Air India confirmed in mid-Aug-08 that it would seek a minimum of INR20 billion (USD458 million) in fresh equity and soft loans from the Indian Government shortly, to fund its increasingly demanding working capital requirements. Chairman & Managing Director, Raghu Menon, stated, "we have not finalised any number [for government support] so far. But it could be more than INR2,000 crore (USD458 million)". He added, "fares have gone up due to [the] increase in jet fuel prices. We are cutting costs, but the real thing will be [a] fall in fuel prices".
Surging fuel costs, a domestic load factor of just 55% in Jul-08, a dwindling domestic market share (down to 18.3% in Jul-08) and intensifying competition on international routes mean the need for fresh funding has never been greater.
The airline estimates it generated a USD458 million loss in the 12 months ended 31-Mar-08 after reporting a USD157.5 million loss in 2006/07. As it continues to hemorrhage cash, losses this financial year could double to around USD1 billion.
Cost-cutting takes wing
At the start of Aug-08, the airline unveiled a USD253 million cost cutting programme by 31-Mar-09. Management issued a circular to all staff on 06-Aug-08 outlining a range of cost cutting measures, including restrictions on executive travel, supplies purchasing, outsourcing and the use of casual labour.
But the central pillar of the cost-cutting programme is a major route rationalisation initiative. The airline has been consistently stating that it is contemplating cutting 15-20% of domestic and international services from the Winter schedule.
In early Sep-08, Air India announced the following route rationalisation moves:
- New York: Terminating London-New York sector of its daily Delhi-London-New York service from 10-Sep-08, to help boost load factors on non-stop services to New York;
- Delhi-Frankfurt-Los Angeles: Three times weekly services to be suspended on 13-Sep-08;
- Incheon: Mumbai-Delhi-Hong Kong-Incheon service to terminate in Hong Kong, effective 01-Oct-08;
- Saudi Arabia: Commencing Kozhikode-Riyadh and Kochi-Dammam services on 07-Sep-08.
Earlier reports suggested Air India's cutbacks could include services to Jakarta and Kuala Lumpur and services beyond Bangkok to Shanghai, Hong Kong, Tokyo and Osaka. The carrier is yet to confirm these cut backs, perhaps reflecting competitive considerations as Jet Airways, Kingfisher Airlines and foreign rivals continue to ramp up their international capacity to/from India.
Replacing older aircraft as new ones deliver
Another part of Air India's efficiency drive is the replacement of older and leased aircraft with new equipment. The airline is adding 14 new aircraft to its fleet of 154 by 31-Mar-09.
In late Jul-08, Air India's parent, NACIL, signed a USD214 million pre-delivery finance loan facility for three B777-200LRs and five B777-300ERs to be delivered in 2009 and 2010. The lead arrangers of the facility are Bank of Scotland and Deutsche Bank. The co-arrangers of the facility are ING Bank and Natixis Transport Finance. NACIL has so far taken delivery of 38 new aircraft of the 111 aircraft on order, comprising a mix of A320 family and B737/B777 aircraft.
Air India plans to return about 11 aircraft - including one B747, five A310s and six A320 aircraft - to lessors at the end of lease terms this financial year. The airline will also be phasing out two ageing B747-300 combis, three A300 B4 and two Dornier aircraft.
The progressive delivery of new aircraft and replacement of older models will have significant efficiency benefits for Air India across its network, although its Indian rivals are also extracting similar benefits as they upgrade and expand their fleets. Air India's new aircraft - delivering at the rate of more than one per month this year - are also placing a heavy financing burden on the carrier.
Expanding in the increasingly cut-throat Gulf
In other routes news, Air India announced plans to launch Kozhikode-Riyadh service in Sep-08. Kozhikode has seen significant new routes activity this year, with Emirates, Etihad Airways, Air Arabia and Qatar Airways all commencing services to the city in the first half of the year.
The Middle East market is becoming intensely competitive following a surge in capacity on the route this year. Air India reportedly slashed its fares to Dubai by up to 15% ahead of an influx of capacity to the city by Jet Airways on 23-Aug-08. Yields are under pressure in what was once Air India's most lucrative route region.
No change to foreign ownership rules - yet
On 20-Aug-08, Civil Aviation Secretary, Ashok Chawla, stated the government has no immediate plans to allow foreign airlines to invest in domestic airlines. At the moment, the Indian Government caps foreign direct investment in the domestic civil aviation sector at 49%, but foreign airlines may not invest either directly or indirectly in the sector. The Indian Ministry of Civil Aviation also added in Aug-08 that it is no longer actively considering proposals for an IPO of the beleaguered airline.
But if Air India's cost-cutting programmes fail to restore profitability, the government may have no option but to consider new ways of improving disciplines at the flag carrier. Partial private ownership could provide the carrot and the stick. In the meantime, Indian tax-payers will continue to foot the bill.