Airlines offset ATF losses via SPVs, aircraft leasing

Written by Shaheen Mansuri | Mumbai, Jun 16 | Updated: Jun 18 2008, 05:12am hrs
As rising fuel costs continue to eat into the bottomlines of airline companies, Indian carriers, apart from rationalising routes, are looking at other means to reduce costs. Airlines such as national carrier Air India, Delhi-based low cost carrier SpiceJet and the Wadia group-promoted GoAir have explored newer ways to mitigate their operating costs in lieu of record high fuel costs at $139 a barrel currently.

An official from Air India told FE , Forming special purpose vehicles is a common practice to undertake any legal activity within a corporate entity. However, to cut down on the cost of acquiring an aircraft from US-based aircraft manufacturer, Boeing, we have formed two SPVs instead of one of which one is in the US and the other, in India. He further explains that the SPV in the US will take the possession of the aircraft as and when it is ready for delivery and will deliver the same to its counterpart in India. The SPV in the US will take care of the legalities involved in financing the acquisition. This procedure, he says, helps the airline to cut down aircraft acquisition cost by 30%. It may be noted that Air India has placed an order for 68 aircraft worth $ 11.6 billion with Boeing.

Similarly, SpiceJet wants to absorb its excess capacity on its network by wet-leasing a few of its aircraft to Gulf-based carriers amongst other countries. Says Kiran Koteshwar, deputy general manager, project and planning, SpiceJet, We had sub-leased our aircraft last year, but this year, more aircraft would be sub-leased. The sub-leases are typically for nine-12 months.

Generally, airlines expect to earn premium on such sub-leasing deals.

GoAir, which has adopted fuel conservation methods to combat fuel cost, has a different game plan to minimize cash flow in such a scenario. Detailing how the low cost carrier is managing its cash flows, GP Gupta, the airlines chief financial officer said, We have entered into a credit line agreement with a certain bank which guarantees a payment to the oil companies on our behalf and we pay them in installments later.