Cash-strapped AI overspends on leasing aircraft

Cash-starved Air India can reduce its financial burden if it accepts a latest suggestion by global management consultant McKinsey & Company to re-negotiate contracts with three aircraft leasing firms — ALAFCO, GECAS and CIT.
The consultant has said the airline could reduce both its fixed as well as variable cost by reworking the agreement. The annual savings have been estimated at about Rs 55 crore. Air India had engaged Mc Kinsey a few months ago to study and review various costs and suggest steps to bring them down. Sources told Financial Chronicle that McKinsey would present its final report to the top airline management in the next few days.
“From the three leasing companies, Air India had agreed to take as many as 22 aircraft. McKinsey has found that globally, lease rentals for similar aircraft is $330,000-360,000 a month while Air India is paying more. The monthly rental in case of Air India is $375,000-400,000 for each aircraft,” an industry source said.
A revision in agreement now could sweeten the deal for Air India, which is looking for options to reduce its ope­r­ational cost. The lease pact with Kuwait-bas­ed Aviation Lease and Finance Company (Alafco) for 14 aircraft (narrow-body A320) is the most expensive among the three with airline committing to pay about $400,000 monthly rental. It could be brought down to $360,000 or even lower, as per the McKinsey study.
The monthly lease rental in case of GE Capital Aviation Services and CIT is learnt to be almost same at $375,000. Air India currently has a total fleet size of 137 aircraft that includes A320, A321, B737 and B787.
With the aviation market growing and domestic air traffic registering double-digit growth month-on-mo­nth, the airline plans to induct 100 more aircraft to its fleet by 2020. Accordingly, it has decided to lease 39 A320s and 35 ATR regional jets in the next few years.
To mount its capacity on long-haul routes such as the US and Europe, the airline has decided to lease B777-200LR and B777-300ER in the coming years. Some of the new routes, which Air India would commence operations are Delhi-Washington and Delhi-Los Angeles.
“We are doing analysis for various routes both in the domestic as well as international markets before inducting any new aircraft,” an Air India official said.

Nirbhay Kumar