Centre to infuse additional equity in Air India

The government is understood to have decided to infuse additional equity in Air India and give a soft loan to counter the financial crunch, as a high-level committee on Saturday asked the Civil Aviation Ministry to move a note on the issue for consideration of the Union Cabinet.

The Committee of Secretaries, headed by Cabinet Secretary K M Chandrasekhar, which reviewed the turnaround plan of the ailing carrier, directed the Ministry to prepare the cabinet note on the matter.

The note, to be prepared in consultation with the Finance Ministry, would be ready for circulation to the Cabinet Ministers in the next seven to ten days, official sources said after the meeting in New Delhi.

Though there was no official confirmation of the quantum of equity infusion and the soft loan the government could give to the national carrier, there were indications that its equity base, which now stands at only Rs 145 crore, would be enhanced by at least Rs 2,500 crore.

While the government would make only a partial contribution as equity infusion to the airline, a major part of resource mobilisation is likely to be through issuance of Initial Public Offer or infrastructure bonds, they said, adding the Cabinet would now take a final call on the issue.

At the first meeting of the CoS last month, Air India had sought an equity infusion of about Rs 2,500-3,000 crore and a loan of Rs 10,000 crore at 5-7 per cent interest for repayment over five years. The carrier's losses have gone up to Rs 7,200 crore in 2008-2009, while it has a debt of Rs 16,000 crore. It has started negotiating with banks and financial institutions to turn its high-cost debt of Rs 10,000-11,000 crore into low- interest loans.

However, the banks wanted the national carrier to get a comfort letter or a sovereign guarantee to convert these high-cost debt, which the government has agreed upon, sources said. At the meeting, the Finance Ministry made projections on the quantum of equity infusion and the soft loan which could be given to the ailing carrier by the government.

The government has also asked the Petroleum Ministry to extend the credit limit on the purchase of jet fuel by Air India for at least three more months, they said.

Air India CMD Arvind Jadhav made a presentation on the turnaround plan spread over 36 months as well as the steps taken in the past two months to reduce costs, enhance revenue and transform business practices. The CoS maintained  that the airline company now needed to "examine its strategic position with respect to its shareholders' (government) objectives".

The CoS, which also comprises Principal Secretary to Prime Minister T K A Nair, Finance Secretary Ashok Chawla and Civil Aviation Secretary M Madhavan Nambiar, has made it clear that any assistance from the government would have to be matched by an 'aggressive' cost reduction and a better revenue management by Air India's parent company NACIL.

A separate cost management and audit team is looking at the airline's financial restructuring plan, including debt servicing, risk management and hedging on ATF. The national carrier is in talks for cancellation of orders for six Boeing 777s long-haul planes meant for delivery between 2010 and 2012.

As of now, it has a 136-aircraft fleet, of which 53 are new ones which have replaced the aged and leased aircraft. Another significant measure to cut costs and enhance revenues was the proposal to allow Air India Express, the low- ost entity, to launch domestic operations from next month by deploying 10 additional all-economy aircraft.

The national carrier was estimating an earning of Rs 180- 200 crore through low-cost operations on the domestic sector and planning to gradually shift 70-75 per cent of its existing domestic flights to Air India Express.

On the manpower front, talks are on with 14 unions on proposals to cut incentives by half and redeploy manpower. However, with a majority of employee unions spurning the Air India management's proposal, four committees have now been set up to focus on specific segments to review the whole issue, a source said.