The proposal, which is subject to the approval of the Finance Ministry, is likely to materialise once the new government assumes office, the official said.
The national carrier currently has a total debt of about Rs 44,000 crore, consisting of aircraft related debt of Rs 22,000 crore and long term working capital debt of Rs 18,000 crore.
The proposal by the airline to raise a tax free bond is a part of Ministry of Civil Aviation backed Prof. RH Dholakia Committees recommendation, which was set up in 2012 to recommend initiatives to cut costs and increase revenue of the airline.
The finance ministry had earlier rejected similar proposal by the national carriers proposal to raise tax-free bonds on the grounds that such issues were permitted only for infrastructure companies.
However, the airline is confident that the finance ministry will give it a green signal after a new government assumes office, as floating the bond is necessary for the ailing carrier, struggling with huge debt.
"Raising the tax free bond is currently the top priority for us, as it will help us to retire the airline's high cost working capital debt, the senior Air India official said.
Air India's board of directors recently conducted a review on several cost cutting measures initiated by the Management, which were a part of the implementation of Prof RH Dholakia Committees recommendation.
The Committee had provided 22 recommendations at various levels to bring down costs and increase revenue which implemented would result in a saving of Rs 3,200 crore, the official said.
These recommendations include strong accountability at various levels in the management, charging for food on certain sectors, shifting of Ground Handling and MRO business to its subsidiary companies, enforcement of excess baggage charges, curtailing the loss making routes, cutting down Staff on Duty movements of crew to minimum and temporary posting of employees, removal of unjustified allowances and implementation of DPE pay scales, closing down of offline stations, banning encashment of Paid Leave and Special Leave, and upgrading passengers to higher class.
While most of these reccomendations have been implemented, those remaining are set to be executed in the coming months.
The government enterprise is also gearing up to take on competition, especially low cost carriers (LCCs) like IndiGo, SpiceJet and GoAir, which have in the past few years eaten into the market share of full service carriers like Air India and Jet Airways (India) Ltd .
"The Management has taken a number of initiatives in implementing most of these measures including the reconfiguration of A 321 (Airbus) aircraft to reduce Business Class seats from 20 to 12 and increase the Economy seating to bring about a hybrid model to thwart competition from LCCs. Four of the A 320 and 6 A 321 have already reconfigured resulting in enhanced capacity, the senior AI official said.
As a part of the revenue enhancing measures the national carrier also plans to lease out space at Air India Building and at some of its booking offices to Banks for installing more ATMs.
The flag carrier is also currently in talks with the high commissions in Nairobi, Mauritius and Hong Kong monetizing its land assets. The airline plans to raise Rs 5,000 croreby 2022 by monetising its land assets.
"We are looking to get our overseas properties revalued to determine the benchmark pricing and come up with tenders, respectively, in the coming months. Several public sector banks have expressed interest on our over seas assets, the official said without naming the banks.
As for monetizing its Indian assess, the airline currently awaits cabinet nod to sell some of its properties, which is expected to happen once the new government resumes office.
With the government's recent infusion of Rs 1,375 crore into the airline, which came as a result of the airline achieving several milestones as per the guidelines of the Turn Around Plan (TAP), Air India is confident to achieve future milestones to get the remainning of the Rs 5,500 crore infusion from the government this fiscal.
"The Rs 1,375 crore, which was infused into the airline recently, was due since last year. Most of it will be used to repay government guaranteed loans, the official added.
According to the TAP the airline is required to complete several performance related milestones to be eligible to get periodic monetary infusions from the government. Air India has in the last six months fulfilled most of its mile-stones indicated in the TAP in terms of Passenger Load Factor (PLF), On-time Performance, fleet utilization, yield and rationalization of various emolument structure of the employees, airline officials said.
Air India, which has also been able to narrow down its losses since the last few years, expects topost a loss of Rs 3,900 crore during FY 2014, down from Rs 5,200 crore it posted in FY 2013.
"These measures apart from improvement in On Time Performance, Load factors , yield and aircraft utilisation are likely to reduce the cost platform of Air India within the next few years and enable the airline to achieve the milestones set under the Government's Turnaround Plan (TAP), the senior Air India official added.