Paras Jain / Mint

Paras Jain / Mint

Air India may post operating profit this year

Air India may post operating profit this year

Mumbai: State-run Air India, in the midst of a Rs2,000 crore government bailout, could turn the corner in the year ending March by posting an operating profit as air traffic continues to revive and changes that have been implemented by the national carrier start taking effect.

The airline is expected to turn Ebitda (earnings before interest, tax, depreciation and amortization) positive in the current fiscal, according to a senior Air India executive and a top official at the ministry of civil aviation, both of whom spoke on condition of anonymity.

They said it will also achieve the target of a Rs2,000 crore jump in revenue, but may fall short by half of a targeted Rs2,000 crore through cost cuts.

Air India posted an operating loss of Rs5,000 crore and Rs3,300 crore in 2008-09 and 2009-10, respectively.

The airline has losses of Rs14,000 crore accumulated over the last four fiscal years and debt of Rs18,000 crore.

In late July, Air India embarked on a turnaround programme aimed at wiping out losses and repaying debt by 2014-15. The carrier also hired Gustav Baldauf as chief operating officer to oversee the turnaround, for the first time the state-owned carrier has appointed a foreigner in a senior position. Air India has about 150 planes, which makes it the airline with the largest fleet in India. In terms of passengers carried, the airline is third after Jet Airways (India) Ltd and Kingfisher Airlines Ltd.

The cost-cutting and revenue enhancement plans had been suggested by a committee of secretaries at the behest of Prime Minister Manmohan Singh.

Achieving the targets will qualify Air India for another equity infusion by the government of Rs1,200 crore in the current fiscal, in addition to the Rs800 crore already given to it. “Going by the current environment and (if there are) no further drastic hikes in jet fuel prices, Air India will be able to report Ebitda-positive,’’ said the Air India executive. Jet fuel accounts for 40% of Air India’s total operating cost.

“Moreover, we have already managed to generate additional revenue up to Rs850 crore by August (fom April) compared to the corresponding period last year," he said. “October to March is traditionally good for airlines in terms of seat occupancy."

He said the April-August period had witnessed a 24% increase in passenger revenue, while yield was up 13.6% on the international sector and 14.9% on the domestic front.

“The seat occupancy level on the international sector rose to 70.7% and 68.4%, respectively in July and August. Only errant jet fuel prices can spoil the party as it continues affecting the bottomline,’’ the executive added.

Making an operating profit was an achievable target as Air India’s interest outgo is as much as Rs2,400 crore a year while depreciation would come to around Rs1,800 crore, the ministry of civil aviation official said.

Paras Jain / Mint

The airline’s executives and ministry of civil aviation officials expect Air India to qualify for the second round of equity infusion, which will ease pressure on the carrier.

This may in turn persuade domestic and international banks to lend to Air India at lower interest rates. SBI Capital Markets Ltd (SBICaps), meanwhile, is drawing up a debt-restructuring plan for Air India, which is looking at interest rates being cut to 8-9% from 12%, which will result in the carrier saving Rs500-600 crore.

“A final plan would be submitted by SBICaps after obtaining necessary approvals from Reserve Bank of India,’’ the ministry official said.

A second Air India executive, who also did not want to be identified, said the carrier has very little room to cut costs as fuel and wage bills, at 18% of total costs, can’t be controlled.

Labour unions had protested against wage cuts, having gone on strike in May to resist the move, forcing the government to intervene and ask Air India to refrain from reducing pay. The airline can only cut costs in material consumption and reduce fuel usage by implementing various international best practices, the second airline executive said. A better fuel management system is saving the carrier up to Rs500 crore.

Apart from that, “on an annualized basis, Air India will start saving Rs1,200 crore from winter owing to the dismantling of the Frankfurt hub," he said. This involves shifting its hub to the Delhi airport’s new Terminal 3 and the restructuring of operations, he said.

Air India will benefit from buoyant air travel and economic growth.

“Not only will Air India be able to fetch good yields on domestic and international routes, the carrier has already managed to negotiate substantially lower rates, paying less than 2% interest annually on most of its international loans,’’ said the first Air India official cited above.

Loan costs could come down further. Air India is awaiting a letter of comfort from the government offering a sovereign guarantee on long-term and short-term loans, which will help it raise debt at lower interest rates.

The government move to restructure debt of leading full-service carriers comes at the right time, analyst Rashesh Shah said in a 20 September report on the Indian aviation sector by, an online brokerage firm affiliated to ICICI Bank Ltd. India’s full-service carriers—Air India, Jet Airways and Kingfisher— had a total debt burden of Rs60,000 crore as of the year ended March.

“According to the plan, which has received final approval from the RBI (Reserve Bank of India), domestic banks are expected to restructure the loans of the airlines that will enable them to raise fresh funds in order to deleverage their balance sheet and finance future expansion plans," Shah wrote in his note, which referred to the listed full-service airlines—Jet and Kingfisher.

The move to infuse fresh equity by the government into Air India will also help, said Charles Dhanaraj, an expert on Indian aviation and an associate professor of management at the Kelley School of Business at Indiana University, Indianapolis.

“I think they should report better results than the previous year. Fresh equity (Rs800 crore) has been put in, which means they don’t have to run their operation entirely on borrowed money," he said. “With debt down, and along with that the interest rates coming down, the interest costs will come down drastically, and that is a big savings for Air India.’’

Operating costs, however, are still too high, he said.

“My contention is that their average revenue per seat per mile is still low compared to competing airlines, and their operating costs as a percentage of revenue or per seat per mile is still higher compared to their competition. Both suggest that there is phenomenal space to grow the profitability,’’ Dhanaraj added.

Air India is on the right track considering the macro economic factors affecting Indian aviation but the airline is adding to its operational costs by hiring highly paid executives from outside the carrier, said a senior consultant to the airline, requesting anonymity.

“Air India is paying crores to executives that are hired outside while it is talking about the inability to manage its current wage bill. These executives are not going to add any value to the airline, but will only help in adding to the wage bill of the ailing carrier," said the consultant.