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Airlines set for bidding war over Air India stake

IndiGo and Jet seek to extend reach by securing network of troubled state carrier

India's government is selling most of its delay-prone flag carrier. (Photo by Takaki Kashiwabara)

MUMBAI/NEW DELHI -- India's top two airlines are poised to fight for a piece of money-losing state carrier Air India as it cruises toward privatization, seeking a coveted flight network connecting the South Asian nation to the world.

The government is selling most of the delay-prone Air India and all shares in a budget airline subsidiary under plans detailed in late March.

The 76% of Air India on offer is worth more than 220 billion rupees ($3.37 billion), based on an Air India valuation above 300 billion rupees. Prospective buyers have until May 14 to voice interest. Winning bidders will be announced May 28.

IndiGo operator InterGlobe Aviation has made no secret of its interest as a buyer. A wealth of regular flights and a reputation for reliability have won the budget airline, which began service in 2006, a market-leading domestic share of nearly 40%. But IndiGo's business remains mostly confined to India. Purchasing Air India, with its landing slots for a host of international routes, would expand IndiGo's reach in one fell swoop, according to President Aditya Ghosh.

Second-ranked Jet Airways (India) is expected to team up with Air France-KLM and American carrier Delta Air Lines on a joint bid, according to Indian media. Buying Air India would help Jet widen its advantage over IndiGo in international flights, a segment where Jet has code-sharing arrangements with Air France and Delta.

Singapore Airlines may also enter the fray, as the Indian government has allowed foreign investors to purchase up to 49% of Air India. "We have an open mind," said David Lim, Singapore Airlines' general manager for India, in a Reuters story this March, calling India a "strategic market." India's Tata group, which runs budget carrier Vistara through a joint venture with Singapore Airlines, is said to be interested as well.

The government's price for the Air India stake could be even higher, as New Delhi will not accept bids below the minimum value that appraisers set, according to Jayant Sinha, minister of state for civil aviation.

India is one of the world's most promising markets for air travel. Domestic air travelers topped 100 million in 2017 and have logged double-digit annual growth since 2015 -- a tally that trails only the U.S. and China in size.

Budget carriers have led the expansion in domestic routes and flights. Price competition has brought declining airfares, which have pulled more passengers into the market.

IndiGo's stand-alone after-tax profit surged more than 70% on the year for the nine months ended December. Third-ranked SpiceJet's net profit climbed about 30%. Meanwhile, legacy carrier Air India booked an after-tax loss of 57.6 billion rupees for the year ended March 2017 as costs for employee compensation and benefits strained earnings, compounding the impact of a falling domestic market share.

Yet Air India boasted a flight network spanning 39 cities at the end of 2017, alongside membership in the global Star Alliance. Its international service, centered on the Middle East and Southeast Asia, is unparalleled in India. The carrier operates 137 flights a week to the Middle East, 68 to Europe and 56 to Southeast Asia, serving such hubs as Dubai, London and Bangkok.

Total international travelers on routes to and from India rose 12% on the year in the October-December quarter. Busy routes to the Middle East are seen as one of Air India's most important sources of earnings.

Other Air India businesses are being sold off separately, including a regional carrier and engineering operations. Turkey's Celebi Aviation Holding has expressed interest in ground handling operations.

The Indian government pumped 150 billion rupees in aid into the flag carrier in the three years to March 2016. Privatizing Air India and subsidiaries should help ease this burden on the national budget.

The government looks to distribute a portion of its remaining 24% stake in Air India to employees of the airline after the sell-off is complete, likely bringing the state's holding below 20%. If Air India's value rises later on, so will the value of the government's remaining shares, Sinha noted.

Selling them off later could help repay obligations that the government will take over from the carrier, the minister explained. Debts in such noncore operations as real estate will be transferred to a company wholly owned by the government, making it easier for Air India to move back into profitable territory.

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