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Business News/ Companies / Air India for `2,000 crore debt as govt delays equity infusion
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Air India for `2,000 crore debt as govt delays equity infusion

Airline hasn't received funds promised to it this fiscal year; faces stiff competition from new entrants in market

Air India’s turnaround plan was scripted in 2011 when the rupee was trading at `45 against the dollar but rupee’s depreciation is set to increase the airline’s expenditure by `2,600 crore in this fiscal. Photo: Ramesh Pathania/MintPremium
Air India’s turnaround plan was scripted in 2011 when the rupee was trading at `45 against the dollar but rupee’s depreciation is set to increase the airline’s expenditure by `2,600 crore in this fiscal. Photo: Ramesh Pathania/Mint

New Delhi: Air India Ltd’s prospects of a turnaround look slim as the national airline seeks debt to make up for a delay in infusion of government funds to the tune of 3,500 crore in the current financial year, and prepares to face competition from new entrants in the Indian market.

Not only will the debt of 2,000 crore add pressure on its already overleveraged balance sheet, Air India is also staring at increased competition as AirAsia Bhd and Singapore Airlines Ltd seek to start airlines in India in tie-ups with the Tata group and Etihad Airways PJSC tries to move in after purchasing a stake in Jet Airways (India) Ltd. The rights to increase the number of its flights to and from India granted by New Delhi to Etihad ahead of the deal, will help the airline become a preferred alternative for people seeking to fly into or out of India—and hurt Air India’s international operations.

The government has pledged $6.5 billion to cash-strapped Air India in equity infusion till 2021, but the airline has received no funds from the 3,500 crore promised to it in this fiscal year. It has to continue expanding its fleet with pe-ordered Boeing Dreamliner 787s and repay aircraft loans.

According to an Air India official who asked not to be identified, the finance ministry has suggested that the airline look at a working capital loan from banks because the government can’t release more funds to it this fiscal year.

Now, Air India has decided to borrow 2,000 crore. The airline has also sought a bank guarantee from finance ministry to get this loan, a second Air India official said.

On Tuesday, the airline’s board also signed off on a plan to sell five Boeing 777-200 LR aircraft to Etihad Airways that could bring in about $350 million for the airline, according to a government official who too didn’t want to be identified.

Air India had working capital loans of 22,000 crore on its books before a turnaround plan was approved in 2011. Of that, 17,000 crore was converted into non-convertible debentures. Under the plan, the government also promised to invest $6.5 billion in the airline, in tranches, till 2021.

The airline has sought a bank guarantee from the finance ministry to secure the 2,000 crore loan, the second Air India official said.

The funds will be able to tide it over till the next fiscal.

“The ministry of finance does not say no to equity (explicitly). They might make a provision in the demand for supplementary grants in the winter session of Parliament," the second person said, speaking on condition of anonymity.

Air India also needs sovereign guarantees for the purchase of three more of its Boeing 787 planes, which are set to join its fleet soon, the second official said. The guarantees have been held up by some differences of opinion on legalities. The 787s are being used to revive routes that Air India had previously operated on. It recently launched flights to Australia. With a 125 aircraft fleet, Air India is also planning to start flights to Milan, Rome, and Moscow using Boeing 787 Dreamliners.

The delay in equity infusion comes at a time when costs have escalated. The rupee has lost 11.08% against the dollar since the start of this year to 61.85.

Air India’s turnaround plan was scripted in 2011 when the rupee was trading at 45 against the US currency. The currency’s depreciation is set to increase the airline’s expenditure by 2,600 crore in just the current fiscal year.

Air India will also face more competition soon from the twin ventures involving Tata Sons and the tie-up between Jet Airways and Etihad.

Consulting firm CAPA says the proposed Tata-Singapore Airlines venture “can engineer a lower cost base than Air India and Jet Airways without the challenges of transformation that a legacy carrier has to face". The new airlines coming up could exacerbate the situation for the state-owned airline, said an airline industry executive.

“Air India may be impacted by potential migration of pilots although under the present contracts/productivity they have a good deal going for them," said Steve Forte, former Jet Airways CEO.

Civil aviation minister Ajit Singh has, meanwhile, cleared the appointment of retired Air India executive director Ashvini Kumar Sharma to head the airline’s new subsidiary Air Transport Services Ltd, responsible for ground handling at Indian airports. The airline plans to hive off the unit.

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Published: 15 Oct 2013, 10:34 PM IST
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