Air India may find it cheaper to buy jets, thanks to Tata's credit profile

On the strength of its excellent financial track record, Tata Group was able to secure Power-By-Hour (PBH) agreements with engine manufacturers GE and Rolls Royce

Air India is considering purchasing the widebody aircraft component of its recent record-breaking order. It is important to note that airlines usually choose the more popular option of leasing the aircraft. According to a report by The Economic Times (ET), Tata Sons can raise funds for aircraft purchases at lower interest rates thanks to its credit history.

 

Air India, owned by the Tata group, announced a 470-aircraft acquisition programme on February 14. The order is the single largest purchase in the history of the aviation sector. According to the report, the purchase includes 70 wide bodies made up of A350s, B-787s, and B-777-9s.

 

So far, sale and leaseback have been the preferred modes of acquisition in India. However, an increase in lease rentals, accentuated by tight aircraft supply, rising demand and interest rates, has made Air India interested in owning a portion of the fleet, according to industry executives. The report added that the airline would take a final call near delivery time.

 

ET quoted an executive of a leasing firm saying, "Air India will exercise both sale-and-leaseback as well as ownership of primarily the widebody assets. The excellent credit rating of the Tata Group will allow the airline to borrow capital at lower rates, helping it to own the assets, unlike the other Indian airlines whose primary source of income remains income from sales and cashback. This also allows the airline to lease in the future and raise cash if needed."

 

Under the sale-leaseback arrangement, the owner sells the aircraft to the lessor. This results in the immediate lease of the aircraft to the entity that placed the order. This allows airlines to unlock capital while operating the aircraft. The financing of an aircraft is finalised six months to a year before delivery. The new order will bring Air India delivery of 25 Boeing 737 Max and 6 Airbus A350-900 by 2024 first half, the report elaborated.

 

Because of its excellent financial track record, Tata Group was able to secure Power-By-Hour (PBH) agreements with engine manufacturers GE and Rolls Royce. The PBH facility provides replacement and maintenance services, which the airline pays based on usage. Significantly, the facility has been stopped by engine makers for most airlines. "PBH agreements are not attractive for engine makers, but due to the size of the order and Tata's profile, Air India got it from all engine makers," ET reported, quoting the executive of the leasing firm.