Debt trap: Air India’s ride out of turbulence may have hit a dead end

Documents reviewed by the Business Standard show that the Modi administration has been aggressively pumping money in a bid to resuscitate Air India’s fortunes. From August 2014, a couple of months after the Narendra Modi-led National Democratic Alliance government assumed power, till March 2017, Rs 16,822 crore have been infused into Air India from taxpayer’s money. The first tranche of Rs 2,000 crore was received by Air India in August 2014. Subsequently, six more payments totaling Rs 1,947 crore were made from September 2014 to February 2015.

Between April and November 2015, seven payments amounting to Rs 3,300 crore were made. Air India had also requested the government to treat interest reimbursements on its aircraft loans as revenue grants rather than equity support. This, according to the airline, would have helped it reduce the interest burden in its balance sheets.

The Modi government’s resolve to revive Air India seemed to have grown stronger the next year. In March 2016, Rs 4,318 crore was given to the airline. These payments were in the form of equity infusions with Air India issuing over 4 billion shares to the government and were part of the national airline’s Turnaround Plan and Financial Restructuring Plan. In March 2017, another Rs 5,257 crore was given to Air India in the form of equity infusions. Being a government owned company; over 5 billion shares were allotted to the president of India as part of the deal. While these figures look impressive, Air India has been surviving on such infusions for a long time now. In 2013-’14, the Manmohan Singh-led United Progressive Alliance government had pumped Rs 6,000 crore into the airline in a similar manner. This was Rs 1,000 crore more than the approved amount.

By the look of it, these infusions over the years seem to have had little impact in reducing Air India’s overall debt situation. The airline has started explicitly stating its overall debt position in its annual accounts only since 2014-’15. Its overall debt stands at Rs 52,460 crore. Its net worth is negative. Its aircraft project loans have hovered around the same mark of over Rs 22,000 crore since the last five years. Its passenger load factor and overall revenues have improved marginally over the years. Losses in 2014-’15 stood at Rs 5,860 crore. The only profit (of around Rs 15 crore) it ever made in years was in the month of December 2014 when aviation turbine fuel prices were at an all time low. It has continually trimmed its workforce over the years. In 2011, it had more than 26,000 employees on its rolls, including over 5,000 Schedule Castes and over 1,400 Other Backward Castes. In 2014-’15, its employee strength was just over 21,000. The number of SCs and OBCs employed by Air India fell by 26% in line with the overall pruning of the workforce.

The airline’s CEO Ashwani Lohani, in an open letter on March 15, had blamed mounting debt as the cause of Air India’s ills. Lohani had noted, “Of course gross mismanagement at the senior management levels of the company played its part in the rapid downward slide too, but isn’t appointing senior management functionaries the function of the governments? Yet the mountain of debt that we acquired appears insurmountable and is at the root of all the problems that manifest as symptoms to all and sundry.”

While the open letter was uncharacteristic of a senior bureaucrat, it also indicates that Air India’s ride out of turbulence could have hit a dead end. To understand Lohani’s point of view involves comprehending the crushing debt trap Air India finds itself in. This is also where Lohani’s claim needs to be taken with a pinch of salt. Unlike some private airlines, Air India’s debt trap was significantly eased in a ‘confidential’ deal with a consortium of 19 banks led by State Bank of India in 2011. This involved restructuring the airline’s working capital.

As of September 2011, Air India’s outstanding working capital was Rs 21,500 crore. Under the deal this outstanding working capital was reduced to a long term loan of Rs 10,437 crore. This loan was to be repaid to the consortium of banks by 2027 with an interest rate of 11%. Air India was also not required to repay the principal amount for a period of two years. As part of the restructuring of its debt, Air India mortgaged a common set of prime assets to the consortium.

The mortgage document reviewed by Business Standard shows that Air India kept the following as security with the consortium: 29 Airbus aircraft, a building at the old airport at Kalina in Mumbai, the Air India building at Nariman Point in Mumbai, a plot of land at Nerul in Navi Mumbai, a building at Santa Cruz in Mumbai, the airline’s staff quarters at Vasant Kunj in New Delhi, land owned by Air India at Baba Kharak Singh Marg in Delhi, its office at Gurudwara Rakabganj Road in Delhi, properties owned by the airline at the Asiad village complex in Delhi, land in DLF Phase-3 Qutub Enclave in Gurugram, plot of land owned by the airline in Chennai’s upmarket Anna Salai and land and buildings owned by the airline in Hyderabad. Air India continues to use these as security even today for availing short term loans from various banks.

To Air India’s and the banks credit, the list of mortgaged assets guarantee recovery of a significant portion of the outstanding loans. This is in stark contrast to the Kingfisher Airlines saga where banks lent thousands of crores after being pledged the airline’s trademarks. These trademarks were reduced to junk after Kingfisher airlines license was cancelled with banks struggling to find buyers to recover even a fraction of their loans.

While Air India’s long term debt was taken care of, a part of the working capital was also converted into short term loans. This was another sweetener from the government to Air India. These short term loans amounting to Rs 7,392 crore was quickly repaid by Air India by issuing non convertible debentures. These debentures were placed through Life Insurance Corporation of India and Employees Provident Fund Organisation and guaranteed by the government. A list of debenture holders shows that the employee provident funds of various public sector banks, private companies among others were subscribers. Some of them include Tata Motors, Shapporji Pallonji, Oriental Insurance, Garden Reach Ship builders, SBI and various other government owned and private banks. Air India invariably has to pay interest to the debenture holders and a part of the government’s equity infusion is invariably ploughed back to these provident funds. This is also where Air India’s debt trap comes a full circle: the government pays Air India money every year and a part of it is again circulated back to the government.

Despite these interventions, Air India’s debt problem has snowballed into a monster of stratospheric proportions. In 2013-’14, just the principal component of Air India’s debt stood at over Rs 50,000 crore. By 2014-’15, its overall debt was Rs 54,260 crore. Surprisingly, the interest and penalty component of the outstanding debt was a little above Rs 1,000 crore – a small sum given the size of the national carrier’s debt. Air India claims to have maintained discipline in servicing its interest obligations even though repaying the principal sum could be a different ball game altogether.

Air India’s complex financials haven’t escaped the scrutiny of the Comptroller and Auditor General of India’s office either. In July 2016, the CAG, in a letter, pointed out that Air India was understating its losses and overstating its loans to the tune of Rs 1,155 crore. In April 2015, the CAG’s audit found that Air India had not factored in losses to the tune of Rs 387 crore it had suffered while selling three of its aircraft.

Clearly, it might just take more than equity infusions every year by successive governments to stop Air India from being a black hole for taxpayers money.

This article first appeared on Business Standard.