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Business News/ Companies / Air India seeks govt help after IOC warns on fuel supplies
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Air India seeks govt help after IOC warns on fuel supplies

Indian Oil has threatened to stop fuel supplies unless the airline pays its dues

Photo: Abhijit Bhatlekar/MintPremium
Photo: Abhijit Bhatlekar/Mint

New Delhi: Air India Ltd has sought the help of the aviation ministry to ensure continuity in fuel supplies after Indian Oil Corp. (IOC), the country’s biggest oil marketing firm, threatened to stop them unless the airline pays its dues, according to two of the airline’s executives.

The predicament of the state-owned airline comes in the wake of an intervention by the aviation ministry to bail out SpiceJet Ltd by asking fuel companies to continue supplies to it (they had threatened to stop them unless the private airline, now controlled by Kalanithi Maran of Sun group, paid its dues) and banks to loan money against guarantees by the promoters.

Air India’s request to the ministry also reflects the state of the Indian aviation industry where all but two airlines—Indigo and GoAir—are reporting losses.

The cut in fuel prices, down by around 25% since June, should improve their operating finances, but most are loaded with debt and other dues. Jet fuel prices have dropped by 31% from 76,241 per kilolitre in January last year to 52,423 per kilolitre now, according to the IndianOil website.

Air India, for instance, has 40,000 crore of debt on its books, and owed oil companies around 1,000 crore as of last fortnight. In contrast, SpiceJet owed the companies around 15 crore at the time they suspended supplies for a few hours, causing several flights to be grounded. IndianOil, too, is state-owned.

An Air India executive who spoke on condition of anonymity said the airline “has a severe cash crunch and cannot meet all the requirements. We have no choice, but to ask the ministry to help us with a comfort letter".

A so-called “comfort letter" is one provided by a financial institution or auditor or any other person or entity in a position of power or responsibility regarding the soundness of a company or individual.

In this case, the aviation ministry will have to write to the ministry of petroleum and natural gas asking it to go easy on state-run Air India and that it will clear its dues in few weeks.

A second Air India executive, who also asked not to be identified, said the airline and IndianOil’s financial teams were working to resolve the issues.

This isn’t new for the airline though.

In February 2012 IndianOil had withdrawn the credit facility to the airline, creating chaos.

While queries emailed to spokespersons for IndianOil and the ministry of petroleum and natural gas remained unanswered till the time of going to press, a person aware of the development, requesting anonymity, said, “Air India has written to IndianOil. The talks and deliberations are still on."

A disruption this month could be tough for passengers, given that flights are already being hit by fog and SpiceJet’s cancellations.

An analyst said oil companies should pass on more benefits to the airlines.

“The fuel companies are not passing the benefits entirely to airlines as the fuel prices are trading at $52/barrel—the lowest since 2009," said aviation consulting firm Capa Centre for Aviation’s South Asia CEO Kapil Kaul.

Indian airlines are expected to lose $1.4 billion in 2014-15, compared with $1.7 billion last year, according to a June estimate by Capa which is currently being revised in the aftermath of the fall in fuel prices.

A former Air India executive said the airline should now ask tough questions.

“It is futile claiming to be Ebitda-positive if the airline is failing to meet daily operational costs, which includes fuel expense. Someone needs to question if financial consolidation should be the desired course for the airline or it should continue to expand its operations and add more aircraft in its fleet," asked Jitender Bhargava, former executive director of Air India.

Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of operating profitability.

Bhargava added that the impact of reduced jet fuel prices on cash flow will be visible only after a few weeks because of the huge debt all airlines have on their balance sheets.

Utpal Bhaskar contributed to this story.

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Published: 07 Jan 2015, 12:04 AM IST
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