will be in phased manner to ensure that the share price remains high. Initially, the airline might offer 20 per cent to the financial institutions, and the remaining would be put on the block later," said the official.

As per the Kelkar Committee report, if 20 per cent shares are sold at Rs 30 per share, the airline could rake in Rs 7.6 billion. And with the CCEA's move to infuse Rs 3.25 billion, the airline's equity base will go up to Rs 4.3 billion.

For the narrow profit margins and huge outstanding debts, Indian Airlines is holding its head high, unlike India's international carrier, Air-India. The company's losses amount to Rs 5.72 billion, accumulated over the past six-seven years, especially since the infamous decision to ground the Airbus A320 on February 14, 1990. However, on the other hand, the company holds reserves of Rs 5.47 billion.

"Moreover, our assets are truly fantastic," pointed out the official. "Indian Airlines has a booking office in every major and not-so-major city of India, a legacy of the socialist days, when the airline was expected to serve the nation's nook and corner. Most of these offices, acquired decades ago, are located in the heart of the cities and worth billions."

While some quarters have criticised the caretaker government for going ahead with the decision to divest from Indian Airlines, the official pointed out that time was of the essence. "There are two factors that need to be kept in mind. First, many aircraft have to be phased out by the years 2002-03, and second, that air traffic is not growing as was anticipated," said the official.

Indian Airlines today has a fleet of 53 aircraft, 51 owned and two leased. The breakup: Airbus A320 -- 30, Airbus A300 -- 11 (of which two are leased), and Boeing 737 -- 12.

Except for the A320, the remaining 23 aircraft have to be phased out since they would have crossed the 20-year mark. For Indian Airlines to maintain its current leadership position in the country, it will have to at least maintain its fleet strength. It, therefore, has to plan on buying new aircraft very soon and for which, funds will be required.

The second factor is that air traffic has stagnated. In 1987-88, the monopoly Indian Airlines carried 10.4 million passengers while in 1998-99, Indian Airlines, Jet and Sahara combined to carry only 12 million passengers. "That means in 11 years, only 1.6 million more passengers despite the fact that the GDP has been growing in all these years," said the official.

In fact, any transport sector growth is always over and above the GDP, usually by 1.5 per cent. Certainly this does not apply to Indian skies. The Indian Airline official has a personal opinion for the virtual stagnation in air traffic growth.

"In India, it must be remembered that over 99 per cent of air travellers are businessmen unlike the West where leisure air travellers make a large component of the traffic. In the 1980s, during the licence-permit raj, businessmen had to virtually fly down to Delhi and other major cities to constantly get permission for their routine business work.

Today, in the liberalised era, this important reason for flying no longer exists. Second, communications by means of couriers, email, telecommunications have improved to the extent that the businessman only needs to travel at the last stage," he said.

Even the Kelkar Committee had misread the growth potential for air traffic. It had recommended that Indian Airlines have a fleet of 75 aircraft to meet the likely burgeoning traffic. "There is really no need for that now. We must just hold our ground," said the official.

Meanwhile, the official doubted if the unions would really oppose the government's move to divest its share from India Airlines. "The unions really don't have too many choices because if we don't restructure ourselves, then we are heading toward a disaster. The union leadership realises this and all their talk of not allowing it is really for public consumption and for their members. They are unlikely to do anything," he said.

According to the official, certainly divesting shares will have an impact upon the employees. "Accountability will go up and shareholders will demand greater productivity per employee. The only employees to be affected are the low-skilled and non-technical staff," he said, adding, "most of such employees are part of the 15,000-strong Air Corporation Employees Union."

The government will certainly not retrench any worker. But it will allow a gradual attrition of manpower by not recruiting new staff, at least among the non-technical categories, and wage rise may suffer a bit.

"Airlines are a capital- and technology-intensive business and we really don't need so many employees but you do need more machines. For Indian Airlines to remain competitive, it has no choice but to changeover," pointed out the official.

Other unions of the technical staff, the Pilots' Guild, etc have not really objected to the plan to divest. "After all, the writing is on the wall. Change or perish. Even the giant PanAm disappeared. And no one wants the same fate for Indian Airlines," the official remarked.

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