Revised AI plan projects operational profit in 5 years

Air India will start making operating profit five years after its turnaround plan is implemented, says the revised outlook of the company.

The new plan is likely to be discussed in the meeting of the group of ministers to be held next week.

Air India had earlier projected it would start making operating profits from the first year after the turnaround plan is implemented.

A finance ministry sub-committee, formed to review the initial plan, had asked the airline to revise its projections and targets since in the earlier turnaround plan, which projects operational profit from the first year itself.

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"According to the revised plan, we will start making operational profit after five years of the implementation of the plan and become a profitable airline in three years after that," said a senior Air India official, requesting anonymity.

The carrier has accumulated losses of Rs 20,000 crore (Rs 200 billion) since 2007.

The projections in the new turnaround plan are on the basis of a growth rate of 12 per cent per annum annum compared to a growth rate of 18 per cent in the earlier plan.

Under the new plan, the airline has demanded an equity infusion of Rs 43,000 crore (Rs 430 billion) till 2021.

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For the current year, it wants infusion of Rs 8,373 crore (Rs 83.73 billion), an upfront equity infusion of Rs 6,600 crore (Rs 66 billion) and support of Rs 1,772 crore (Rs 17.72 billion) in the form of a guarantee on short-term loans for this financial year.

Of this, the government had already infused Rs 1,200 crore (Rs 12 billion) in the current financial year.

As part of its restructuring plans, the airline proposes to issue redeemable preference shares for Rs 7,400 crore (Rs 74 billion) of the Rs 22,165 crore (Rs 221.65 billion) working capital loans, with eight per cent dividend.

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It also proposes steps to enable it to repay Rs 11,100 crore (Rs 111 billion) of loans at 11 per cent interest over a 15-year period.

The fund requirements of the cash-strapped airline are huge. It has to repay Rs 20,415 crore (Rs 204. 15 billion) worth of loans before the end of this financial year. AI has Rs 42,350 crore (Rs 423.5 billion) of debts in all -- Rs 20,185 crore (Rs 201.85 billion) aircraft loans, Rs 22,165 crore working capital loans, and the others being overdue.

Its fleet induction plan, till 2014-15, with a fleet of 133 planes, has also been scaled down to 233 compared to the earlier plan of adding 272 aircraft.

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The induction will be a mix of long-haul, short-haul and smaller planes.

"Had we inducted 272 airplanes, we would have made profits much earlier," said the official.

The official said the Boeing 787 Dreamliners are a key component of the airline turnaround plan and should join their fleet.

"The 787s will be a game changer. It is a next generation aircraft and also consumes 20 per cent less fuel. Above all, we require a medium-haul aircraft to make our medium haul routes profitable," he said.

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The officer said 787s will replace all the Boeing 777s, which will deployed in long-haul international routes, and Airbus 319s and 321s that will be deployed in the domestic routes.

"We aim to have a market share of 30 per cent in five years and that target is the same in the new turnaround plan also," he said.

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Firm's fortunes hinge on Boeing 787, say experts

Air India will lose its first-mover advantage if it cancels its order for 27 Boeing 787 planes, as the waiting period for new orders is upto 10 years, said an aviation industry source.

AI will receive its first Boeing 787 plane by the year-end, while the first ever Boeing 787 Dreamliner will be delivered to Japan's All Nippon Airways next week.

The fate of the Air India-Boeing deal hangs in balance till the government clears the purchase.

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Last week, the Air India board referred the proposal to acquire Boeing 787s to the Finance Minister Pranab Mukherjee-led Empowered Group of Ministers.

Earlier last week, Civil Aviation Minister Vayalar Ravi had said AI does not have the money to buy new planes, fuelling speculations that the airline will cancel or defer the order.

The national carrier has been saddled with Rs 40,000 crore (Rs 400-billion) debt and was unable to pay salary to its employees on time.

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The minister's statement came in the wake of the Comptroller and Auditor General questioning the government's decision to buy the planes and burdening the airline with additional debt.

According to media reports, the government may even halve the order and opt to induct only 14 planes or defer some of the deliveries.

"Air India does not have a medium haul aircraft which it can use to connect West Asia, South Europe, Far East and Tokyo.

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"Air India had 20 airbus A-310 planes and the Boeing 787 is a replacement for them. The B-787 has a range of 13 hours, burns less fuel, carries 50 percent more cargo.

"It is a brand new plane and will have less maintenance.

"That makes it attractive for Air India. Since its a new plane Air India will be able to charge premium on its fares and yields will be higher," said an aviation industry source.

"Jet Airways will get deliveries of its Boeing 787 in 2014. The waiting period for new orders is nine-ten years." Jet has ordered 10 Boeing 787 aircraft.

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In addition, Jet Airways and Spicejet have 69 Boeing 737s on order. The backlog of deliveries of Boeing 737, 777 and 787 to airlines in India is over 100 and will be cleared over the next five years.

"Any new generation aircraft will add value to the airline and help attracting passengers. The question is how to utilise and market it. In the past Air India has not shown great acumen in those two things," said an industry expert.

Cancellation of the Dreamliner deal, however, will be fraught with implications not restricted to Air India alone.

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The order for 27 Boeing 787s is a part of an order of 68 planes which AI made in 2005.

The deal size is around Rs 38,000 crore (Rs 380 billion).

As a part of the deal Boeing agreed to certain offsets, investments, training of AI crew and construction of MRO in Nagpur.

The total offsets from civil and defence purchase deals is around $4 billion and the plane manufacturer has been working with Indian corporate and public sector companies such as Hindustan Aeronautics Limited, Tatas, Wipro, Infosys and HCL.

For instance manufactures flaperon, an aircraft component, used in Boeing 777 and Tatas are manufacturing floor beams for the Boeing 787 plane.