Fledgling recovery

Reports that Air India may become the first public sector enterprise to avail of the Reserve Bank of India’s recent S4A scheme (Scheme for Sustainable Structuring of Stressed Assets) on debt of about ₹10,000 crore is not exactly good news for its lending banks or taxpayers. The scheme requires the banks to bifurcate loans due from a distressed firm into ‘sustainable’ and ‘non-sustainable’ portions, based on an independent review of its current cash flows. Once approved, the non-sustainable portion will be converted into equity, with the firm servicing the sustainable portion alone. While such a haircut will no doubt prop up Air India’s net profits given its mammoth interest obligations, it will saddle its consortium of 19 lending banks with equity stakes in the unlisted carrier. They can hope to encash or even value this stake only in the event of a successful disinvestment by the Government. Despite a stated public policy of letting go non-strategic enterprises, it is ironical that a ₹30,000-crore ten-year equity infusion sanctioned by the UPA in 2012 was continued on more liberal terms by the Modi government. It is now time for the Centre to set out a specific gameplan backed by a decisive timeline for Air India’s disinvestment. Without such visibility, it would be difficult for any non-government entity to justify further accommodation to the national carrier.

In this context, it is certainly good news that Air India’s financial position has shown a turnaround of late. In FY16, the carrier announced its first operating profits in nine years at ₹105 crore, against operating losses of ₹2,636 crore in FY15. To achieve this, the airline hived off a key division, slashed employee pay, squeezed in more flights and lifted load factors. Still, the sustainability of this turnaround isn’t a given, in light of the boost from the sharp slide in fuel prices and the 20 per cent plus surge in domestic passengers. To win back market share from private-sector rivals, Air India is pinning its hopes on a 30-40 aircraft fleet expansion to be deployed in high-traffic routes. However, the mere induction of new aircraft may not be enough to bring customers back to Air India. For that, the Maharaja may have to show material improvement in quality of service. Its low ranking on metrics regarding on-time performance and customer complaints seem to have contributed to a further market-share slide in the past year. If low-cost carrier IndiGo has scored a decisive win over all rivals in recent years, it has been through an asset-light model that leases out idle capacity and an obsessive focus on on-time performance, fuel savings and quicker turnaround times.

For Air India to transform into a more appealing proposition for travellers, lenders and prospective investors, it may have to rethink its hybrid business model and fleet expansion plans, apart from cutting back on freebies that it is saddled with as the ‘national carrier’. The Centre should quickly cede to the current CMD’s demand for autonomy and a level playing field, so Air India can build on its recent turnaround.

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