Government working on new turnaround plan for Air India

NEW DELHI(TIP): Speaking to reporters on the sidelines of the International Aviation Summit on Tuesday, September 4, civil aviation secretary RN Choubey said that the government was continuing to fund Air India despite a decision being taken to sell it so that the company’s value doesn’t erode till the time it is disinvested in. “Our first aim is to work out the necessary support for Air India’s healthy functioning. We will not like value destruction to happen. If we do not support, there may be value erosion. Otherwise, when we actually find that environment has improved, oil prices have come down and we actually want to sell, we may find that value has eroded,” Choubey said.

Late August, the Ministry of Civil Aviation, in its representation to the Parliamentary Standing Committee for transport, tourism and culture, said that disinvestment of Air India is not going to be happening any time soon. The first attempt by the government to sell its stake in the airline – codenamed Project Royal – failed mainly due to the government not parting with the entire stake, the high debt-levels and a high employee-to-aircraft ratio. To help the airline survive, the government had announced a financial restructuring plan (FRP) in 2012 as part of the original turnaround plan, as per which the airline’s working capital loans were restructured to long-term debt.

“If FRP was working, Air India wouldn’t have been in a dire strait. FRP didn’t go wrong. The FRP earmarked crude at $45 a barrel and today the crude is at $75 a barrel. Dollar was still high. The plan, now, is to make Air India stand on its own feet so that it can be sold in future when its conducive to sell the airline. Unlike the FRP, where the government did financial restructuring, the new plan will focus more on organizational reform. Will make it a board managed company. One more outsider may join the board,” a senior Air India official said, on condition of anonymity. Last month, the government appointed ITC Chairman YC Deveshwar and Aditya Birla Group Chairman Kumar Mangalam Birla as independent directors on the board of Air India.

As per estimates by aviation consultancy CAPA India, the national carrier is expected to lose more than $2 billion in value during 2018-19 and 2019-20. “Air India’s value will continue to erode, making future privatization unlikely. In the absence of full recapitalization and a clear direction, Air India is likely to see a continued decline in its domestic and international market share, and head towards strategic irrelevance. This will diminish its potential to be revived and to secure a strategic investor. In the meantime, it will remain a structural distortion for the industry and a burden on the tax payer. The quantum of losses will become increasingly unacceptable,” CAPA India said in its mid-year aviation outlook for 2018-19.

The Air India official pointed out that the carrier’s financials for the 2017-18 did not show any signs of improvement, primarily due to the soaring fuel costs. “I can’t reveal more on this as the results are being audited,” he said. For the year 2016-17, Air India reported a net loss of Rs 6,288 crore. Choubey said the ministry was yet to take a call whether the new turnaround plan for Air India will require a Cabinet approval or can be done bilaterally between the ministries of civil aviation and finance.

Meanwhile, Air India Ltd will raise ₹500 crore in debt to meet working capital needs and pay interest on its outstanding loans, a senior official at the state-run carrier said on Wednesday, September 5.

“Air India will soon issue a tender to raise ₹500 crore from domestic banks,” said the official who didn’t want to be named.

The latest fundraiser will exhaust the sovereign guarantee limit of ₹2,000 crore offered by the government to the loss-making airline, the official said.

Air India had in August raised ₹1,500 crore from Bank of Baroda under a sovereign guarantee to service bank loans and dues of international vendors, including leasing companies.

The latest fund-raising follows a failed government attempt to privatize Air India to stem the flow of public funds into running the airline.

Civil aviation secretary Rajiv Nayan Choubey on Tuesday, August 4 said the government has agreed to make a fresh equity infusion in Air India and also provide a sovereign guarantee.

“At the moment, we are borrowing from domestic banks as it doesn’t make sense to borrow from international lenders due to the value erosion of the rupee (against the dollar),” the official said.

Air India also used the ₹1,500 crore debt raised in August to “normalize debt accounts”, some of which were in danger of turning into non-performing assets, the official said.

Air India has a net debt of about ₹55,000 crore, including about ₹21,000-22,000 crore of aircraft debt, the official said. “We are hoping to repay the aircraft debt fully by 2021.” The carrier took on the loans to pay for new planes from Boeing and Airbus.