Bailing out Air India

Capital infusion alone is no remedy

The Group of Ministers formed to turn around Air India has recommended that the government should infuse equity of Rs 23,000 crore into the ailing national carrier by 2020-21. This includes Rs 6,500 crore this year. So, if the Cabinet agrees, the government will have to invest Rs 16,500 crore over the next eight years. It is not clear if the investment will be front-loaded or back-loaded; if it’s evenly spread out, the bill will come to Rs 2,062.5 crore per year. The guarantee that the ministers want in return from the inefficient airline is that it should raise its flight occupancy from 69.5 per cent now to 73 per cent by 2015 and 75 per cent by 2020, and its traffic should grow at 12 per cent a year from five to six per cent now. The market is growing at around 20 per cent; so this is a reasonable demand.

On the face of it, this hardly looks a foolproof turnaround plan. If Air India has to be put back on track, the government will have to look at each and every item of cost, and see where efficiencies can be achieved. Smart airlines the world over even see if the paint on the exterior can weigh less so that the aircraft burns less fuel, every second is scraped off in preparing the aircraft for another flight. In the absence of such an effort, the proposal put forward by the ministers is just another example of good money being thrown after bad. In the past, the government has shown its lack of seriousness on reviving the airline by botching up the merger of Indian Airlines with Air India, the liberal grant of bilateral rights and the purchase of new aircraft even when the coffers were empty. The Comptroller and Auditor General in its recent report has pulled up the government for these errors of judgement.

Even now, the government is undecided about the $1.4-billion (around Rs 7,000 crore) order for 27 Dreamliners from Boeing. The deliveries are supposed to begin next month. The Group of Ministers has referred the matter to the Cabinet. At the moment, Air India’s equity is all of Rs 2,145 crore — hardly enough to go shopping for Dreamliners. Debt could be an option but the carrier is already neck deep in debt. It has aircraft loans of Rs 20,185 crore and working capital loans of Rs 22,165 crore on its books. In addition, it owes Rs 2,600 crore to the jet fuel marketing companies, Rs 800 crore to the airports and Rs 400 crore to vendors. Its losses have added up to Rs 20,000 crore.

Out of the working capital loans, Air India wants to convert Rs 18,000 crore into long-term debt. The banks are required to make provisions in their accounts for all such rollovers. Any provision of this magnitude could seriously dent their profits. So, Air India now plans to approach the Reserve Bank of India (RBI) with the request that the banks should be exempt from this rule. The matter really rests with RBI, but no such bailout will be a durable remedy for Air India’s financial problems without a commitment from all stakeholders to implement a credible turnaround plan in a time-bound manner.