Going against the current flow of deferred deliveries or outright cancellations, the state-owned National Aviation Company of India Limited (NACIL) better known as Air India will induct 30 aircraft in the current fiscal year ending March 2010, and another 45 by March 2012, as part of its fleet expansion plans. Compare this with the large scale deferrals and cancellations by Indian carriers, most notably Kingfisher Airlines.
The airline will induct seven Boeing 777s (200LRs and 300ERs), four Boeing 737-800s and 19 A320 family aircraft comprising A319s, A320s and A321s. The airline has 153 airplanes in its fleet and placed orders with Boeing and Airbus in 2007 for 111 aircraft valued at Rs 400 billion ($8 billion) to renew and augment its fleet. 45 jets from the new order have already been delivered.
The fleet expansion will further force NACIL into massive debt. As per airline sources the company’s total debt in the medium term is estimated at Rs 790 billion ($16 billion). It needs Rs 440 billion for fleet procurements and has Rs 220 billion in long term loans and Rs 130 billion in working capital loans.
The massive expansion at a time of sagging revenues and rising expenses has forced the airline to ask the government for a Rs. 40 billion ($800 million) bailout comprising a soft loan of Rs 27.50 crore and equity infusion of Rs 12.3 billion, this after the current ruling UPA coalition has already pumped in close to Rs 274 billion ($5.6 billion) in to the airline over the last five years.
India had two state-owned airlines earlier. Indian Airlines (renamed to Indian) which operated domestic routes and a few international routes to South East Asia and the middle east using an Airbus dominated fleet. Air India used to operate all international routes and a few domestic routes using a Boeing dominated fleet. In 2007 the two airlines were merged to form the National Aviation Company of India Limited (NACIL), which now operates under the brand Air India.
Mergers are difficult at the best of times and with the best of companies. It is no surprise that two years on, Air India and the erstwhile Indian are nowhere close to merging their operations, effectively operating two separate airlines in a shotgun marriage. Such is the lack of progress that Air India’s efforts to join the Star Alliance have been delayed by at least a year.
The civil aviation ministry which controls Air India, has been pushing within government for the desperately needed funds, but it appears the finance ministry is unwilling to oblige this time.
The interim Budget for 2009-10 has already provisioned Rs 81.65 billion for the fleet procurement, and with elections under way, no significant decisions will be taken till the new government is formed.
Senior-most level officers were asked why NACIL was not re-negotiating the deliveries and prices of aircraft in light of the economic scenario. Their answer is simple
“We can’t renegotiate.”
Which leads us to the question why?
Seasoned India watchers will choose the most obvious possibility and claim there is political skulduggery and involvement of kickbacks. While I cannot discount this, there may well be another reason — offsets.
Unlike the private airlines, Air India pays a slightly higher price for aircraft under more restrictive terms, but demands the sellers Boeing and Airbus provide offsets to India, under which these manufacturers and their vendors agree to procure products from India up to a certain percentage of the purchase. In the case of civil airliners it is typically 30~35 percent, while for military procurements it can be as high at 50 percent.
It is no fluke that in the last few years all of a sudden Boeing and Airbus and their many vendors have suddenly discovered the software and manufacturing potential in India.
So is it a case of underhand dealings or bailing out the Indian economy or a bit of both? Share your views via comment.