Air India could have been saved from the present financial mess had the government infused equity into the company while permitting it to buy 111 aircraft at the beginning of the decade. A CAG audit report found fault with the ministry of civil aviation’s decision to seek minimum equity infusion, and financing the aircraft order through debt.
In its report, the CAG has concluded that “capacity expansion by both the erstwhile airlines (Indian Airlines and Air India) without adequate due diligence by either the companies or the ministry as to requirement and imprudent project financing has put the merged entity into acute financial stress.”
CAG has examined Air India’s operations from 2005-2010, when Praful Patel was the civil Aviation minister, but his name is not mentioned anywhere in the report. Patel has often been accused of mishandling Air India and its aircraft purchase plan. His opponents have also made allegations on him granting profitable overseas routes to other airlines, instead of protecting Air India’s interests.
CAG has questioned the rationale for financing the purchase of 43 new aircraft by Indian Airlines, which took 97% of the purchase bill as debt. The normal practice is to take only 80% as debt. Indian Airlines proposed to place an order for buying 43 aircraft at $2,014 million plus Rs224 crore in 2002.
“The proposal envisaged 97% financing through debt and 3% government equity against the normal project financing ratio of 80:20. Ministry of civil aviation, PIB and the CCEA, however, approved the proposal.... even though Indian Airlines’ financial health did not warrant such approval”.
As on date, working capital borrowings of Air India from various banks stand at Rs22,165 crore, while long-term loans for financing aircraft acquisition come to another Rs22,000 crore. In the last three years, the government has infused Rs3,200 crore as equity and the airline is seeking another Rs6,600 crore this fiscal. Over the past four fiscals, the airline accumulated Rs14,000 crore losses and is likely to report a further loss of Rs7,000 crore in financial year 2011.
Even Air India’s finances went for a toss because of aircraft purchase, according to the CAG. It noted in the report that while Air India proposed acquisition of 28 aircraft (10 long range and 18 short range) in 2004, a ministry directive to reconsider this proposal pushed the airline to propose not 28 but 68 aircraft. All the additions were in the long range aircraft.
“The increase occurred despite Air India’s strong initial reservations against it”. CAG noted that the assumption that market share would increase from 19% to 30% was in itself faulty, and that this proposal was pushed despite the airline’s not-so-good financial health.
It has also hinted at the government’s policies actually helped the growth of private sector airline companies just when Air India and Indian Airlines were allowed to expand fleet in anticipation of market share growth.
“Despite tremendous growth in aviation sector in India, the company could not attract passengers due to its inability to handle the intense competition posed by private players offering low-cost and better services. As a result, Air India is close to a debt trap with its deteriorating financial performance”.
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