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Business News/ Companies / Air India-Indian merger would produce airline burdened with debt
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Air India-Indian merger would produce airline burdened with debt

Air India-Indian merger would produce airline burdened with debt

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New Delhi: The yet-to-be-approved merger of Air India and Indian would produce an airline so heavily burdened with debt that it would spend an average of Rs4,000 crore a year just in loan payments, data from the civil aviation ministry shows.

Those loan payments, which will continue for at least 12 years, would eat up about a third of the two airlines’ combined revenues at 2005 levels, the last year for which financial numbers are available. This raises questions about the profitability of the merged airline.

For the merged airline to service a debt of this size, “a quickly completed merger" would be necessary, said Kapil Kaul, an analyst with the Center for Asia Pacific Aviation.

“The question right now is whether the merger is followed by effective restructuring, which is the only thing that will allow the airline to be competitive," he said.

A parliamentary process to clear the Air India and Indian merger is about to wrap up this month, with civil aviation minister Praful Patel championing the proposal. A group of union ministers was convened to study the merger and has approved the merger “in principle". A final decision will be made after Patel meet representatives of the airlines’ employees. Between them, the carriers had 33,740 employees on their payrolls in 2006.

The loan payments will apply to the Rs45,000 crore debt that Air India and Indian have racked up in purchasing 111 new aircraft, a ministry spokesperson said in response to emailed queries from Mint. That purchase would place the merged airline amongst the biggest 20 fleets in the world.

The debt payments are likely to be linked to deliveries of the planes, which means the instalments may be lower in initial years and then rise as more aircraft are inducted into the fleet.

At the same time, the new aircraft—48 Airbus and 63 Boeings—are expected to generate unspecified revenues, some of which would offset the loan payments.

“Even though the new aircraft cost a lot of money, they will also earn money," said a senior official at Indian, the state-owned domestic airline, who declined to be identified because he is not authorized to speak on the merger.

It is unlikely that Air India or Indian could have received loans of that magnitude had they not been state-owned carriers, said Kaul, and perhaps more importantly, if the merger were not to be carried out, Air India and Indian would find it impossible to service that debt.

As of now, the ministry of civil aviation has released limited details about the report prepared by consulting firm Accenture on the exact structure of a merged airline. Patel has said in press briefings that three years after the merger, the new airline could enjoy profits of about Rs600 crore per year, compared to the current combined profits of Air India and Indian of about Rs160 crore.

But it is not clear if those figures take into account the cost of paying hiked salaries at Indian to match those at Air India. That process could saddle the new entity with an extra Rs133 crore annually.

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Published: 16 Feb 2007, 02:11 AM IST
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