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Air India says SBI Capital’s plan may help it turn profitable 2 years ahead of schedule

LiveMint logoLiveMint 26-03-2017 Shally Seth Mohile

Mumbai: Air India Ltd’s hopes to post a profit at least two years sooner than expected, helped by improved operational efficiency, better passenger load factor and lower fuel prices, a company official said.

Under the revised plan charted by SBI Capital Markets Ltd, the debt-laden national carrier expects to become profitable by 2019-20 as against 2021-22 estimated earlier. It hopes to become cash positive by 2018-19 as against the earlier plan of 2020-21, said S. Venkat, adviser (finance) at Air India.

By 2020-21, Air India hopes to pare its debt by Rs15,000 crore. Of this, the company plans to pay off Rs9,000 crore of debt taken for acquiring aircraft. The remainder will depend on whether lenders agree to swap debt for equity, said Venkat.

At the end of fiscal 20150-16, Air India had a debt of Rs46,000 crore.

In an effort to reduce the airline’s interest burden, Air India chairman and managing director Ashwani Lohani wrote to all its lenders last month requesting them to link the interest rate to MCLR (marginal cost of fund-based lending rate) instead of base rate, he said.

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MCLR is lower than the base rate of a bank, as it calculates interest on a marginal cost of funds, rather than average cost of funds. At State Bank of India (SBI), for example, the one-year MCLR is 8%, compared with a base rate of 9.25%.

Officials at SBI, the lead lender to the airline, were not available for comment.

Air India pays Rs350 crore in interest every month. The alignment of interest rates, the spokesperson pointed out, would lead to savings of interest of around Rs150-200 crore on a loan of Rs15,000 crore.

Even as the airline is in talks with banks for converting debt to equity—a plan that has not made much progress so far due to banks’ unwillingness—it is looking at reducing their overall exposure through a government-backed non-convertible debenture (NCD ) of Rs10,500 crore. It has sent a proposal to the finance ministry for issuing an NCD.

The total exposure of banks to the airline is around Rs30,000 crore. “We still haven’t received any restructuring plans from the management at Air India. However, the account is not an NPA (non-performing asset), as they have been paying their dues,” a senior official at a mid-sized public sector bank said on condition of anonymity.

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The NCD will reduce banks’ exposure to the airline to less than Rs20,000 crore, said Air India ‘s Venkat. “We have sent a proposal to the finance ministry and a decision regarding the same is expected in the next couple of months,” he added.

India’s largest airline has continued to fly with the help of a government bailout package. So far, it has received Rs23,993 crore of a Rs30,231 crore equity infusion promised by the government under a financial restructuring plan in 2012.

The original targets, part of a turnaround plan, were finalized in June 2011 and approved in April 2012. The airline posted a net loss of Rs3,836.77 crore in fiscal 2015-16 against a net loss of Rs5,859 crore a year earlier.

With its fleet of 140 planes, Air India controls nearly 15% of the domestic market and, at 17%, the largest share of international inbound and outbound traffic.

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Analysts said Air India can do a lot more. “What they are doing now is financial re-engineering. It can do a lot more with regards to improving its cost efficiency,” said an analyst at a domestic brokerage, declining to be identified. “It is raking in the benefits of an up-cycle, not necessarily of their own making,” he said, pointing out that if it succeeds in bringing down the cost per average seat kilometer (ASKM) excluding fuel, “one can say, it has really spruced up.”

To be sure, a robust passenger growth of more than 18% month-on-month, has helped most airlines improve their operational efficiency, including improvements in load factor and better utilization of the aircraft, driving profitability.

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