Mar 20, 2017 08:20 PM IST | Source: Moneycontrol.com

COMMENT: How many bailouts does Air India need to come out of its funk?

Air India can count itself lucky every time the government jumped to its rescue – and the carrier has run into rough weather more number of times than it seems normal for a flag-bearer.

COMMENT: How many bailouts does Air India need to come out of its funk?
Shishir Asthana

Moneycontrol Research

Air India can count itself lucky every time the government jumped to its rescue – and the carrier has run into rough weather more number of times than it seems normal for a flag-bearer. Recently, an Economic Times report suggested that the government was contemplating a move to create a Special Purpose Vehicle which will house the entire debt of the airline, thus leaving the company debt-free. But the question is whether the airline can be saved.

The Problem

Government-owned Air India has been let down both by its owner as well as its employees. During the UPA I regime under Prime Minister Manmohan Singh the airline committed colossal mistakes. It was forced to buy aircraft at a time when no new additions were needed to its fleet. The airline’s busiest and most profitable routes were given to a few private sector airlines. Finally, when the airline was down on its knees, the government decided to merge Indian Airlines with it in 2007.

It has been nearly a decade since the airline has seen profits. It was only in March 2016 that the company managed to post an operating profit of Rs 105 crore but because of its huge interest payment it ended up with a loss. Over the past decade Air India has managed to pile on peak debt of Rs 51,367.07 crore in 2014-15. The company had to undertake a sale and leaseback of the wide-bodied Dreamliner aircraft to pare its debt by Rs 5,000 crore to Rs 46,570 crore which includes Rs 15,900 crore on account of aircraft acquisition.

It, however, faces a bigger problem going forward. The airline needs to repay Rs 19,000 crore by 2020-21. At the current rate the solution lies in selling more aircraft. It may be noted that sale and leaseback is a costlier option than buying an aircraft outright.

The only reason the company has stayed afloat is because the UPA government loaned it Rs 30,000 crore in 2012 for a period of ten years.

The present government is in no mood to extend the life line. It isn’t keen to ‘waste’ tax-payers money by throwing bad money after good.

Poor Standards

But debt is one part of the problem. Another pain point is employees or the service standards of Air India. The latest DGCA report (January 2017) shows that Air India tops the charts of passenger complaints (nearly twice that of the second player). It is at No.2 on the cancellation rate chart, next only to TruJet – a regional airline. Air India has the second worst on-time performance record after Vistara. Among the bigger airlines Air India has the lowest passenger load factor while its growth rate at 10.37 percent is nearly one-third of private sector peers who grew by 27.94 percent in January 2017.

The Solution

The government has flirted with the idea of converting part of the airline’s debt into equity. However, banks didn’t buy it. Reports suggest the government was also looking to have the airline listed. But given the financials, it would have been a huge embarrassment for the government to see the company list below par.

The latest solution of creating an SPV to eat up the airline debt seems unique. The newspaper report suggests that the along with the debt certain assets of the airline will also be transferred in the SPV. The airline has started work on transferring the assets and debt into the SPV.

Most of the loans of the company are working capital in nature and include Rs 7,500 crore of convertible debenture. Most of the assets that are being transferred are non-aircraft assets. These may include land and buildings of the company.

The only problem in such an arrangement is that the land and building would not be generating enough revenue to service the mountain of debt. Perhaps further development or sale of these assets might reduce the load on the airline.

Even if the debt is taken off from the books of the company, its service track record suggests that the airline would send an SOS to the government.

The Sticky Issue

Knowing the problem, it is said, is half the solution. Air India’s Chairman Ashwani Lohani seems to partly understand it. According to Lohani, it was the government’s decision to buy the aircraft, so it should be its responsibility to service the debt. Lohani said in an interview that if you take debt out of the equation, the airline will beat everyone hollow – it sounds more like a boast by Kingfisher’s Vijay Mallya.

Companies have to bear the brunt of wrong decisions of the management but this does not mean that the promoters take the debt on their books and leave the assets behind.

However, Lohani has figured out the problem of service standards and low operating performance of the company. It’s the average age of the employees. Air India has had a freeze on hiring for the last 18 years. As a result the average age of its employee is 50 years. Training such staff in a fast changing environment as far as service standards and technology goes is a Herculean task.
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