Air India revival: Lenders right in rejecting equity for debt, govt clueless about next move

New Delhi: It is quite clear from myriad reports on ailing Air India that the government remains clueless about what to do to tackle this white elephant. Yes, even the Modi government, which came to power on slogans like “minimum government, maximum governance” is unable to take a brave call to privatise this airline. It is unable to convince lenders to take a hair cut, its babus who run the airline are unable to bring discipline crucial to turning it around and external environment keeps making Air India’s life tougher with rising costs. Of course, the ministers in the Modi government continue to claim they have a “winning” strategy up their sleeve to turn around Air India but if there is indeed any strategy for a turnaround, it has not been visible till now.

First, the latest bad news: This piece says public sector banks have turned down government’s hare brained proposal to convert some of their loans in ailing Air India into equity. Had the proposal been accepted, a string of banks would have together held about 40 percent of the airline’s equity.

Second, there are still some half hearted attempts going on to sell this airline. This piece hints at a possible sell off even before the airline has been turned around but Civil Aviation ministry mandarins have denied any such move.

Representational image. PTI

Representational image. PTI

And finally, this is what the Chief Economic Advisor Arvind Subramanian has to say about the Maharaja: It is quite clear from such loose talk that those tasked with running Air India don’t seem to have a clue how to go about resurrecting it. Some facts, already well known, bear repetition at this juncture: Air India has been piling up losses ever since the two erstwhile airlines – Air India and Indian Airlines – were merged in 2007 to form the present entity.

Last fiscal, it posted operational profit of Rs 106 crore amid for the first time in a decade but is unlikely to achieve the target of a ten-fold increase in this in the current fiscal. The airline continues to accumulate losses year after year, though net loss has gone down in recent years.

Besides piling up losses, Air India is also in deep debt. At last count, the total debt on its books was close to Rs 46,000 crore, with annual interest payout of about Rs 4,000 crore. The hair cut that public sector banks were being nudged to take in the form of equity would have reduced the interest payment burden but only by a fourth.

The airline needs to repay Rs 19,000 crore by 2020-21; it has repaid a part of its short-term borrowings with proceeds from the sale and lease back of the wide-body Dreamliner aircraft. Besides, the airline is already in talks with state insurer LIC for picking up further debt to finance yet another round of aircraft inductions – remember, much of the debt which is drowning this airline already was taken to finance its earlier mega aircraft order.

Another reminder of a fact already known: the airline is being kept alive by taxpayers’ money since the government is committed to pumping in about Rs 30,000 crore over a decade to prop up the airline’s equity. About 80 percent of this money has already been poured into the airline, with results which are there for everyone to see. The turnaround plan under Air India has been given such a massive equity support projects an operating profit of Rs 1,086 crore in 2016-17 on revenue of Rs 22,206 crore and a net loss of Rs 1,989 crore.

So what should the government, averse to privatising this relic, do to save Air India? This piece says government should use the new insolvency code to let lenders own 100 percent of the airline. “Assuming banks forgo more loans in exchange for full control, the carrier’s total debt could fall to $2 billion. That would be the lowest since the 2008 financial crisis, and sustainable” financial daily Mint said, citing Bloomberg report.

Whether lenders would want to own a piece of worthless paper – which is all Air India is at the moment – remains to be seen. But the moot point is, why is Air India’s operational performance below par, year on year, and shouldn’t the airline management be focused on improving it to convince lenders of the airline’s worth? The target Air India had set itself for FY17 is Rs 1,086 crore operating profit. This would require the airline to make Rs 11 crore daily operating profit in the current quarter alone. When in the first nine months of the fiscal year, it made no operating profit but an operating loss of Rs 161 crore – or a daily operating loss of about Rs 58 lakh.

As per DGCA data, Air India’s combined OTP (on-time performance)  at four metro airports has been the worst among all major domestic airlines in each month of calendar 2016 except in October when GoAir was worse. In November, the OTP of Air India across these airports was 67.7 percent which means every third flight from these airports was delayed. For January 2017, Air India was second lowest, behind Vistara, with an OTP of 56.8 percent at these four airports.

Another metric – bums on seats or passenger load factor – also does not favour Air India. This denotes the number of passengers as a percentage of total number of seats on an aircraft. In five of the 11 months of 2016, Air India was the second lowest (Vistara had the least PLF among national airlines). In the remaining six months, AI was ahead of Vistara and the Jet Group by a small margin. This means competition was able to entice flyers far more than AI in most instances. For January 2017, Air India’s load factor was the lowest again among all national airlines at 81.4 percent.

This, despite AI having a hub and spoke model which ensures better domestic connectivity than other airlines which follow a point-to-point connectivity model and also the fact that on most occasions, AI was matching fares with competition. The only consolation in the 11 months of 2016 under review is that the load factor for AI did not fall below 70 percent, which means it was flying at least 7 in 10 seats full at any given time. Even in market share, the airline has had a mixed year. DGCA data show its share of the domestic market fell from 16 percent in January to 12.9 percent in November. In January 2017, it improved market share to 14.1 percent.

In the end, the issue boils down to the rhetorical question Subramanian had raised: Why is Air India continuing to exist? A look at the state of loss making public enterprises in India shows the government’s disinvestment push does nothing to address the chronically sick public sector units.

According to the government’s own analysis (the last public enterprises survey of 2014-15), just three PSUs accounted for over two-thirds of the total losses incurred by the CPSEs in that year. BSNL, Air India and MTNL. “Amongst the top ten loss making companies, Bharat Sanchar Nigam Ltd, Air India Ltd and Mahanagar Telephone Nigam Ltd were the top three loss making CPSEs during 2014-15. The top ten loss making companies claimed 85.45 percent of the total losses made by all the (77) CPSEs during the year. The top three loss making CPSEs namely, BSNL, Air India Ltd. And Mahanagar Telephone Nigam Ltd incurred a loss equal to 62.09 percent of the total loss of all loss making CPSEs in 2014-15,” the survey report said.

Why does government not move to shut down or divest BSNL and Air India? These two PSUs together have accumulated losses estimated at over Rs 68,000 crore. Divestment or death. That seems to be the choice before the government.


Published Date: Mar 03, 2017 01:12 pm | Updated Date: Mar 03, 2017 01:13 pm