Air India wants 2400 crores more, the bleeding continues

After a loss of 8,556 crores in FY19, the Chairman and Managing Director (CMD) of Air India has indicated that the airline needs a sovereign guarantee of 2400 crores to fund ongoing operations. The airline continues to bleed cash at an alarming rate. Capacity woes continue and estimates indicate that twenty-two aircraft are grounded. On the costs side, there have not been any aggressive actions that would lead one to believe that the issue is being addressed. Why then should the government continue to fund the airline?

Cash-burn not helped by route decisions

Continued cash losses haven’t deterred the airline from making new route announcements. These include:
o Amritsar – London
o Mumbai – Nairobi
o Chennai – Jaffna
o Delhi – Chennai to Bali
o Chennai – Batticaloa
o Trichy – Jaffna

One can only wonder how these routes contribute to the airline at a time when all decisions must be geared towards conserving cash (which will help the ultimate disinvestment goal as well).

Alliance Air is bleeding cash and is estimated to lose around 250 crores this year. Yet new regional routes continue to be announced. The argument that these are covered by the UDAN subsidy is flawed (to say the least) as the subsidy levels are far too low to cover the route losses. Further, subsidies come with a pricing cap limiting the airline’s ability to drive up yield (also the reason why Indigo and SpiceJet have not taken the subsidy on several routes).

On the international side, long-haul routes that are bleeding cash continue without any focus on product or processes that can help drive a premium. As of this writing, at least three 777 and another three 787 aircraft are grounded further adding to the cash-burn.

Capacity woes continue

With twenty-two aircraft grounded, the airline is struggling with operational reliability. Latest figures for domestic flights show dismal network performance at 42% the second highest passenger complaints (2.3 per 10,000 passengers) and an amount in excess of INR 2 crores paid out as compensation for delays, denied boardings and cancellations.

Air India Express is one of two subsidiaries that are profitable and where expansion is limited by capacity. Yet no allocation has been made or even requested for towards supplementing the Air India Express fleet.

Finally, given the market weakness and exit of Jet Airways, the opportunities that have presented themselves have simply not been leveraged. Capacity woes continue.

Costs cannot be wished away; action is required

Finally, there has not been much clear and decisive action towards cost reduction. Leadership that should be focused on aggressively conserving cash and drastically cutting costs has not quite risen up to the task. Instead, the airline has had directives to pilots on how to make announcements; on the nature of meals; and on hiring advisors (in contravention of their own directive).

There are also statements like, “buyers need to look beyond the balance sheet” or that “[Air India] can grow and become one of the finest airlines in the world. But that can happen only in private hands.” These statements while they make for excellent creative writing do nothing for investor interest. An investor will essentially look squarely at the balance sheet and the airline cannot grow its way out of its troubles.

For the situation Air India finds itself in, each cost item needs to be looked at. From renegotiating leases of aircraft to office stationery. That is the level of focus required to get the cost base in order. Yet, this is just not being done. And in a price-sensitive market, one cannot compete with a cost structure that is unsustainable. It is no wonder that the airline is issuing statements such as, “In this financial year so far, the airline has performed much better than last year in most parameters. In terms of — number of passengers, revenue and yield… barring on-time performance because of the issues we have are having with regard to non-availability of some our aircraft…” This statement essentially indicates that the airline has taken no action with regards to cost. And as such this situation is not sustainable.

On Saturday, the government gave a sovereign guarantee to Air India to seek a 500 crore loan, however that is just a very small and temporary relief for the cash strapped airline.

The government has made several statements that clearly indicate that a sale of Air India is the only option. Yet with a slowing economy, large corporate houses being very cautious and the continued challenges at Air India, once again, it poses the question that BangaloreAviation posed several weeks ago: what if Air India does not attract any buyers. What then?

About External Analyst

The writer(s) are external experts. Bangalore Aviation may not agree with the views expressed by the author. Authors prefer to remain anonymous for a variety of reasons but mostly since they are not authorised by their employers to express their views publicly on the record.

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