Finance ministry refuses Rs 300-bn fund-infusion proposal for Air India

Airline told to transfer non-core assets, subsidiaries to special purpose vehicle

The finance ministry has turned down Rs 300-billion fund-infusion proposal for Air India in the absence of a clear turnaround plan. The civil aviation ministry had sought the package to wipe out the debt obligation of the state-owned airline, defaulting on salary disbursements and payments to vendors. 
 

The finance ministry has instead asked the airline to transfer its non-core assets and subsidiaries to a special purpose vehicle (SPV). Those assets would be monetised to reduce the company’s unsustainable portion of the debt. Of the Rs 500-billion total debt, around Rs 220 billion has been termed unsustainable, implying it cannot be serviced with the cash flow income.

Of the overall debt component, aircraft loans account for about Rs 160 billion, which has been raised partially from EXIM Bank, foreign institutions and NCDs (non-convertible debentures), while the rest is from working capital.

Senior officials aware of the development said the civil aviation ministry was of the view that the airline could not perform at the optimum level due to the hefty interest outgo. “The civil aviation ministry had proposed that a small infusion of funds was not helping the airline’s turnaround plan as it was paying Rs 40-50 billion annually in interest,” said a senior official.

However, sources in the finance ministry suggested that the airline was unable to come out with a concrete turnaround plan. “The last bailout package for the airline didn’t improve the functioning of the airline. Instead the burden kept on increasing. So it has been proposed that the airline should transfer the non-core assets and its subsidiaries into the SPV, following which the government will monetise the assets and pay off the unsustainable portion of the debt. That will help in cleaning the airline’s books,” a senior finance ministry official said.

The finance ministry’s stand also stems from the fact that in an election year, budgetary resources need to be allocated for funding agriculture and infrastructure rather than an airline, a source pointed out.

The government is simultaneously preparing to sell Air India’s engineering and ground-handling subsidiaries, Air India Engineering Services Limited (AIESL) and Air India Air Transport Service Limited (AIATSL).  

“We have started the sale process of the two subsidiaries,” said a senior government official. The airline’s non-core assets comprise real estate assets across prime locations in cities and airports. 

A consultant will be appointed to make a detailed inventory report of the assets and fix a proper valuation. The process will be reviewed by a committee represented by secretary-level officials from the ministries of Civil Aviation and Finance, Air India executives as well as a retired judge. “With the SPV holding a portion of the debt, this will help clean up Air India’s books and lighten the debt burden. 

The move will also push up the enterprise valuation of the company, making it more attractive for investors whenever the sale process is resumed,” the official said.

Experts supported the move saying that subsidising large-scale losses of the airline was not a viable idea. “Funding large-scale losses is grossly unfair to the tax payer,” said Kapil Kaul, CEO (South Asia) of aviation consultancy firm CAPA.