AI will report positive operating margin this fiscal, claims chief

New Delhi: There is some good news from Air India: the airline may become EBIDTA positive this fiscal, which would be for the first time since the erstwhile Air India and Indian Airlines merged in 2007 to create the present airline.

Chairman and Managing Director Rohit Nandan said today that despite grounding of the Boeing 787 Dreamliners since January and a two-month strike by AI pilots earlier in the year, he expects the airline to report a positive EBIBTDA. But AI is till far away from declaring a net profit, which he said should happen before 2018-the date mandated in the Turnaround Plan for the airline.

[caption id=“attachment_633000” align=“alignleft” width=“380”] So all is not on the path to profitability for AI yet. Reuters[/caption]

Nandan also made it clear that the grounding of the Dreamliners is costing the airline every day and that Boeing Co will have to compensate AI for the grounding and subsequent delay in further aircraft delivery.

Between April and January this year, Air India’s revenue from passengers increased 8.3 percent, load factor (number of occupied seats on an aircraft) increased to 71.8 percent from 68.5 percent, yield (revenue per passenger per km) was up 19.2 percent and number of passengers carried was higher by 3.4 percent.

But these statistics may not hold for the remaining days of this fiscal until March 31 unless Air India also joins the fare war on domestic sectors which was unleashed by Jet Airways yesterday.

Besides, airline officials had said earlier that the 787 grounding is costing AI Rs 30-40 lakh more daily since the airline has had to replace the Dreamliners with other aircraft which are less fuel efficient.

So all is not on the path to profitability for AI yet. Hurdles abound. For example, the impending equity partnership between Jet Airways and Etihad could sound the death knell for Air India. Not only will the new Jet-Etihad combine be a bigger entity capable of giving fierce competition to AI on international routes, AI’s own problems like the largest debt pile, lack of a fleet growth strategy and absence of a domestic low cost arm would hurt the national carrier on the domestic front too.

To top it all, the changing world aviation order where the Gulf airlines (Emiartes, Etihad and Qatar) are enhancing their presence through global alliances is already posing a grave threat to AI’s survival.

If amid all this, the government agrees to review bilateral traffic rights with the Gulf nations (specially with the UAE), AI’s future could well become uncertain.

AI has already panicked, with Nandan seeking protection against the might of the Jet-Etihad deal from the Ministry of Civil Aviation early this year. According to an exhaustive report by aviation consultancy Centre for Asia Pacific Aviation (CAPA), the Jet-Etihad deal would be a killer for AI on international operations as well as domestic routes.

“The absence of a long-term fleet strategy, with no pending narrow body orders and no longhaul aircraft commitments beyond 2015 limits the future business case (for Air India),” CAPA said today.

The combined Jet-Etihad might will have a fleet of 180 aircraft when AI’s operational aircraft are only 100 in a fleet of 127 aircraft. In fleet size alone, Jet-Etihad will tower over AI.

CAPA says that there is no long-term fleet strategy for AI. It has no pending narrow body orders and no long haul aircraft commitments beyond 2015, limiting the future business case. Compare this with Jet (outside of the partnership with Etihad) which is expected to place an order in the coming months for up to 100 narrow bodies-a mix of B737 MAXs for the full service operation and A320neos for JetKonnect.

Also, 46 B737-800s from an earlier order are still to be delivered. Jet (standalone) currently has a wide body fleet of 23 aircraft (13 A330s and 10 B777-300ERs) of which five B777s have been subleased to Thai Airways, leaving an operational fleet of 18 aircraft.

CAPA estimates its wide body fleet size will increase by at least 10 aircraft in the next 12 months.

On the debt front too, AI is on a very weak wicket. As of now, its debt stands at about $9 billion, which is twice the debt of all Indian carriers put together and more than four times the debt on Jet Airways’ (standalone) books. Higher debt means higher servicing costs and a much weaker balance sheet.

Air India’s current operations anyway leave a lot to be desired. Take for example its loss making flights. Of the 189 routes, only 12 meet total costs which means not even one flight in 10 is able to meet operational costs.

A further 82 cover their cash costs but not their total costs and 95 routes, or just over half, do not even meet their cash costs. International routes are bleeding particularly badly and account for 80-90% of losses.

CAPA has suggested massive funds infusion into AI, many times more than the current bailout package which will pump in over Rs 30,000 crore into the debt laden, loss making national carrier.

CAPA’s recipe suggests $12-14 billion investment in expanding fleet alone (it suggests 240-280 new aircraft over the next decade).