Private equity majors, who are chasing too few ideas perennially, are turning coy about the aviation sector at a time when at least three big players are in the midst of raising funds. According to sources, Jet Airways has been scouting for $300 million, followed by Kingfisher Airlines looking at raising $150 million. Air Deccan has mandated Edelweiss Capital for raising $100 million.
“We are also looking at some of the names mentioned but you can’t justify the investment as it is difficult to make money. I remember my professor in Harvard telling me whatever you do, don’t touch the airlines,” laughs Neeraj Bhardawaj, partner, Apax Partners India.
Incidentally, Apax Partners, which had picked up a 40% stake in a Spanish low-cost carrier Vueling Airlines, made a profitable exit with 5x returns by staying focused on maintaining the cost structure while maintaining a strong consumer marketing element. However, there is a systemic issue about the sector in India with PE players left with no clear time-line for the sector turning profitable.
Not all agree. Both SpiceJet and Paramount have managed to raise funds. SpiceJet raised Rs 300 crore by divesting 25% to the Tata Group and Dubai government’s PE arm Istithmar and hedge funds Goldman Sachs and BNP Paribas in January this year. Earlier Kotak’s PE arm had invested $14 million for a 10% stake in Paramount Airways.
“I think there is an increased level of interest from PE players as there could be arbitrage opportunities with the sector opening up to foreign players in the future. Currently, deals are delayed as PE players want to take big positions in these airlines and are not satisfied with minority stakes,” says Nitin Deshmukh, head (PE) of Kotak Mahindra.
Deccan Aviation MD GR Gopinath says, “Aviation is sometimes viewed as a specialist industry and to that extent the appetite for such investment has been selective. Having said that, we have been successful in raising PE money in the past and we believe, we will be successful in raising more money.”
Texas Pacific Group (TPG) is one of the active PE players on the aviation front with the PE major having evaluated both Air Deccan and Kingfisher Airlines. TPG had earlier dropped its plans to invest $50 million in Spice Jet.
Aviation experts put the woes of the aviation sector on overcapacity. The industry has gone from 83 planes in 2002 to 255 planes in 2007 without significant changes in either infrastructure or passengers.
Both Air Deccan and Kingfisher Airlines have been aggressive in adding capacity while the former has also been adding new routes which take time to stabilise. As a result the aviation industry has to run with empty seats or extremely low rates making the entire sector unprofitable.
All the players in the domestic space are currently losing money and combined losses are expected to touch $350 million this year. This is reflected in the bourses where aviation stocks are trading way below their issue price. Not surprising that none of the major PE players are taking the bait.
Source : Economic Times