Equity, bond lifeline for AI; airlines free to import fuel

Written by fe Bureau | New Delhi | Updated: Feb 8 2012, 07:46am hrs
The aviation sector breathed a sigh of relief on Tuesday with a ministers panel clearing a financial lifeline for flag carrier Air India and allowing airlines to import jet fuel. A combination of government-guaranteed debt and equity will help Air India stay afloat while cheaper imported jet fuel will reduce operating costs across the board.

Airline stocks soared on the Bombay Stock Exchange after the decision was announced, even as the benchmark 30-share Sensex fell 0.5%. Jet Airways closed 14.48% higher at R341.20, Kingfisher Airlines up 13.20% at R29.15 and SpiceJet up 10.98% at R27.30.

The group of ministers (GoM) headed by finance minister Pranab Mukherjee cleared Air Indias plans to raise R7,400 crore through the non-convertible debentures with coupon rates of 8.5-9%, besides an equity infusion of R6,750 crore. The government had invested R3,200 crore in Air India in 2011, taking the ailing airlines total bailout package to R17,350 crore. The non-convertible debentures (NCDs) are likely to carry a coupon rate of 8.5-9% and financial institutions may subscribe to these bonds, sources said.

Air India, including the merged Indian Airlines, has been at the government's door for more than three years as the global civil aviation market turned rough.

The GoM also decided to allow direct jet fuel imports, a long-standing demand of airlines. Fuel is the biggest cost component of airlines, accounting for 40-45% of operating costs. State governments levy around 22% sales tax on jet fuel, making it much cheaper to buy fuel from abroad.

However, there may not be any immediate relief as none of the carriers have facilities to store and transport fuel.

All these proposals will now be referred to the Cabinet for final approval.

The GoM has taken a view on Air India's financial restructuring. Bonds will be issued but this will have to go to the Cabinet. A total of about Rs 7,400 crore will be raised through this route, aviation minister Ajit Singh said.

The GoM had to look at the bond option because banks were not keen to restructure airlines' debt, which would require greater provisioning. The meeting was also apprised of the in-principle decision taken by Mukherjee and Singh to let foreign airlines buy up to 49% in domestic carriers. A Cabinet note on the issue is to be drafted by the civil aviation ministry to start the process for a final decision.

Air India has outstanding loans and dues worth Rs 67,520 crore, of which Rs 21,200 crore is working capital loans, Rs 22,000 crore long-term loans on fleet acquisition, Rs 4,600 crore vendor dues and accumulated loss of Rs 20,320 crore. It remains to be seen how far the package helps Air India since larger issues like workforce streamlining and wage rationalisation remain to be addressed.

Eventually, we will have to survive on our own performance and all employees have to realise it, Air India's chairman and managing director Rohit Nandan told FE after the GoM meeting which lasted for 90 minutes.

With high costs and low passenger yields, (revenue per passenger per kilometre) Air India has a daily cash loss of Rs 21 crore. The airline's seat factor ranging around 75-78% is much lower compared to the break-even flight occupancy of over 90% at prevailing industry yield.

The company's own estimates state it is unlikely to make profits until 2017.