ECBs may not add tailwind to airlines

AVIATION: Analysts wonder who will lend to the crises-ridden sector

In a bid to revive crisis-ridden airlines, the Budget proposed a Rs 4,000 crore equity infusion for Air India and permitted airline companies to raise capital through external commercial borrowings (ECBs) with a cap of $1 billion for the industry for a year. Analysts wondered, though, who would lend to the sector.

“Preliminary estimates are that this may save 150-300 basis points for working capital loans for airlines. Key challenges would be the banks’ reluctance to lend to the sector and the hedging costs,” said Amber Dubey, Director (Aviation), KPMG, a financial advisory firm.

“For ECBs, one needs a good credit rating and a balance sheet which can help raise funds. Indian carriers have huge debt and interest burden, continuing losses, mostly a negative net worth and some have business model issues. I do not see this decision resulting in any tangible gains given the deteriorating financials of the airlines,” said Kapil Kaul, chief executive of Centre for Asia Pacific Aviation, an aviation think tank.

Equity infusion in Air India did not draw any surprised reactions. The government has infused equity of Rs 3,200 crore in the last two financial years in Air India, increasing its equity base to ease to Rs 3,345 crore. Its debt stands at Rs 43,000 crore.

Finance Minister Pranab Mukherjee met a long-pending demand of the aircraft maintenance, repair and overhaul (MRO) sector by allowing full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment. Industry uniformly welcomed this proposal.

“This puts the Indian MRO industry on a level playing field. It will help us attract business from airlines within 5 hours flying distance from India and also create jobs in the country. The MRO-spend in India is set to grow to Rs 10,000 crore from Rs 2,500 crore and a major part of the spend will come to India (excluding spare parts) with this relief from the government,” said Vivek Gour, managing director of Air Works, an Indian MRO with aircraft overhaul facilities in Bangalore and Delhi.

The increase in service tax was treated as bad news for the industry, with fares expected to rise by 12 per cent.