Air India in debt trap

India’s national carrier Air India has been incurring financial losses since 2007, primarily due to the global economic downturn, operational inefficiency, and certain governmental policies, which failed to promote the best interests of the company.

The trail of losses….
In 2006-07, state run carriers, Air India and the Indian Airlines posted a loss of Rs 541.30 crore and Rs 230.97 crore, respectively. The Central Government formally merged the two airlines into a new company, called the National Aviation Company of India Ltd, or NACIL, in August, 2007. NACIL posted a loss of Rs 2226 crore in 2007-08.

The accumulated losses for Air India till March 2010 stood at Rs 15,000 crore.  The national carrier lost Rs 2,226 crore in 2007-08, Rs 7,189 crore in 2008-09, and Rs 5,551 crore in 2009-10.In the first half of 2010-11, Air India had already incurred a loss of  Rs 3450 crore.

The reasons for the current economic plight of Air India can be broadly categorized into external and internal factors. The global aviation industry had been badly hit by the global economic downturn and lost over $ 10.4 billion in 2008-09; Air India operating in a global environment was no exception. The soaring prices of the Aviation Turbine Fuel (ATF) also adversely impacted the aviation industry, in general. The merger with Indian Airlines in 2007 was not much successful for Air India, and created varied integration problems. Imprudent government policies forced the airline to operate on unprofitable domestic routes; the government also doled out liberal air-traffic rights to foreign carriers, which increased the competition for the state-run airline. Over and above this, the huge financial burden of a $15 billion order placed for 111 aircrafts with Boeing and Airbus in 2005, added to the financial woes of the carrier. The Air India employee base runs into 30,000 and it is overstaffed, with 240 employees per aircraft, as against the industry norm of 125. It is also low on efficiency, with its aircrafts clocking around 9 hours daily flight time, while the corresponding figure for its competitors is 11 hours. Its passenger load factor is below 70 per cent, which is nearly 80 per cent for its competitors.

At present, Air India is saddled with a debt burden of Rs 40,000 crore, out of which Rs 19,000 crore are working capital loans. Accumulated losses have burgeoned to Rs 15,000 crore , with the recent strike contributing  to another Rs 150 crore in losses. Air India is virtually into a debt trap-the airline is spending all its earnings in repayment of interest on aircraft loans, working capital and aircraft capital requirements, and fuel expenses. It had to take more loans at higher interest rates to pay the salaries of its employees and meet other expenses. As a result, the debt-equity ratio of the airline has reached a high of 20:1 and its annual interest burden, a whopping Rs 2,600 crore. To reach a debt-equity ratio of 2:1, the government will have to put in another Rs 12,000 crore. Currently, Air India needs at least Rs 10,000 crore in equity to stay in business. The Government has already injected Rs 2,000 crore  in 2009-10, raising the equity base to Rs 2,145 crore. It will reportedly infuse another Rs 1,200 crore in 2011-12.

The airline has embarked on a plan to recover its monetary dues from the government and other airlines; this includes Rs 803 crore in dues from the government for the usage of aircrafts for VIP travel and emergencies. Such flights are operated on a no profit/loss basis by the airline. The company also plans to recover another Rs 152 crore in dues from private airlines like Kingfisher for ground handling operations and support. The airline is to sell its property in Paris, worth Rs 10 crore.

The way out
Air India is seeking to restructure and refinance its rupee-denominated loans in a bid to ease out the debt burden. Its current outstanding long-term debt is around $5 billion or Rs 233 billion. The carrier can sell its non-core assets to improve its balance sheet. Chances of further equity infusion from the government is contingent on the success of the cost –curtailing and revenue enhancing measures taken by NACIL. As part of its debt-restructuring plans, Air India issued a tender in May, 2010 to refinance debt worth 50 billion rupees.

The airline is set to clamp down on recruitment in the “non-operational areas” towards curtailing employment costs. The company will also link employee perks to improved benchmarks. To streamline losses, Air India is returning leased planes, grounding old ones, introducing new aircrafts, containing the size of the contract labour force, and introducing fuel-efficiency.

The Air India board has passed a debt restructuring plan,  prepared by SBI Capital market Ltd (SBICAPS) and vetted by Delloite, (in March, 2011). The restructuring plan reportedly offers to turn at least 60% of the total working capital into a long-term loan and the remaining into cumulative preference shares, with 15 years tenure. The loans will be backed by “sovereign guarantee”, which assures that the government will repay the loan if the borrower fails to do so. Further deliberations in this matter will be taken up by the civil aviation ministry and the RBI towards reaching an optimum arrangement for converting the high-cost debt into a low-cost one. This will be the third financial restructuring plan for the national carrier and if successful, is expected to make the venture profitable by 2014. Air India aims to augment its revenue by 50 billion rupees and cut down its expenses by 40 billion rupees annually. The company currently needs to service around 400 billion rupees of debt. However, the formal sector lenders are exhibiting a cautious approach to the “deep” debt restructuring plan and many are insisting on an early exit clause to the scheme.