Rs 2000cr Issue Proposed To Fund Mclr Purchase

An internal committee of Air India has recommended a Rs 2,000 crore equity issue to fund the purchase of medium-capacity long-range (MCLR) aircraft. The remaining foreign exchange cost of the project would be met from external borrowings at an interest of 8.5 per cent per annum.

The airline has based its costing on the 1994-95 budget rates, while revenue and costs have been worked out for assumed induction of all 23 aircraft in the first year for 17-year financial projections.

Interestingly, the airline's financial consultant I-Sec has suggested that the equity issue be limited to Rs 1,004 crore for acquisition of 31 aircraft at a cost of Rs 5,988 crore. The new aircraft include five B747-400s, three

A310-300s and 23 MCLRs.

The I-Sec report also points out that the medium-term acquisition strategy of AI would be possible if each of the routewise passenger load factors is increased by 20 per cent and the resultant productivity norms in line with those achieved by Singapore Airlines.

However, if the airline considers an increase of 20 per cent in each of the routewise passenger load factors or increase in load factors in select routes in a manner such that the impact on the revenues is the same, the proposed fleet acquisition programme need to be pruned to bring down the passenger load factor by 10 per cent from the 1994-95 levels.

The internal committee based its evaluation on internal rate of return (IRR), which is a measure of profitability over a certain period. The analysis has been carried out for a period of 17 years, which is considered as the effective life of an aircraft and is based on fuel, maintenance, flight crew, navigation, insurance and interest and depreciation parameters. These factors add up to 90 per cent of the cost of one aircraft.

However, the committee did not take into consideration any inflationary impact on costs and revenue. Aircraft depreciation is calculated on 95 per cent net costs of the aircraft over 17 years as required under the Companies Act. Besides, the committee has not taken into consideration buy-back offers of Boeing, Airbus Industrie and McDonnel Douglas of B747-200s in the financial evaluation.

The credits offered by the manufacturers have been discounted from the time these credits are available to April 1994 using a discount rate of 8.5 per cent per annum.