NPA-wary banks reluctant to enhance Air India credit line

By: and |
Mumbai | Updated: April 9, 2015 11:31:47 AM

Air India is now struggling to meet its working capital requirements as banks are unwilling to enhance its existing line of credit.

Air India, saddled with debt, is now struggling to meet its working capital requirements. (Reuters)Air India, saddled with debt, is now struggling to meet its working capital requirements. (Reuters)

Air India, saddled with debt, is now struggling to meet its working capital requirements as banks are unwilling to enhance its existing line of credit. This is sure to affect its growth plans, airline officials told FE.

The carrier, whose current working capital credit line falls between Rs 4,000 and Rs 6,000 crore, is looking to expand its long-haul operations, especially on routes such as North America, Australia and Europe. The airline is hoping to maximise revenues by increasing frequencies on busy international routes, apart from improving operational efficiencies across domestic and international routes.

“We have a working capital credit line of Rs 4,000-6,000 crore which we would like to enhance to meet our growth needs. But banks are averse to lending to the aviation sector pointing to the difficult times the industry has gone through in the past,” officials said, without specifying the additional capital required by the airline.

“Banks are not enhancing the credit limit so the benefits are passed on to competing foreign carriers which fill in the capacity the national carrier is unable to cater to,” officials said.

The fall in the jet fuel price by more than a half since June has however brought some relief to the airline, though the high cost domestic aviation environment continues to put pressure on the company’s bottom line.

“Though Air India has seen some relief in working capital requirements owing to lower aviation turbine fuel (ATF) prices, high airport charges, high interest expenses as well as low yields per mile have meant that credit requirements have remained high,” officials added.

Air India is expected to cut its net loss by about a third to Rs 3,500 crore during Fy16 as a result of a significant reduction in fuel costs and improvement in operating performance

The airline also expects an operating profit of under Rs 10 crore during Fy16, its first annual operating profit since the implementation of the government-approved turnaround plan (TAP) in 2012.

“Banks must reconsider their decision and provide the necessary working capital and long-term capital requirements. The aviation industry today is on the path of recovery with the drop in fuel prices and we expect to become operationally profitable from FY 16,” officials said.

“Many foreign carriers are subsidised by their respective governments and receive lower interest loans, enjoy higher yields compared to Air India”, the officials added.

At present, yields per passenger for Air India stand at Rs 6 per mile on domestic routes and Rs 3.50 on international routes.

“As we have a one-month payment cycle when we are paid by the agents with a lag, we sometimes find it difficult to meet our working capital expenses,” officials said.

According to Air India, interest rates on loans are around 13%, about 2-3 basis points (bps) ve the base lending rate of banks.

“The restructured account tag is still attached to us and this makes it more difficult to raise loans,” officials added.

A consortium of 19 banks, led by State Bank of India (SBI), had approved the Rs 18,000-crore financial restructuring plan of the debt-laden Air India.

However, bankers say lending to Air India is difficult at a time when banks, especially the public sector ones, are struggling to keep their non-performing assests (NPAs) in check.

During the first nine months of Fy15, Air India’s total revenues stood at Rs 16,000 crore while its operating expenses were Rs 16,700 crore. The airline posted an operating loss of Rs 1,700 crore and a net loss of Rs 3,600 crore during the same period. As per FY15 budget estimates, the airline expects a net loss of Rs 4346 crore, total revenues of Rs 21,290 crore and operating expenses of Rs 22,525 crore.

According to the airline, the number of passengers travelling by the national carrier is expected to rise to 1.80 crore during Fy16 from 1.69 crore during the previous year on the back of a 7.3% increase in capacity.

The airline, which got a Rs 30,000-crore government bailout approved in 2012, is required to fulfil key operational and financial targets to be eligible for the cash infusion. According to the government-approved TAP, it is required to post a total revenue of Rs 26,889 crore in FY16 while its net loss is expected to come down to Rs 1,447 crore during the same period.

However, its latest estimates say it will post a loss of upto Rs 3,500 crore during Fy16. Despite failing to meet some of the TAP estimates, Air India officials are upbeat on the performance of the airline.

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