Business In India | "India Airlines Least in Need May Gain Most From New Owner Rules"

By: Siddharth Philip and Vipin Nair
Source: http://www.businessweek.com
Category: Business In India

India’s decision to allow local airlines sell stakes of as much as 49 percent to overseas carriers may be of most benefit to operators least in need of investment.

SpiceJet Ltd. (SJET), which has said it’s in “no rush” for funds, may be the most appealing target for foreign investors because of the discount carrier’s low debt and record of profitability, said Sharan Lillaney, an Angel Broking Ltd. analyst. Kingfisher Airlines Ltd. may struggle to win investment, even as billionaire Chairman Vijay Mallya seeks new financing, after posting at least five straight annual losses.

“The biggest beneficiary will be SpiceJet as it has lower debt and a decent brand image,” Lillaney said. “Kingfisher needs to restructure its balance sheet and convert debt into equity before it can look at attracting any foreign investment.”

The two carriers and Jet Airways (India) Ltd. rose Sept. 14 on speculation the rule change will help the industry win funds following years of losses caused by price wars, high fuel taxes and a weaker rupee. Prime Minister Manmohan Singh’s government announced the end of the ban along with a similar easing for retailers as its moves to open up Asia’s third-biggest economy.

Kingfisher Debts
Kingfisher (KAIR) has said it is in talks on investment that depend up regulatory changes as it struggles under an 86 billion rupee ($1.5 billion) debt pile. The carrier has also cut two- third of services, grounded planes and halted international flights in a bid to end losses.

“I am skeptical whether Kingfisher is able to attract” foreign investment, said Nikhil Vora, Mumbai-based managing director at IDFC Securities Ltd. “Kingfisher’s significant leverage on its balance sheet makes it a challenging proposition for any buyer.”

The airline, named for liquor tycoon Mallya’s flagship beer, needs an immediate capital infusion of $600 million for a turnaround, according to CAPA - Centre for Aviation. The company’s founders will need to provide at least half of this before talks with a foreign airline could begin, the research company said.

Kingfisher has only an “outside chance” of selling a stake compared with SpiceJet and Go Airlines (India) Ltd., CAPA said in an e-mailed statement. The carrier has a long-term debt to total capital ratio of 162 percent, according to data compiled by Bloomberg. That compares with 76 percent for SpiceJet and 58 percent for Mumbai-based Jet Air.

Kingfisher has plunged 58 percent in the past year in Mumbai trading. SpiceJet has jumped 44 percent and Jet Air has climbed 35 percent. India’s three other main carriers, state- owned Air India, IndiGo and Go Airlines are all closely held.

Kingfisher Re-Engagement
The easing of the investment rules will help Kingfisher re- engage with prospective airline investors “in a more meaningful manner,” Prakash Mirpuri, a spokesman, said in a Sept. 14 text message. The carrier will also move toward re-capitalization and ramp up its operations, he said.

SpiceJet Chief Executive Officer Neil Mills didn’t answer calls to his mobile phone on Sept. 14. GoAir Managing Director Jeh Wadia, IndiGo President Aditya Ghosh and Jet Air Chief Operating Officer Sudheer Raghavan also failed to answer calls the same day.

Kingfisher posted a 6.5 billion rupee loss in the quarter ended June, compared with 2.6 billion rupees a year earlier. SpiceJet and Jet Air both posted profits in the period.

Non-airline investors from overseas were allowed to hold as much as 49 percent in local carriers before the rule change.

Gulf Airlines
Middle East airlines may be the most likely to buy into Indian carriers because of their geographical proximity, existing service connections and state backing.

Qatar Airways Ltd. Chief Executive Akbar Al Baker said in April that that anyone who didn’t want to invest in China or India “must be crazy.”

The country’s annual passenger numbers may surge to 180 million by 2020 from 61 million last year as rising wealth makes travel affordable to more people, according to a government forecast. Qatar Air declined to comment by e-mail yesterday.

Abu Dhabi-based Etihad Airways PJSC said yesterday equity investments are an “important evolution of its successful partnership strategy.” The carrier already has stakes in Virgin Australia Holdings Ltd., Air Seychelles Ltd. and Air Berlin Plc.

“The Indian aviation industry offers tremendous potential, with significant passenger movement on domestic and international sectors,” it said without commenting on whether it wanted to buy into a local carrier. The airline will add flights to a ninth Indian city, Ahmedabad, in November, it said.

Source: http://www.businessweek.com/news/2012-09-16/india-airlines-least-in-need-may-gain-most-from-new-owner-rules