Mumbai: Ailing national carrier Air India is in the process of restructuring its borrowings through a series of initiatives that could cut its interest costs by one-third and ease the way to to another round of equity infusion from the government.

Tough call: Air India’s total interest costs in FY10 stood at Rs2,400 cr. PTI

The debt plan includes securing a government guarantee that will help it renegotiate the interest rate it pays banks for working capital loans, closing old loans and replacing them with new ones contracted at lower interest rates besides raising funds through a global competitive tender, said two Air India executives.

Air India is run by the government-owned National Aviation Co. of India Ltd, or Nacil, and needs equity capital from its owner to reduce its financial leverage. The government has already put Rs945 crore into Air India, most recently through two infusions totalling Rs800 crore in February and March, and has said that further help will depend on the ability of the airline to put its finances in order and cut costs. Air India till recently had borrowings of Rs16,000 crore on equity capital of Rs145 crore.

“We are expecting at least Rs750 crore a year in interest cost savings," said one of the Air India officials, who requested anonymity because he is not authorized to speak to the media. The airline’s total interest costs in 2009-10 were Rs2,400 crore.

To start with, Air India is expecting a letter of comfort, a form of sovereign guarantee, by end-April to help it reduce working capital loans which amount to Rs16,000 crore.

Such a guarantee would be the first that Air India has obtained to meet working capital needs, said the Air India executive, and will yield the cash-strapped carrier Rs600 crore a year.

“We are actively considering to issue a letter of comfort to Air India to rework its working capital loans. We are waiting for some clearances before issuing a letter of comfort," said a senior aviation ministry official who did not want to be identified.

“But Air India needs to lay down a clear cost-cutting plan and we cannot go on helping," the official said.

The carrier has meanwhile refinanced the bridge loan taken from UK-based Standard Chartered Plc, the second largest foreign bank in India by assets, with a $1.1 billion (Rs4,961 crore) loan secured from JPMorgan Chase and Co.

“Air India would save at least $30 million a year with this deal in terms of interest cost," said the Air India executive. “This is because we could manage to get competitive interest rates."

Besides this, the carrier has paid Rs925 crore to oil marketing companies on jet fuel sales and brought dues down to Rs1,200 crore as on 31 March 2010.

“When you consider the credit period of 90 days, our outstanding is Rs500 crore. This is manageable for us," said the second Air India executive. He also did not want to be identified.

In February, the three state-run oil companies—Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd—had threatened to halt sales of aviation turbine fuel (ATF, commonly known as jet fuel) on credit if the airline failed to clear dues of almost Rs2,000 crore.

A senior executive with a state-run oil marketing company confirmed that Air India had settled a part of its dues.

Lastly, Air India will shortly float a tender for raising funds for acquiring three Boeing 777-300 ER (extended range) planes that the carrier will take delivery of in April-August this year.

“We will issue tender for RFP (request for proposal) from Indian and international banks for raising $450 million,"said the first Air India executive. “Since it will be a competitive tender, we are expecting to tie up the funds at very low interest rates."

Hemant Bhattbhatt, senior director at financial advisory services firm Deloitte Touche Tohmatsu India Pvt. Ltd, said Air India was attempting a restructuring by handling debt and equity in such a manner that the carrier will have maximum financial leverage.

“Air India is trying to boost its profitability prospects by effectively using equity resources and replacing old debt with new ones to lower the debt burden. This makes lot of sense for Air India and will increase the paper profitability," Bhattbhatt said.

While Air India could do this because of government support, it would need to tackle the root of its financial problems, Bhattbhatt said.

“The risk of sovereign guarantee is that you will be complacent while private airlines are competing for better market share" he said. “Air India should now tweak its business model to generate maximum revenue on its own rather than depending upon government support."