Air India drops lease plans, proposes purchasing Boeing planes

Air India is planning to switch from sale and lease back to acquisition model for Boeing 787 and 777 aircraft citing higher operating expenses and redelivery costs.

The move comes in the backdrop of operating losses in two consecutive quarters in FY 2017, largely blamed on increase in lease rentals. Air India suffered an operating loss of Rs 460 crore in the July-September period, after another Rs 246-crore loss in the financial year's first quarter, April-June.

Air India has 27 Boeing 787s on order and has already inducted 23 aircraft. Twenty-one of them are on lease following sale-lease back transaction. The airline is planning a debt-funded acquisition for remaining aircraft (including two in service) which it will acquire till August 2017. Similarly, Air India plans to acquire 3 Boeing 777 aircraft in 2018 raising debt instead of sale-lease model.

Recently the airline management made a presentation to the civil aviation and finance ministries seeking their approval to raise loans and switch to acquisition route. Air India is seeking a 25-year loan from the Life Insurance Corporation with five years moratorium of principle payment to fund the aircraft.

"We feel outright purchase of aircraft is more economical option than leasing. The burden of leasing cost remains in the books for a long time," Air India chairperson Ashwani Lohani told Business Standard.

While traditionally Air India has always opted for the aircraft acquisition route with government guaranteed loans it decided to carry out sale and lease back transactions for its Boeing 787 planes following recommendation of government panel which reviewed its turn around plan. The panel had suggested sale and lease back route as it would improve cash position, help in reducing losses, improve debt-equity ratio and lower interest burden.

But now the national carrier doing a rethink considering the shortcomings of sale and lease back model. This is also in the context of operating losses posted by the airline. Lease rent is included in operating expense while interest cost is not recorded in it.

According to the airline, the shortcomings are no rights for termination of lease contract, stringent clauses for aircraft redelivery on lease expiry and 8-12 months of security deposit. " For earlier aircraft taking into account taking into lease rentals, security deposits and cost of redelivery of aircraft the cash outflow works out higher," Air India said.