Fund crunch hurts Air India operations

Fund crunch hurts Air India operations

Mumbai: Cash-strapped Air India Ltd has been forced to ground four planes with vendors of spares partially stopping the supply of parts as they have not been paid. The national carrier is also facing a threat to operations in at least three airports—Kozhikode, Ahmedabad and Guwahati—because of money it owes jet fuel suppliers.

To add to its woes, airport operators and caterers have threatened to stop services to the airline.

The programme to unify the flight code and ticketing systems of both Air India and Indian Airlines has been held up because of the shortage of funds.

Air India and Indian Airlines merged into Air India Ltd in 2007.

According to two senior executives of the airline, the cash crunch has become so acute that the carrier may not be in a position to pay salaries to its 33,000 employees in the next fiscal year.

The cabinet is meeting on Thursday to decide on a 1,200 crore equity infusion to keep Air India flying. This is despite the airline not having achieved some key targets set by the group of ministers constituted by Prime Minister Manmohan Singh to qualify for the fund disbursement.

Mint had reported on 7 December that the money would be released this week.

The infusion, the second instalment of a 5,000 crore government bailout, has been on the cards for several months. Last year, the government gave 800 crore to the airline.

The 1,200 crore equity infusion will be followed by another 3,000 crore over the next two years. Air India posted a net loss of 5,551 crore in the year ended March against the previous year’s net loss of 7,189 crore. It has a total debt of 40,000 crore, including 19,000 crore of working capital loans. Air India spent at least 3,000 crore on paying salaries in fiscal 2010.

“Air India has already communicated to the government that it will not be able to pay salaries after March 31," said one of the two senior Air India executives cited above, who did not want to be identified.

The airline, which has a fleet of 160 aircraft, owes 640.43 crore to the Airports Authority of India, or AAI, the state-run airport operator, as of 30 September.

The four planes have been grounded over 184 crore owed to aircraft spare vendors, said the executive cited above.

“Airport operators and caterers have also threatened stoppage of services as the airline owes 480 crore to them," he added.

Air India has been asked to pay for fuel on a daily basis, or cash-and-carry mode, by the state-run oil marketing companies (OMCs)—Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd. They are refusing Air India credit after the state-run airline ran up 2,300 crore of dues.

The oil marketing companies did not offer any comment for this story.

The unified IT code is critical for Air India’s entry into Star Alliance, said the second executive cited above.

Star Alliance is a global network of airlines that Air India is planning to join by March 2011. Entry to such an alliance typically helps an airline increase seat occupancy by 5%.

An airline consultant, who did not want to be identified, said government support is crucial for Air India as it is spending at least 2,400 crore a year in terms of servicing the debt. “In Air India’s case, all improvements it makes in terms of passenger revenue or cost-cutting measures are nullified by the interest cost. Hence, financial restructuring is the key, but the government should make the carrier more committed to its targets," he said.

Craig Jenks, president of Airline/Aircraft Projects Inc., a New York-based air transport consulting and advisory services firm, said government support cannot go on indefinitely.

“It’s only reasonable that the government’s patience would be limited. These kind of bailouts used to be the norm in Europe but they are now quite illegal under European Union laws," he said. “Airlines in Europe either sustain themselves or go out of business as happened to the national airlines of several European countries."

Still, Air India could make things work for itself if it gets some things right, he said.

“If Air India can get the Delhi hub (the new Terminal 3, or T3) to really function well, and international flights connect efficiently both with other international and domestic flights, there is a very large upside," he added.

Air India recently shifted its operating hub to Delhi from Mumbai.

The carrier has sought government approval to start negotiations with employees on compensation.

The second Air India official cited above said the airline is in the process of unifying the compensation of Indian Airlines and Air India employees along with “rank rationalisation".

He did not divulge details about the negotiations, but said there would be no job losses. The unification of grades and scales, a critical element of the merger process, has been pending for the last three years.

An employees union official said a meeting has been called this week by Arvind Jadhav, Air India chairman and managing director, to discuss the harmonization of pay scales and the career progression of erstwhile Air India and Indian Airlines employees.

“The airline is going through a consultation process on its proposed common pay scale and grades. The management has given us a proposal and we are examining it," the official said.