Mumbai: The lifeline that the government is expected to throw to the cash-strapped National Aviation Co. of India Ltd, or Nacil, could be altered in a way that would be a setback to the financial restructuring plan of the ailing, state-owned airline.

Cash-strapped: Air India aircraft at the Mumbai international airport. The group of ministers will meet again on 30 October to discuss how to infuse funds into Nacil, which operates the national flag carrier Air India. Abhijit Bhatlekar / Mint

All of the expected Rs5,000 crore of financial aid may not come in the form of equity. Instead, some Rs3,000 crore of the cash infusion may come in the form of a loan that will help the airline pay off some of its mounting debts.

Less equity will weaken the ability of the national flag carrier that operates the Air India fleet to borrow from banks, according to airline officials.

The borrowing capacity of a company is limited by the amount of equity and reserves it has in its balance sheet.

The original plan was that the government would infuse Rs5,000 crore of equity in the undercapitalized airline in three phases over three years: Rs2,000 crore, Rs2,000 crore and Rs1,000 crore.

The current equity base of Air India is just Rs145 crore.

According to a member of the parliamentary standing committee on transport, tourism and culture, who spoke on condition of anonymity, the group of ministers (GoM) that met last week had decided to split the financial help it will offer Nacil into two parts, Rs2,000 crore of equity and the rest as a loan to help the airline clear some of its debts.

“This would result in (an) equity base of Rs2,145 crore instead of Rs5,145 crore (for Nacil). However, some members (of the GoM) have opposed this proposal and the group has not yet taken a final call on this," he added.

The GoM is meeting again on 30 October to discuss how to infuse funds into Nacil.

Air India’s debt rose to Rs15,241 crore at the end of June, up from Rs6,550 crore in November 2007.

Some analysts see this move as an indirect attempt by the government to protect its own exposure in case the airline it owns defaults on its loan repayment commitments.

“The finance ministry would not want to increase Air India’s fund-raising capability...because if the carrier fails to repay the loans, it would ultimately come back to the government," said Amrit Pandurangi, who heads transport and infrastructure practice for audit and consulting firm PricewaterhouseCoopers.

“The sustainability of raising resources is also equally important. Therefore, the government will consider giving them soft loans at lower rates," Pandurangi added.

“A higher equity base will help Air India raise more loans at cheaper rates. But the loan base of the carrier is already high," said an airline consultant. He did not want to be identified since he is advising other domestic carriers too.

The airline, saddled with cumulative losses of Rs7,226 crore in the 2008 and 2009 fiscal years, is expecting to post an additional Rs5,000 crore for the current fiscal.

“As of now, the plan is to infuse Rs5,000 crore equity in three phases in three years. The first tranche is Rs2,000 crore. The GoM has not decided on anything at present," said a senior official in the civil aviation ministry. He did not want to be identified.

“Based on the recommendations, the cabinet committee on economic affairs (CCEA) has to approve the equity infusion," he said.

The official added that the government will also extend a sovereign guarantee to the airline, as it restructures Rs16,000 crore of working capital loans, a move that could save Nacil at least Rs500 crore in interest costs. However, all governmental help is contingent on cost savings by the airline.

Last month, Air India lost at least Rs100 crore in revenues in five days after around 200 executive pilots resorted to a work stoppage beginning 26 September to protest a proposed cut of up to 50% in productivity-linked incentives, or PLIs. The proposed PLI cut, which would have saved the airline Rs700 crore, was part of a turnaround plan to enable Air India to get an equity infusion and soft loans from the government.

Later, after a meeting with labour unions on 14 October, Union civil aviation minister Praful Patel asked the airline to find ways to save at least Rs800 crore internally as the PLI cut proposal was turned down.

An Air India sub-committee “is meeting tomorrow (Tuesday) to discuss steps to save Rs800 crore a year. I cannot disclose details of the meeting. If at all the government is not keen on increasing the equity base, it should help us raise loans at lower rates of interest and linked to the rates on government securities," a senior Air India executive said. He did not want to be identified.