Earlier this week, Air India, the beleaguered Indian national carrier, announced that it would be utilizing a sale-leaseback arrangement to evade the divisive lawsuit filed by the Air Transport Association (ATA), a US airline lobby group, over Us $ 3.4 billion worth of financing for the carrier’s order of 27 Boeing 787 and 3 777-300ER widebody jets.
The lawsuit from ATA claims that because Air India is in dire financial straits (having lost more than Rs. 13,000 crore in the past four years), Air India might very easily default on its loans, leaving the US taxpayers on tab. Without getting too far into the politics of this lawsuit, it will suffice for us to say that the Maharaja will not be dying any time soon; as the imminent Rs.30,000 crore (plus) bailout proves, there are many in the government who are not yet willing to give up their “personal Netjets.”
When we discussed the issue in our podcast last week, Devesh brought up the point that the ATA’s suit could well affect employment at Boeing. However, the ATA has countered that export-import financing has given a direct edge to foreign competitors in adding international capacity to the US. Both of these are valid points (that will be hopefully explored in a later post), however Leeham Co., a respected aviation consultancy, implied that the dispute had more to do with a conflict between Delta Air Lines and the Indian government. In that case, any argument about there being an attempt to change the Ex-Im system is a bit overstated. Still, we will keep a close eye on the situation as more news becomes available.
Air India sale-leaseback is sound strategy; lease plans, not so much
As part of Air India’s new fleet plan, the carrier will take delivery of all 27 aircraft on order, contradicting earlier reports that they would be halving the order. These 27 aircraft would be immediately sold to lessors such International Lease Finance Corp (ILFC) and General Electric Capital Aviation Services (GECAS), who would then turn around and lease the plane back to Air India. IndiGo has used this strategy to great effect with its fleet of Airbus A320 aircraft; a large chunk of its fiscal year 10-11 profit was derived from similar agreements. By selling these aircraft off immediately after purchase, Air India is able to generate cash to pay off some of its debts and avoid using Export-Import Bank funds. Given that the 787 is currently a very desirable aircraft, lessors will likely be quite willing to bring those aircraft onto their books as assets.
As part of this new fleet plan, Air India plans to lease out 5 Boeing 777-200LRs and 2 Boeing 747-400s once the 787s come on property. These leases are expected to raise Rs. 300 crore for the company. Boeing 747-400s are relatively un-economical, 4-engined aircraft, that beyond short term charters (such as Hajj), will be of little value to most airlines (save Iran Air and Air Koryo). Meanwhile the 777-200LR fleet, while newer, is not in high demand amongst world carriers. The only major operators of the type are the MEB3 (Emirates, Etihad, Qatar), Delta Airlines, along with a host of other niche carriers around the globe. Thus these aircraft are unlikely to be leased out at all, and if they were, the rates would most certainly be unprofitable for Air India.
I’ve gone on record as stating that Air India should cosider leasing out its larger 777-300ERs; which are highly desirable assets that would command premium lease rates. On many routes, the 777-200LR can have trip costs of up to 20% less than those of the 777-300ER. Thus for an airline of Air India’s profitability; the additional revenue from leasing out the 777-300ERs would be topped off by a minimization of losses on Air India’s route network.