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The Rediff Business Special/Neena Haridas

Maharaja on the prowl for a suitable ally

The Maharaja is out to sell a part of his empire. And it is the Civil Aviation Ministry which is faced with two rather tricky questions, ever since the government decided to divest 60 per cent stake in Air-India: 'What should be the price for the Maharaja's stake?' And 'who will Air-India sell out to eventually?'

Speculation is rife at the Rajiv Gandhi Bhavan, as Air-India and government mandarins conduct an internal evaluation. And, some of the answers that the ministry officials have come up with seem rather depressing.

A merchant banker, asked to evaluate Air-India, has come up with a measly figure of Rs 360 million, according to industry sources. This evaluation was based on the difference between the assets and liabilities of the airline. However, the evaluation based on the potential of Air-India after privatisation is slightly better: Rs 5 billion.

"Of course, once the bidding starts, the story would be different. The government has another six to eight months before the negotiation really begins with international and domestic airlines. As of now the ministry is trying to set things right in the airline so that we can strike a good deal with the right partner," an airline official says.

So who is likely to be the most suitable partner for the Maharaja? The list of possible allies is rather long -- SwissAir, Air France, Singapore Airlines are among the frontrunners, while British Airways, Emirates, KLM are also in the fray.

The divestment of Air-India will be on the lines suggested by the Cabinet Committee on Divestment. Of the 60 per cent divestment approved, 40 per cent will be offered to a strategic partner with a cap of 26 per cent on foreign holding. That is, foreign airlines interested in acquiring Air-India will have to look for a domestic partner who can invest the rest of the 14 per cent. Of the balance 20 per cent, employees will be offered 10 per cent as employee stock options, or ESOPs, and the remaining 10 per cent to domestic financial institutions and the public.

But who will take the big bite? Industry sources opine that "the logical partner would be an airline with a substantial network and the requisite experience and technology; an airline on the growth path. The synergies will take care of Air-India's fleet problems till turnaround time."

Says a ministry official, "Air-India certainly needs a partner with a long-term commitment to India. An ideal partner would be an airline with a track record of operating through India and which derives traffic flow to and from India."

Among the lot, Singapore Airlines, or SIA, has been in touch with Indian skies for a long time, which could make it a possible choice. Singapore Airlines, as one of the most successful airlines in the world, is pursuing an acquisition strategy over the past few years. The most recent example being SIA's international forays is the $ 950 million deal last year, when it took a 49 per cent stake in Virgin Atlantic.

Singapore Airlines also owns about 25 per cent of Air New Zealand. The airline has also made unsuccessful attempts to enter China, Thailand and India.

In fact, in its eagerness to get to India, Singapore Airlines's made an attempt recently to enter into a tie-up with the Tatas for a domestic Indian carrier. Besides, SIA is a very strong brand and has a financing capability that can benefit Air-India. However, its large India operations could act as a deterrent to the venture.

"But Air-India itself may not be too interested in Singapore Airlines because the latter is mainly East-bound, whereas Air-India's proclaimed focus is the West. This could be a dampener to the positive attributes of the deal," industry experts say.

On this front, synergies are better with the European carriers -- Lufthansa, British Airways, Air France and KLM -- for the reason that they are West-focussed.

Lufthansa, for one, has been operating in Indian skies for a long time now. Besides, it has a strong brand equity and a considerably large fleet as well. However, experts are sceptical on whether Lufthansa would take the plunge with Air-India as it is committed to a stake in Thai International.

British Airways, the Big Bird of Europe, is a healthy contender, but it is too healthy for Air-India. BA has everything that Air-India wants: a strong image, a large fleet and experience of partnerships since it owns 25 per cent of the Australian carrier Qantas.

But what does Air-India have that BA needs desperately. Almost nothing, feel industry experts. Hence, Air-India may find it difficult to negotiate favourable terms with this mega-carrier.

What puts Air-India on the back foot here is that it needs British Airways more than the other way round. Also, there is strong competition between the two carriers for the India-Europe traffic.

Dutch carrier KLM could emerge as a contender since it recently broke up an alliance with Italian airline Alitalia and could be looking for other partnerships. The KLM-Northwest combine is trying to form a major international grouping of which Air-India could be a part.

This leaves Air France as the next-best choice, especially considering that Air-India and Air France already have a code-sharing arrangement.

Air France has a strong new hub in Paris and a West-bound orientation which could be effectively used by both the carriers. They have, in a sense, a common background since the French carrier was also a loss-making, state-owned entity till a public offering two years ago. Taking this argument further, for the record, even the socialist work culture in the two airlines is similar, opined experts.

Across the Atlantic, the only possible bidder is United Airlines which is establishing itself as an around-the-world airline and Air-India could well be on its agenda.

Since it has a limited presence in South Asia, a stake in Air-India could offer excellent connectivity to both carriers. The airline is one of the largest in the world, has the financial muscle to pull out Air-India. Currently, it is headed by a Rono Dutta.

What if the strategic partner is Indian? Says the official, "Civil Aviation Minister Sharad Yadav has made it clear that he has no objections to a domestic Indian carrier bidding for a stake in Air-India." Experts say that this is a veiled pointer to either Jet Airways or even Indian Airlines.

"But the problem here is that none of the domestic players has the muscle to pull off this stunt. Jet Airways would obviously gain out from such an alliance, but there is almost nothing that Air-India would gain. There would be no benefits of extra routes or markets being thrown open and no significant financial advantage since Jet is currently finding its feet in the Indian domestic scene. At best, Jet could emerge as the Indian partner in the foreign collaboration," says an aviation industry source.

"The factors that determine the choice will be the route network, the extent of overlap with Air-India's own network, and the ability to complement the two," says the ministry official.

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