Finance Ministry to hold back equity support to Air India

The Finance Ministry has decided to hold back the equity support of Rs 3,574 crore it had said it would provide to Air India, civil aviation ministry and Air India sources said.

The decision will undoubtedly have an adverse impact on Air India, which has been attempting a turnaround and making an effort to achieve various milestones it had been set as pre-conditions for this equity support.

"The ministry of finance said it cannot give the equity right now because of the fiscal deficit," says an Air India executive not wanting to be identified.

The finance minister has set a target of containing the fiscal deficit at 4.8 per cent of the gross domestic product in the current fiscal year. With six months of the year yet to go, the deficit already stands at 62.8 per cent of the target.

Air India's turnaround plan was formulated in 2011. A financial restructuring plan that would allow the airline to retire high cost working capital loans, was also approved in April 2012 by the airline's creditors, 17 in all. The plan envisaged equity infusion of about Rs 23,000 crore into the airline over the next 10 years by the government as a stakeholder.

There is an allocation of Rs 5,000 crore as additional equity infusion for Air India in the Budget for 2013/14.

The finance ministry's latest decision means Air India will now have to raise money from the market if its turnaround process is to continue.

"The ministry has said that we can raise the money from banks based on a guarantee," said the official.

It is not clear whether too many banks will be willing to put in that much money into the airline at a time when the rupee is depreciating and operating costs are rising. Most airlines have a faced severe liquidity crunch and have had to resort to high cost working capital loans. Jet Airways recently announced it would raise around $300 million through external commercial borrowings and retire high cost working capital loans raised at 14 per cent.

Also, Air India will have to secure government guarantees for this money to be raised from the market. Air India's experience with getting these guarantees has not been happy. Guarantees proved difficult to come by in 2012 when it decided to hit the market with its bond issue of Rs 7,400 crore.

But the Air India official said, "Banks are favourably inclined and we have been able to tie-up financing to a substantial extent."

"We have conveyed to the ministry of finance if they are not giving us the money, they should give us the guarantees," said a civil aviation ministry official.

Air India's financial restructuring is aimed at its conversion of Rs 22,000 crore of high cost working capital debt of which the banks agreed for a conversion of Rs 10,500 crore to long term loans and the rest, Rs 7400 crore was to be returned to the banks through the bond sale.

Falling in line with the projections of achieving turnaround and reaching milestones set to achieve operational efficiency, Air India turned EBITDA positive (Rs 65 crore) during FY2012/13. Its passenger numbers have gone up and it has now overtaken Jet Airways (not including its low cost subsidy, Jet Konnect) in market share, show government data released in August.