Mounting liabilities: Government to repay Air India’s Rs 12,000 crore debt

Despite fiscal constraints, the Centre is likely to provide Rs 12,200 crore from the Budget — half of it this fiscal and the balance in the next year — to retire 40% of the Rs 30,000-crore working capital debt of Air India. As a precursor to this, the debt — not backed by assets — will be shifted to a special purpose vehicle (SPV). The SPV will service the balance debt of Rs 17,800 crore through monetisation of the carrier’s assorted assets. Another Rs 25,000 crore of AI debt, which are backed by aircraft assets, would be serviced by the carrier itself.

The whole exercise is expected to make AI more attractive in the eyes of potential suitors when the sale takes place in two-three years, sources privy to the formulation of the latest package told FE. These proposals would soon be vetted by the Cabinet, sources added.

The government had to drop a plan to privatise the debt-trapped national carrier due to lack of investor interest. In order to service part of debt, the government-owned SPV would try to monetise the national carrier’s non-core assets including four subsidiaries, land and buildings along with artefacts. Besides, the SPV could also raise extra-budgetary resources (EBRs) to service the debt. The idea is to reduce the immediate burden on the exchequer.

After the takeover of the working capital debt, AI won’t receive any further budgetary support except the remaining `2,000 crore equity infusion under an ongoing turnaround plan (TAP), an official said. After failing to find a buyer for the airline earlier this year, the Centre has decided to first recast debt and monetise non-core assets before privatising AI and AI Express together.

Given that AI had borrowed Rs 55,000 crore with an average interest cost of nearly 9%, the debt transfer from its books would give nearly Rs 2,700-crore annual relief to the carrier from the next financial year. AI will also tighten its belt to prune costs and service of the residual debt of Rs 25,000 crore by improving operational efficiency and cutting wage costs.

AI’s interest cost stood at Rs 4,235 crore in FY17, while it reported a loss of Rs 5,765 crore. The airline’s losses may shoot up in FY19 as costs of aviation fuel have gone up by 35-40% in the past one year. With cash crunch likely to continue due to rising fuel costs, the Centre might either infuse or arrange additional loans of Rs 2,000 crore in FY19 to help AI service loans and pay salary. The additional budget support in FY19 would mean the government’s Rs 30,231-crore equity infusion under a 10-year turnaround and financial restructuring plan will come to an end two years ahead of the schedule in FY21. AI has received an equity infusion of `28,175 crore till date, including Rs 1,630 crore so far this fiscal.

Under the new plan, AI might be given two-three years to turn around before it is divested, another official said. The carrier’s other assets include wholly owned subsidiaries AIESL (which is involved in the maintenance, repair and overhaul of engines and airframe) and Hotel Corporation of India which will be transferred to the SPV. The SPV will also hold the AI headquarters in New Delhi, housing complex in Santa Cruz, apart from other land and buildings owned, leased, licensed or possessed by AI. Air India, AI Express and Air India Singapore Airport Terminal Services will be sold together later. In June this year, the government called off the proposed sale of 76% stake in AI after no buyer showed interest.