Air India sale: Reserve price likely to be at Rs 15,000-20,000 crore

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Air India’s reserve price is likely to be fixed between Rs 15,000-Rs 20,000 crore, according to a report in Business Standard. The report, however, also added that it may still go ahead even if the bid quoted is below the reserve price. For the purpose of setting the reserve price, the government has taken indicators like future cash flow projection of the airline, brand value, bilateral rights and slots at foreign airports.

According to the publication, valuation firm RBSA Advisors and the consultant for the divestment EY gave a presentation to the committee of secretaries and headed by cabinet secretary Rajiv Gauba on Wednesday to set the reserve price, which will be used as the benchmark to compare the financial bids.

Air India’s current earnings not used for valuations

The bidding parameter was changed for Air India by the government, by allowing potential buyers to quote the enterprise value instead of the equity value. At the same time, the centre has mandated a 15 percent of the bidder’s quote as upfront cash.

For the valuation exercise, Air India’s current earnings were not used as the benchmark as the company’s abilities are not being fully utilized. The airline’s future earning potential and the financial forecast has been provided after consider the complete utilization of assets of the company which includes current slots unused, frequent flyers and bilateral rights.

In the case of intangible assets like brand value, bilateral rights and airline’s domestic slots a separate valuation exercise was undertaken. Also, Indian airports do not permit slot trading like London’s Heathrow airport, where slots are traded and a benchmark value can be obtained. Therefore, benchmarks of revenue generated by low cost carriers and full service airlines were used to reach an average value.

The airline presently has 2,378 international and 4,486 domestic slots across Indian and major international airports.

On the other hand, the brand value was determined using the historical merger and acquisition cases, ascribing separate value to the brand.

Failure of the current disinvestment process could lead to an infusion of about Rs 650 crore per month to keep the airline running as the airline is losing Rs 25 crore in cash daily.