Only recently has Air India moved to the sale and leaseback model with their Boeing 787 purchases, and Air India’s newest A320neo aircraft, all 27 of them are on a lease.

In 2018, the government, for the first time, had made an unsuccessful bid to sell Air India to prospective buyers and had to eventually close the process without a sale. Reason? Too much debt, too little in terms of assets, and too much task in terms of control. The government wanted to retain a 24 percent stake in the national carrier, to be sold later after a turnaround was established for the airline. This time it’s different.

On Monday, the government released a 220-page preliminary information memorandum (PIM), kicking off the sale process of Air India for a second time around. Learning from the last time, many things have been changed. The prospective buyers are being offered 100 percent of Air India, along with Rs 23,286-crore debt. What comes along is the following:

1) Air India's 100 percent stake along with all its aircraft, slots, employees but keeping aside 4 Boeing 747 aircraft used for VIP operations

2) Air India Express' 100 percent which is the no-frills airline started by Air India to serve the Middle East and South East Asia routes

3) AISATS' 100 percent share, the airport ground operations and cargo handling joint venture with Singapore Airlines.

What is being kept aside is all the Air India artefacts, paintings, key buildings such as the Air India Building at Nariman Point in Mumbai and the headquarters building in central Delhi. Apart from that, the hotels owned by Air India under the Centaur brand, 100 percent stake in Air India Engineering Services Ltd (AIESL)—Air India’s 100 percent owned ground handling company and Alliance Air, which is the regional airline under Air India, will be carved out of the Air India Limited before the sale.

The attempt this time around, then, is to hand out as much of an airline operation with a robust international and domestic network to the prospective buyers, instead of a whole aviation company with their hands in the other parts of the business as well. What is confusing then, is why is the sale of the 50 percent stake in Air India SATS Airport Services Private Limited (AISATS) being lumped with this sale process.

From the last time around, Air India has cut down the amount of debt to be taken over by the prospective buyers. The combined debt of Air India and Air India Express is Rs 60,074 crore. The last time around it was expected that Rs 33,392 crore would be taken over by Air India’s prospective buyers. This time, the amount to be taken over is less by a third. Accordingly, Rs 23,286 crore is the amount that Air India asks to be taken over.

Ernst & Young, which is the transaction adviser and wrote the PIM, claims that this debt would be backed by the aircraft on the books of Air India.

A look into the PIM gives out the details of the entire fleet of Air India. Air India has 121 aircraft in its fleet as of 1 November 2019 out of which it owns (or will own) 65 aircraft. Air India Express has 25 aircraft in its fleet out of which 17 are owned by the airline, or will be owned by them. Will be owned indicates that the aircraft is on a financial lease right now, and once the entire amount is repaid to the bank, the title transfers to Air India. Air India mentions in the PIM that they own 56 percent of the fleet and other airlines don’t own as many aircraft as they do.

Unfortunately, their transaction adviser seeks to play it as a compliment to the airline, while not realising that the market moved from owning aircraft to leasing them many years ago. Owning these aircraft has largely been one reason Air India has many old aircraft in its fleet, not being able to replace them for newer aircraft which are fuel-efficient and faster. Only recently has Air India moved to the sale and leaseback model with their Boeing 787 purchases, and Air India’s newest A320neo aircraft, all 27 of them are on a lease.

Unfortunately, 16 aircraft owned by Air India are grounded as of 1 November 2019, which is 13 percent of the fleet. A quick look at the aircraft which are being offered by Air India which are on their own books, and one realises the trouble with the Air India thinking:

4 A320CEO aircraft configured with 150 seats and an average age of 9.64 years

19 A319CEO aircraft configured with 122 seats and an average age of 11.4 years

20 A321CEO aircraft configured with 182 seats and an average age of 10.94 years

3 Boeing 777LR aircraft configured with 238 seats and an average age of 10.26 years

13 Boeing 777ER aircraft configured with 342 seats and an average age of 9.95 years

6 Boeing 787-8 aircraft configured with 256 seats and an average age of 5.17 years.

Now, I am not trying to talk down the valuation of the owned fleet of Air India, but here is the trouble a prospective buyer would face with this fleet. It is not efficient in terms of seating or fuel-efficiency. Airbus newer version of the A320, called the A320neo all offer about 15 percent savings on the fuel bill as compared to the older A320CEO aircraft. Not just that, the configuration of the A321CEO aircraft matches an A320neo of IndiGo from the current era (exessive business class seats on the A321 aircraft of Air India).

