RISKY BUSINESS

A “mountain of debt” has been slowly killing Air India

Quartz india
Quartz india

Air India’s top boss says that the national carrier’s main problem is its giant mountain of debt.

On a May 14 Facebook post, Ashwani Lohani, Air India’s chairman and managing director, explained: “It needs appreciation that Air India always had and still has the finest set of employees be it the pilots, cabin crew, engineers or the rest. Yet the mountain of debt that we acquired appears unsurmountable and is at the root of all the problems that manifest as symptoms to all and sundry.”

The airline has a debt of Rs46,000 crore, which has been accumulated over the years partly due to expansion but mostly because the company needed funds to sustain its operations.

Air India isn’t the only case where debt has ruined the business. Other such examples include consumer electronics maker Videocon Industries, the now beleaguered Kingfisher Airlines and the Jaypee Group, a Noida-based conglomerate with interests in infrastructure, power and real estate.

For all these businesses, aggressive borrowing anticipating future demand or expansion plans turned out to be failed risks.

What happened at Air India?

Air India’s losses began mounting when it was merged with the domestic Indian Airlines in 2007. Both these firms were already making losses then, and the merger significantly spiked Air India’s costs. It spends almost one-fifth of its revenue on its employees.

The government-owned firm resorted to borrowing to plug the funding crunch. A part of Air India’s debt was taken for expanding its fleet (Rs14,000 crore are towards aircraft loans), and the rest were primarily working capital loans to sustain day-to-day operations.

Today, interest expense for Air India is around Rs4,000 crore a year.

To add to its challenges, the 2008 economic downturn pushed oil prices to historic highs, thus increasing fuel cost for airlines. Air India also could not keep up with the increased competition with new private airlines entering the sector. Currently, it has a market share of 14% in India.

Even after a bailout of Rs30,000 crore from the government in 2012, the airline’s short-term loans continued to increase. The rise was “due to failure in generating projected revenue, mainly on account of non-achievement of asset-monetisation target, increase in staff costs,” a Comptroller Auditor General (CAG) report found in March 2017.

Trimming the debt

To reduce the massive debt pile, the government has considered various options. Lohani wants to restructure the debt, he said in Sept. 2016. But there hasn’t yet been any concrete plan for restructuring.

Meanwhile, there have been reports that the government is looking to sell a majority stake in the airline to private investors, though nothing has materialised so far. The Economic Survey 2017 also suggested that Air India should be privatised to ensure its turnaround. The CAG, on the other hand, has suggested that Air India recover its dues from chartered flights.

For Lohani and Air India, though, dealing with debt isn’t a theoretical exercise. “My biggest threat is debt, not jet. Remove that, and we will beat everyone hollow,” Lohani told the Economic Times newspaper in January. Until then, the struggle is real.

Also read: Videocon is a classic case of what debt can do to a company

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