Air India could become the first and possibly the only domestic airline to take advantage of the sops offered to the sector in Union Budget 2012-13.

The two major announcements for the aviation industry were sops for the MRO (maintenance, repair and overhaul) sector and an external commercial borrowing (ECB) line of credit for meeting working capital requirements of airlines.

Sources told Business Line that Air India was working to complete a transaction to borrow around $330 million through the ECB route to meet its working capital needs. The Budget permitted domestic airlines a one-year window to tap the ECB market.

According to sources, the state-owned airline is in talks with two banks, including one foreign bank and another which is an Indian branch of a foreign bank, to tie up the finances and hoped to complete the transaction before the current financial year is over. The move is expected to reduce the airline’s cost of borrowing by 7-8 per cent, sources added.

Air India, however, seems to be more of an exception than the rule in the domestic airline industry when it comes to taking up Budget proposals. Almost all domestic airlines declined to comment on record on why they had not been able to take up the offers made in last year’s Budget.

Lack of clarity on implementation of the $1-billion window for using the ECB is cited as one of the reasons why most airlines did not make use of the offer.

Peeyush Naidu, Director, Deloitte India, points out that “repayment of such loans in foreign currency, with the exchange rate situation prevalent last year, may not have seemed attractive to airlines. Also, creditworthiness of the entities in view of their existing levels of debt, as well as extent of foreign exchange earnings itself in view of their mix of domestic and international operations could have been other key factors.”

Adds Jasdeep Walia, aviation analyst, Kotak Institutional Equities Research, “Very few global banks will be interested in giving loans to Indian airline companies, given the stressed balance sheets. Only if fresh equity is pumped in, global banks may possibly have higher comfort in giving loans.”

The Budget also allowed duty-free import of spares for 90 days at an MRO. This short window for using the spares meant that the proposal died a natural death.

The then Finance Minister Pranab Mukherjee had also mentioned in his Budget speech that the Government had permitted direct import of aviation turbine fuel (ATF) by Indian carriers as actual users. This was meant to reduce the airlines’ cost of operations.

Five domestic airlines applied for permission to import ATF but are yet to begin the actual imports. Analysts say that this is due to lack of infrastructure for importing the fuel.

Besides, Mukherjee had also said that a proposal to allow foreign airlines to participate with up to 49 per cent in equity in domestic airlines was under the active consideration of the Government. In September the Government cleared this proposal.

Jet Airways is in talks with the Abu Dhabi-based Etihad Airways for a stake sale.

(This article was published on February 3, 2013)
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