There are far better and fuel-efficient aircraft in the market now to operate 120 seater routes, but in India, one would rather fly an A320neo than an A319CEO to get about 60 more seats per flight on the same route with the same pilot and adding one more flight attendant to each flight. Coming to the 777s, Air India literally sold its family silver on a platter, giving away 5 Boeing 777LR aircraft to Etihad in 2014 for $336 million approximately, aircraft it could have profitably deployed to the West Coast of the US after the wild success of its non-stop between Delhi and San Francisco.

The valuation these (owned) aircraft may have displayed in the books of Air India then maybe overenthusiastic as compared to what the current price they may really fetch in the market at present. The aircraft are built for 25 years or more of operation, but the trouble is they are almost on the back of older technology. If anyone would buy the airline, would ideally want to get rid of the older aircraft and swap them in for denser seat configuration on the same aircraft. This means the buyer would have to double down on getting new aircraft, or risk paying up to 15 percent more per flight operation in terms of fuel as compared to current generation aircraft. Air India’s cost per available seat kilometre of Rs 4.8 for FY2019, compared with IndiGo’s Rs 3.85 (September 19 quarter) should drive the point home about efficiency in terms of costs shaving off a lot of money.

There are other holes in Air India’s business plan as well. For instance, the bad numbers of their frequent flyer programme. Jet Airways-owned JetPrivilege was the most successful frequent flyer programme in India, and now branded InterMiles, it has about 10 million members. Air India’s frequent flyer programme claims to be the first in India, but only managed to garner about 2.64 million members in over 25 years? As a comparison, Club Vistara had over 1.6 million members as of November 2019, and with new partnerships, reaching about 2 million members anytime now. Airline loyalty programmes are run worldwide as profit centres, unlike the cost centre approach, followed in Air India.

There are many things the preliminary information document touch upon but not go into details of or give guarantees on. For instance, currently, the government officials are only supposed to fly Air India, and the government is a major buyer from the airline. Once the sale happens, this condition will be waived and that is a chunk of business guaranteed to come to Air India going away.

Not just that, the slot utilisation is not the best for Air India, a company that really needs every bit of business it can get. Air India got the largest chunk of rights on Mumbai/Delhi to London Heathrow market when Jet Airways shut down, and they can fly another 21 flights per week between this sector which always has high demand, but they haven’t capitalised on this opportunity, giving it away to British Airways and Virgin to take the market.

Coming to the part about who can own the airline and the limitations imposed on buyers, the restrictions are lesser this time around. The net worth of the bidder or consortium is reduced to Rs 3,500 crore instead of the Rs 5,000 crore from earlier. Each member of the consortium should have at least 10 percent of the net worth of the consortium total. If an Indian airline is bidding as a part of the consortium, the net worth requirement is ignored for them, which opens up the room for SpiceJet and Vistara to bid, where it would have only been IndiGo clearing the bar earlier. The new owner necessarily needs to use the Air India brand for the years ahead, but can merge their existing operation with the Air India operation.

Then given the entire situation what is a prospective owner bidding for? The seller would like to make you believe, a huge share of the Indian domestic and international market with slots and a global network and membership of Star Alliance amongst other stuff. In reality, Air India offers you a lot of debt, old aircraft, slots and bilateral which are not guaranteed beyond six months, a frequent flyer programme which is under-utilised, membership to Star Alliance which is no more than a bragging right and lots of extra employees that a well-run operation may not need. Here is hoping the prospective buyers have deep pockets to not just buy the airline but fix it to return it to its former glory. They will need to spend a lot of money on a turn-around of the airline as well.

(The writer is Mumbai-based business travel and aviation journalist and the founder of the Indian frequent-traveller website Live From A Lounge—www.livefromalounge.com. He tweets at @LiveFromALounge)