Airlines hunt credit tools to avoid crash

Cash crunch forces search for financial engineering

MUMBAI: Back in 1997, the first indication of the private airline boom going bust was when they started defaulting on their payments. Circa 2008, the cash crunch in the sector is causing airlines to come up with new ways to keep the money rolling in the system to avoid defaults.

If airlines are to be believed, these instruments include those where shares of the company are put forward as a guarantee for debt.

SpiceJet’s head of projects and planning, Kiran Koteshwar, said, “We are looking at various instruments which are available in the market. These include short term instruments, including simple overdrafts where shares are used as the guarantee. These are products which are available all over the world.”

He added the Delhi-based firm was exploring the possibility of getting insurance for its debt.

An analyst with a foreign brokerage, who did not want to be named due to compliance issues, said, “Credit on forward sales has been an accepted practice in the industry. But putting the promoter’s shares on the line is risky and would be slightly strange. People would give debt only when they feel value, which is not really there in the airline industry now.”

Says a senior Jet executive: “While Jet is not in need of such instruments currently, it is natural that players who are finding it tough would try and find additional structures and instruments to keep money rolling.”  

 “Small players have reached a stage where they have no assets such as aircraft because of sale and leasebacks deals,” the official said, referring to the practice among airlines to keep their balance sheet light by buying an aircraft, selling it to a third party and leasing it back, which is very cost-beneficial.

With oil constituting the largest chunk of operating costs, most of the credit facilities are used to service fuel needs.

Airlines seem to have successfully negotiated with oil companies for longer payment periods.

Jet claims that they now have a 60-day credit period, up from 45 days some few weeks ago.

SpiceJet sources say their credit period varies between 15 and 45 days.
One analyst told DNA Money, “Almost every oil marketer has been offering two weeks or 15 days of credit on fuel. But anything longer, especially without any interest, is certainly good for the aviation industry.”

Airlines have been finding it difficult to raise money, especially when it comes to expansion plans. Jet Airways had to postpone its rights issue due to choppy equity markets. Raising credit has not been easy with debt being expensive.

The weak outlook for the aviation industry - with projected losses of $2 billion for FY09 - hasn’t helped either. But, slowly, the squeeze seems to be happening on the operating expenses also.

n_john@dnaindia.net