Mumbai: National flag carrier Air India Ltd is exploring the sale and leaseback route for acquiring 27 Boeing 787 planes 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.
As an alternative, the state-run airline is also looking at the structured leasing method. Under this, a special purpose vehicle owned by a finance company typically acquires the planes and leases them out. Structured leasing also offers certain tax breaks.
If neither of these options works out, Air India will have to buy these planes by raising loans from banks. In the past, it had taken bridge or short-term loans to fund purchases.
Cash-strapped Air India had Rs42,570 crore debt on its book and an accumulated loss of Rs22,000 crore on 31 March. The airline has asked for an immediate equity infusion of Rs6,600 crore from the government to stay afloat.
It requires Rs42,920 crore infusion till fiscal 2021, including guarantees for aircraft loans worth Rs30,584 crore.
“The sale and leaseback route will ease the debt burden for the airline. Air India has always opted for direct buy of new planes and this is why its outstanding debt for aircraft purchase has risen to Rs20,000 crore,” said an Air India executive requesting anonymity. This is almost half of its total debt.
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.
Private airlines including SpiceJet Ltd, Jet Airways (India) Ltd, Kingfisher Airlines Ltd and IndiGo (run by InterGlobe Aviation Pvt. Ltd) are using the route to expand their fleet.
Another Air India executive said the carrier is also examining the structured leasing route.
Air India had bought some of the wide-body planes in late 1980s and early 1990s through structured leasing. It formed a special purpose vehicle, in which 20% of the equity was held by Japanese investors, to acquire aircraft and lease them out for at least 10 years.
This was a workable situation as the Japanese investors were exempted from tax on this investment but the arrangement doesn’t exist any more.
“We are looking at structured deal proposals from some of the European nations but nothing has been finalized as yet,” the second executive said.
Air India is in the process of raising $850 million to fund first seven Boeing 787 planes, known as Dreamliners.
When loan availability is scare, airlines resort to sale and leaseback.
“The plans can be leased out but it’s not always as cost-effective as a vanilla loan. It all depends on the structure of the deal,” said a director at a global tax and consultancy firm who did not want to be identified.