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India's cash strapped airlines may finally get to fly higher

By Arindam Majumder
August 09, 2018 21:34 IST
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The ministry has also asked that the cap of such borrowings is to be set at $500 million (Rs 3,450 crore) for a single company and $1 billion (Rs 6,900 crore) for the entire sector.

Distressed Indian airlines may get a new line of funding from foreign lenders, as the government is mulling opening up the external commercial borrowing (ECB) route for them to raise working capital.


The civil aviation ministry has sought the intervention of the finance ministry to allow airlines to tap foreign funds.

“Airlines, in their correspondence with the government, have requested that since aviation has become a primary mode of transport and an essential part of the infrastructure, they should be given benefits such as access to ECB for working capital. We have written to the finance ministry asking for it,” said a senior ministry official.

The ministry has also asked that the cap of such borrowings is to be set at $500 million (Rs 3,450 crore) for a single company and $1 billion (Rs 6,900 crore) for the entire sector.

“Some airlines such as Jet Airways and IndiGo had demanded that the cap be higher, so we have asked for it,” the official said.

A Reserve Bank of India (RBI) spokesperson did not respond to queries.

ECBs are loans raised by an Indian corporate entity from a foreign commercial bank or other financial institutions to be used for commercial purpose such as capital expenditure.

Data from the RBI India shows that the quantum of such borrowings had increased over the last decade, reaching a peak value of Rs 200,000 crore in 2014.

According to the current RBI guidelines, airlines can access foreign funds but only for the purpose of buying aircraft or engines.

This makes it compulsory for airlines to buy the asset - an aircraft or an engine - and show it on the books, before raising capital.

The RBI in 2012 had allowed such a scheme when a similar distress hit the sector but, it was discontinued in April 2016.

The sector is showing similar signs of distress due to the inability of the carriers to raise the ticket price despite an uptick in input cost.

Credit rating firm Icra has forecast that the industry is likely to post a loss of Rs 36 billion in the current fiscal year.

Senior airline executives said allowing ECB for raising working capital can be a game changer for the sector, reeling from the twin shocks of high fuel prices and exchange rate fluctuation.

First, airlines with high debt will get access to a large volume of funds at a fairly cheaper interest rate.

"Foreign commercial banks, depending on their risk assessment, give very competitive interest rates. There is nothing like it if you can lower your borrowing cost,” said a chief financial officer of a private airline.

Second, this will allow the domestic airlines to retire their high-cost working capital debt.

“This is a great saving for the airlines as they can refinance high-cost working capital loans with dollar-working capital loans,” the executive said, pointing out that foreign loans are at least 7-8 per cent cheaper than rupee loans.

For an Indian airline, a bulk of their working capital needs is dollar denominated.

These include aircraft lease rents, maintenance costs, salaries of expats, ground handling and parking charges abroad, and payments to global vendors.

“Inclusive of fuel, dollar-linked costs of airlines would be 60-70 per cent. So, if we can raise debt in dollars, it is always beneficial,” the executive said.

However, the move, if implemented, may not benefit all airlines as creditworthiness of Indian airlines remains low.

“Indian carriers have huge debt and interest burden, continuing losses, mostly a negative net worth, and some have business model issues.

"The decision may not benefit all airlines, but the ones with strong balance sheet will gain immediately,” said an analyst.

Photograph: Amit Dave/Reuters

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Arindam Majumder in New Delhi
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