Reality check for Air India restructuring

Reality check for Air India restructuring

Mumbai: National carrier Air India is modifying its financial restructuring plan and pushing back by a year targets for achieving operating, cash and net profits.

Also See | New Targets (PDF)

The carrier has toned down projections for growth rate, seat occupancy and yield in the modified restructuring plan, as a consortium of lenders found it too ambitious, according to two persons familiar with the development.

The plan was prepared by investment banker SBI Capital Markets Ltd and vetted by consulting firm Deloitte Consulting India Pvt. Ltd.

One of the two persons is a banker and the other an executive of the airline. Both declined to be named.

The original draft of the third financial restructuring plan envisaged cash-strapped Air India making operating profit by 2012, cash profit from 2013 and net profit from 2014. Cash profit is profit after tax plus depreciation.

Air India has accumulated 13,300 crore in losses since its merger with Indian Airlines in 2007. The state-run carrier has total loans of 40,000 crore, including 22,000 crore short-term loans.

The annual interest cost alone is 2,400 crore for the short-term loans and 1,000 crore a year for long-term aircraft loans.

“As per the modified restructuring plan, all financial targets will be moved by a year. The modifications reflect the realistic scenario... Lenders have asked Air India to make staggered growth projections considering uncertainties of the sector," said the banker involved in the financial restructuring plan.

An Air India executive confirmed the development.

“We expect to meet the consortium of lenders next week (starting 7 June)," he said. “Once approved, the new plan will be submitted to the Reserve Bank of India as well as the ministry of finance."

The modified plan pegs revenue growth at 12-15% instead of 20% over 10 years. Based on the fluctuations in jet fuel prices and passenger growth, amendments were made in the projections of seat occupancies and yield of Air India.

The banker said Air India is looking at converting 60% of its working capital into 10 or 15-year loans with an interest rate of 10.5%. The remaining loan will be converted into 15-year cumulative redeemable preference shares with a fixed coupon of 8.5% along with a government buy-back guarantee.

“The financial restructuring plan aims at bringing down the interest cost to 2,000 crore instead of 3,400 crore. This plan will offer Air India flexibility to meet its operational obligations," he added.

The consortium of lenders, led by State Bank of India (SBI), has met four times since 8 April to finalize the restructuring plan.

It has formed a steering committee with representatives from Punjab National Bank, Bank of India, Bank of Baroda, Canara Bank, Dena Bank and Central Bank of India besides SBI.

Inder Sethi, former deputy managing director and commercial director of Air India, said the carrier should focus on achieving profitable seat occupancy factor, get equity infusion from the government and withdraw loss-making flights.

Sethi said the low utilization level of aircraft and high-cost debt can make things worse for the carrier. Air India should consider to cancel some of its wide-body plane orders if it can’t find economical and profitable routes, he added.

In past couple of weeks, Air India has combined and withdrawn several flights as it cannot afford to pay 16 crore to oil marketing firms daily under the cash and carry model.

The government owes 1,173 crore to the airline for using its flights for transporting VIPs. It has also committed to infuse 1,200 crore equity.

Air India is in the process of raising $122 million from banks for making pre-delivery payments to US-based Boeing Co. for seven 787 planes. It will also finalize the refinance agreement for $475 million for the purchase of three 777-300ER planes and one spare aircraft engine in next one week. Citibank and Standard Chartered Plc are arranging the funds.

In yet another deal, ICICI Bank Ltd will refinance 5,500 crore loan that Air India had earlier taken from other banks to buy 21 Airbus A320 aircraft.