The civil aviation ministry is preparing a formal proposal for the government to put in more equity and provide loan assistance. The proposal would be ready this fortnight.

"The cuts in capacity will be implemented from the next month itself. Air India will save around Rs 500-600 crore (Rs 5-6 billion) in the remaining months of this financial year," said a senior civil aviation ministry official.

"We have finalised the international and domestic routes on which we will be reworking and withdrawing flights," said an Air India executive.

"A committee headed by our CMD Raghu Menon has been formed in the ministry, which is looking at curtailments. We will get the ministry's approval tomorrow," he added.

Around 50-60 flights, including domestic and international, would be cancelled daily. However, since there would be redeployment of aircraft (smaller air), the seats offered could decline by 10-12 per cent.

Jet Airways [Get Quote], Kingfisher and SpiceJet have already announced a 10 per cent decline in their total domestic capacity.

Industry sources said that in the international sector, flights to Los Angeles would be affected and capacity in West Asia would be reduced.

Air India, which incurred a loss of Rs 2144 crore (Rs 21.44 billion) in 2007-08, has asked the government for Rs 1300 crore (Rs 13 billion) in the form of equity and Rs 1000 crore (Rs 10 billion) as soft loans. The main reasons for the loss were a decrease of around Rs 629 crore (Rs 6.29 billion) in operating revenues and a loss of around Rs 92 crore in passenger revenue.

The national carrier's fuel bill was around Rs 7000 crore (Rs 7 billion) in 2007-2008, which was more than Rs 400 crore (Rs 4 billion) over 2006-07.

Facing a huge liquidity crunch, the national carrier increased its working capital limit in the last board meeting from Rs 8000 crore (Rs 80 billion) to Rs 9500 crore (Rs 95 billion).

This would increase the interest burden on the airline, according to sources. The interest on borrowings increased by around Rs 370 crore (Rs 3.7 billion)  and was the second largest expenditure head for Air India in 2007-08.