Maharaja turns


It’s a healthy sign that Air India has begun to pay back its creditors
Article Date: 
Dec 10 2012, 2140

Air India appears to be returning from the brink. It has begun repaying loans taken from banks. Its market share has improved to 19.3 per of the 44 million passengers carried in the first nine months of this calendar. It has crept back to the position of India’s second largest domestic carrier, though it is still much behind leader Indigo’s market share of 28 per cent. Air India has had big support from the government in the turnaround attempt, rightly so since the government owns it. After all, many international carriers, including Lufthansa, JAL and Korean Air, also receive support from their respective governments. Banks are heaving a sigh of relief at the money flowing back from Air India. The total debt of the airliner is Rs 68,000 crore, of which Rs 21,000 crore is in the form of working capital. Government support to it has been in the form of fresh infusions to help capitalise its debt. It is expected to receive fresh support of Rs 20,000 crore over the next five years, implying more equity infusions. Two reasons why it got sick in the first place were the bunched acquisition of 68 aircraft, including the top-of-the-line Boeing 787 (nicknamed Dreamliner) and the low equity support of just Rs 3,200 crore from the government during the 11th plan. There appears to be a course correction on the part of the government. But the airline has still a long way to go before it is healthy again. That will need periodic capital infusions. Where will they come from? The government does not have unlimited cash. It is possible some of the airline’s assets may have to go on the chopping block. For example, maintenance, repair and overhaul business of the airliner. Instead of immediate sale, this could take the shape of a separate hub that could be used by other carriers. At least, that’s what the civil aviation ministry at one point wanted. It could become a separate profit centre for the airliner. Other measures have been used in the past by international airliners to earn money. They, for instance, routinely lease out aircraft to generate revenue. Air India has 103 aircraft. Leasing out some of its surplus fleet will bring in additional revenues; it will help the turnaround. Private airlines that lease aircraft from international aviation leasing companies have been hit hard by the appreciating dollar, which raises the rental costs. So leasing Air India’s planes makes sense, since it will help private airlines to provide a degree of stability in their lease price outflows by restricting their foreign exchange exposures. Where revenue is in rupees, payments of most cost heads should be in rupees, unless there are alternative cost recovery options. That may still not be enough for Air India. For airlines profitability comes form time spent by aircraft in the air. Ideally, any aircraft asset needs to spend at least 14 to 16 hours a day in the air for it to make money, of course, with adequate passenger load factors. It is only when aircraft operate at high passenger load factors that yields are high. That was a major problem for Air India, but the rising market share indicates revenue is coming in. Perhaps, it is time for Air India to revisit global alliances, Star or Sky. The Maharaja could then twirl his whiskers with greater confidence.

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