New Delhi: This could mark a very important milestone in Air India’s turnaround. A consortium of 19 public sector banks is examining a proposal by the airline to convert Rs 10,000 crore worth of loans into equity. If this move actually happens, the PSU banks could together get to own about 40% stake in Air India. Obviously, these banks will also then get a say in how the airline is being run. As of now, the banks have held one meeting with officials of the airline and need to take an approval from their respective boards before this ambitious loan recast proposal moves forward.
An airline official confirmed the move, saying the consortium of banks includes SBI, Bank of India, Canara Bank, Bank of Baroda, Punjab National Bank, Syndicate Bank, Central Bank and Oriental Bank of Commerce. He also said that once the board of directors of each bank ratifies this proposal, the entire debt restructuring exercise will have to be approved by the Union Cabinet.
“The Cabinet will have to approve this scheme since it would mean arrivals of third party shareholders (PSU Banks) in Air India – the government has been the sole owner till now. The entire loan restructuring process could take up to six months. But once it is done, we can reduce our total annual interest payment outgo by about Rs 1,000 crore,” said this official. As of now, the total interest payment annually is Rs 4,000 crore, so this ambitious loan restructuring proposal could mean interest payment falls by a fourth from FY18.
Restructuring of loans is critical to Air India’s turnaround. But it also brings to mind a similar attempt to involve banks in another airline’s turnaround – remember the Kingfisher Airlines saga? This story speaks of how PSU banks converted Rs 650 crore worth of loans into equity at a premium in the now-defunct KFA and ended up owning about 23% of the airline’s equity.
Given this background, not all the banks being asked to consider conversion of loans into equity may agree. The total debt on Air India’s books now stands at about Rs 46,000 crore, down by about Rs 4,000 last fiscal on several measures the airline took to reduce this leverage. Of the total debt, about Rs 20,000 crore is sought to be restructured through the Sustainable Structuring of Stressed Assets (S4A) scheme announced by the government recently, where banks are being asked to look at equity on return for debt repayment.
This scheme allows debt recast of the sustainable portion of a loan in case 75% of the lenders, who hold 50% of the value of the debt, agree. The official quoted earlier said of the Rs 20,000 crore debt under S4A, Rs 10,000 crore each has been classified as sustainable and non-sustainable. So the non-sustainable portion is being converted into equity whereas the remaining Rs 10,000 crore will be serviced in the normal course.
This story talks about tweaking of the current S4A norms where the 50% portion of the total loan to be qualified as sustainable may be reduced. Perhaps as the PSU Banks involved with Air India talk among themselves about the S4A scheme, the government may tweak the scheme itself and contours of the Air India deal may change as we go along. The story also alludes to little success PSU Banks have had so far in implementing the S4A scheme.
But whether banks involved come on board or not may also depend on the desperation they themselves face about rising bad debts in the system – it is possible that the loan for equity proposal of Air India may be the best bet yet for banks to reduce some of the red ink on their own balance sheets.
In any case, the criticality of a debt recast for Air India’s turnaround cannot be over emphasized, since it would be crucial to the airline achieving its net profit target by FY18 and expanding the Rs 105 operational profit it report for FY16 in the current fiscal. Though the airline reduced its operational loss in the first six months of the current fiscal, it still has not been able to make an operational profit. The maiden operational profit in FY16 came for the first time in a decade and was also the first time after the two erstwhile airlines (Air India and Indian Airlines) merged to form the present entity. Air India was earlier targeting a 10-fold jump in operational profit this fiscal to about Rs 1,000 crore.
So in order to achieve its target of about Rs 1,000 crore operational profit in 2016-17, it must pull up socks and hope for a significantly better operational performance in the remaining six months of the year till March 31, 2017.
Another airline official pointed out that during the first half, yields (revenue per passenger) fell by almost 15%, an unprecedented fall in revenues due to all-round fare wars. “This negated all the benefits of benign oil prices. We are fighting a daily battle on yields but given the stiff competition on pricing, there is little we can do. The good part is that occupancy in the front of the cabin has improved. Business Class is now 60% full and First Class 40%,” this official said.
Updated Date: Oct 27, 2016 16:20 PM