by Elton Gomes
The finance ministry has rejected a Rs 300-billion fund-infusion proposal for national carrier Air India in the absence of a clear turnaround plan. The civil aviation ministry had sought the bailout package to clear the debt obligations of the state-owned airline, which includes defaulting on salary disbursements, and payments to vendors.
The finance ministry has urged the airline to transfer its non-core assets and subsidiaries to a special purpose vehicle (SPV). Such assets can be monetised to reduce the burden of debt on the company. Out of the Rs 500-billion debt, around Rs 220 billion has been labelled as unsustainable, which means that it cannot be serviced with the cash flow income.
Earlier in August, it was reported that the finance and civil aviation ministries were discussing a bailout plan of Rs 110 billion, after the government decided to not go ahead with the 76 percent stake sale in the state-owned carrier. The civil aviation ministry then submitted a proposal to the finance ministry for a Rs 300 billion infusion plan in order to reduce the airline’s debt and to pay employees and vendors.
The civil aviation ministry increased the proposed amount for the bailout package as it felt that Rs 110 billion would not suffice because a majority of it would have gone in paying debts, and that would leave very little towards actually improving Air India’s core operations.
This is possibly why previous bailouts for the airline have failed as most of the funds infused have been used to pay debt. The airline was borrowing taxpayer funds from the government in order to pay back other creditors. The finance ministry has refused the bailout package this time until the civil aviation ministry comes up with a viable plan for the airline’s functioning in the long run.
What is the problem?
Air India’s sale has hit a rough patch due to lack of interest from buyers. Private players such as IndiGo and Jet Airways initially did show some interest, but eventually backed out. In the absence of any buyers, the Central government was left with no choice but to extend the deadline for submitting a bid. Coupled with its lacklustre performance, the airlines bleak financial condition has made it largely unappealing to buyers. The airline has a debt burden of around Rs 48,781 crore as of March 2017, and this undoubtedly is a significant red flag to any buyer.
When Air India’s board met earlier in August, the government decided a proposal for equity infusion and a possible loan waiver to improve the airline’s finances.
Potential next steps after failure of strategic divestment
The Central government is now looking to transfer Air India’s non-core assets and “unsustainable debt” to a special purpose vehicle (SPV) in order to revive the national carrier, as per a top official, news agency PTI reported. The government has constantly been looking for ways to revive the carrier, particularly after its strategic disinvestment failed to attract buyers.
The official said that efforts are on to sell non-core assets of Air India. As part of the disinvestment process, the government has proposed the creation of an SPV so that non-core assets and “unsustainable debt” can be transferred there.
Elton Gomes is a staff writer at Qrius