Mumbai: Cash-strapped Air India, seeking more money from the government and trying to pare costs, will nevertheless press ahead with the purchase of all the 27 Boeing 787 aircraft it agreed to acquire in 2006.
The carrier aims to opt for a sale-and-leaseback arrangement to partially stem the financial drain this will entail, Air India’s board decided on Tuesday in a meeting.
The airline also plans to lease out some of its planes, both old and new, to reduce its debt burden of Rs43,777 crore. The carrier is also considering a proposal to replace full meals with a snack for flights of less than 90 minutes and to do away with hot meals for flights of less than an hour.
The carrier expects to save Rs300 crore by leasing aircraft and another Rs250 crore through the renegotiation of contracts in material consumption in this fiscal year, according to two senior Air India executives who didn’t want to be named.
The board also decided that the carrier may lease out excess capacity of two Boeing 747-400 planes and some Boeing 777-200 long-range planes once the airline receives the Boeing 787s, also known as the Dreamliner.
Mint’s P.R. Sanjai says cash-strapped Air India will go ahead with its plan to acquire 27 Boeing 787 Dreamliner planes but will use cost-cutting methods to reduce its burden
The ministry of civil aviation has said previously that Air India has no money to buy the 787s and was exploring the option of postponing or cancelling a portion of the 27-plane order.
Air India said in a press release that the board approved the issue of a request for proposal for the 787 aircraft under the sale-and-leaseback mechanism, pending government clearance.
Mint reported on 24 July that Air India was exploring the sale-and-leaseback route for acquiring 27 Dreamliners as one of the options to reduce its debt burden. Large leasing companies such as International Lease Finance Corp. and GE Capital Aviation Services buy planes from airlines and lease them back to the carrier.
A sale-and-leaseback agreement typically allows airlines to generate additional capital and is often a stop-gap arrangement to project a healthier balance sheet as the debt will not be reflected on the books.
“In effect, this is an operating expenditure model rather than a capital expenditure model,” said Narayan K. Seshadri, chairman and chief executive officer of Halcyon Resources and Management Pvt. Ltd. Seshadri is known for turning around private companies. “In this exercise, you will make some money. But largely the airline industry is dependent upon the recurring scenario of economic growth and fuel cost pressures.”
In the last fiscal year, Air India’s fuel costs rose 18% to Rs1,097 crore, wage costs rose Rs295 crore due to an increase in gratuity provisions, depreciation by Rs300 crore due to fleet additions and interest costs by Rs860 crore due to an increase in borrowing and higher interest rates, the carrier said in the release.
On Monday, a consortium of banks broadly agreed to Air India’s debt recast plan following the Reserve Bank of India’s approval for the restructuring process.
The debt recast plan seeks to convert Rs11,000 crore of short-term working capital loans into long-term debt, thus extending the carrier’s repayment period. The airline also wants to turn Rs7,000 crore of debt into cumulative preference shares bearing an 8% dividend rate that lenders will subscribe to.
Air India expects the debt recast will lead to savings of Rs1,000 crore on interest payments. Apart from this, the airline has asked the government for an immediate equity infusion of Rs6,750 crore to tide over the crisis. According to the latest plan submitted to the government, the carrier is seeking total equity support of Rs42,920 crore till fiscal 2021. It also wants government guarantees for aircraft loans worth Rs30,584 crore till fiscal 2021.
The carrier currently has total debt of Rs43,777 crore, including loans and dues it owes to vendors such as oil companies and airport operators, Parliament was told on Thursday. Air India has accumulated Rs13,300 crore in losses since its merger with state-owned Indian Airlines in 2007.
“The financial restructuring envisaging lower interest rates and longer duration of loans was okayed by lenders for Air India. But this is just a part of restructuring. Air India has to carry out operational restructuring and without that the financial restructuring will not be successful,” said Ashesh Shah, director and founder of Trans-Continental Capital Advisors Pvt. Ltd, a company that gives financial advisory and turnaround assistance to many firms in India and abroad.
The state-run carrier is losing market share on routes where it no longer has a monopoly, he said.
“Air India has to cut down costs, matching private rivals. It should get people back to flying Air India. Otherwise, the desired effect of financial restructuring will not be derived,” said Shah, who has 15 years of experience in corporate restructuring and turnarounds.
Other experts endorsed this view.
Air India’s products are not competitive and its brand has suffered, said Nawal Taneja, professor emeritus at Ohio State University’s department of aviation.
“It needs to get its act together, starting with the timely and decisive integration of Air India and Indian Airlines, followed by realistic strategies to join an alliance. Through the development of competitive products and a sought-out brand it can stop discounting prices to uneconomical levels,” he said.