CF-II Report On AIR INDIA FINANCIAL DISTRESS & RESTRUCTURING

SUBMITTED BY: Roshni Chhabra (2012259) Rupa Deepanju (2012261) Sagar Panchal (2012262) Sakshi Nagar (2012266) Sneha Ramesh (2012309)

SUBMITTED TO: Dr. Kulbir Singh

Company Background:
Air India is a state-owned flag carrier, the oldest and the largest airline of India. It is a part of the Indian government-owned Air India Limited (AIL) which is renamed as Air India Ltd. The airline operates a fleet of Airbus and Boeing aircraft serving Asia, Australia, Europe and North America. Its corporate office is located at the Air India Building at Nariman Point in South Mumbai. It is the 16th largest airline in Asia. Air India has two major domestic hubs at Indira Gandhi International Airport and Chhatrapati Shivaji International Airport. An international hub at Dubai International Airport is currently being planned. Some six decades ago in August 1953, the Indian air transport industry was nationalised to provide safe, smooth and economic air travel to the people. It involved eight warring airlines with different work cultures, horrendous safety record, disastrous financial conditions because of cut-throat competition and inefficient management in some. Thus come into existence Indian Airlines Corp and Air India Ltd to operate domestic and international long haul services. The nationalisation was also expected to spur growth, promote economic activity, rush assistance in times of natural calamities like flood, famine and earthquake, foster national integration and, above all, serve as the second line of defence in the event of war with another country. It must be conceded that the nationalised airlines fulfilled most of the expectations of the nation, particularly at times of natural calamities and during the wars with China and Pakistan. These apart, bringing remote places of the country into the mainstream by connecting them with air service need not be told. Air India is the 16th largest airline in Asia, serving 25 destinations worldwide, and, with its affiliated carriers, serves over 100 cities. Air India has codeshare agreements with twelve other international airlines. In 2010, Air India is expected to join Star Alliance, the world's largest airline alliance.

How the Financial Distress began

Around 20062007, the airlines began showing signs of financial distress. The combined losses for Air India and Indian Airlines in 200607 were 770 crore (US$140 million). After the merger of the airlines, this went up to 7200 crore (US$1.3 billion) by March 2009. This was followed by restructuring plans which are still in progress. In July 2009, SBI Capital Markets was appointed to prepare a road map for the recovery of the airline. The carrier sold three Airbus A300 and one Boeing 747300M in March 2009 for $18.75 million to survive the financial crunch. By March 2011, as shown in figure 1, Air India had accumulated a debt of 42570 crore (US$7.8 billion) and an operating loss of 22000 crore (US$4.0 billion), and is seeking 42920 crore (US$7.9 billion) from the government. Refer Exhibit 1 (Air India Balance Sheet)

Figure 1
Source: CAPA Research, Company Reports. Data for IndiGo and GoAir is as at 31 March 2012; Kingfisher and SpiceJet as at 30 September 2012; Air India (estimate) and Jet Airways as at 31 December 2012.

For 3 months (JuneAugust 2011), the carrier missed salary payments and interest payments and Moodys Investor Service warned that missing payments by Air Indi a to creditors, such as the State Bank of India, will negatively impact the credit ratings of those banks. A report by the Comptroller and Auditor General (CAG) blamed the decision to buy 111 new planes as one of the major causes of the debt troubles in Air India; in addition it blamed on the illtimed merger with Indian Airlines as well.

Figure 2
Source: CAPA - Centre for Aviation Research

On 1 March 2009, Air India had made Frankfurt Airport at Frankfurt am Main as its international hub for onward connections to United States from India; however, the airline shut down the Frankfurt hub on 30 October 2010. However on 14 July 2010, Air India chief, Arvind Jadhav announced their intention to make the new terminal 3 at Delhi's Indira Gandhi International Airport the hub for international and domestic operations with the plans of starting new direct flights to Chicago (USA) and Toronto (Canada) and also taking almost all international long haul flights away from its former Primary hub at Mumbais Chhatrapati Shivaji International Airport due to lack of space. This would streamline passenger movements and reduce operating costs. However, service to Toronto was terminated in 2012. The airline also plans to open a new hub for its international flights at UAE's Dubai International Airport. The new Chairman and Managing director changed the order of some of the 111 planes ordered in 2006 to get narrow-body aircraft instead of the wide-body aircraft. In January 2013, Air India paid GMR Group a sum of 415 crore (US$76 million) towards outstanding dues on account of charges related to the airports at Hyderabad and Delhi. Of the amount paid, 340 crore (US$63 million) was paid to clear the user development fee (UDF), airport development fee (ADF) and landing and parking charges at the Indira Gandhi International Airport in Delhi. The remaining 75 crore (US$14 million) was paid to clear similar fees at the Rajiv Gandhi International Airport in Hyderabad. Air India had also shown improvement in its performance as shown in figure 3 its market share had grown to 20.8% from 14% in 2011. 71.7% of all Air India flights were performing on time according to the then Central Minister of State for Civil Aviation, K.C. Venugopal.

Figure 3
Source: Centre for Asia Pacific Aviation & Ministry of Civil Aviation

Why the Distress

Merger of two entities - Indian Airlines and Air India back in 2007. This is a unique problem that is now being seen as the root of Air Indias downfall. On 23rd August 2007, the two airlines were merged into a new company-National Aviation Company of India Ltd to fly under the brand name 'Air India'. The merger was done with an aim to provide an opportunity to fully leverage strong assets, capabilities, infrastructure and skilled and experienced manpower available with both the companies to the optimum potential. Also to provide a large and growth oriented company for the people in larger public interest; provide maximum flexibility to achieve financial and capital restructuring through revaluation of assets; and provide an increased thrust and focus on airline support businesses. The synergy benefit was estimated to be over Rs 800 crore and will be realized once the integration is completed. But unfortunately none of the aims could be achieved. There have been problems of integration ever since. Recently, even Civil Aviation Minister Ajit Singh admitted that the merger had not worked out as planned. From a market share that was once above 60%, the merged company now has just a 17% share of the market. The challenges that the merger is facing are many. One of the biggest challenges is that Air India and Indian Airlines are working as separate entities since their merger in 2007. The merger, in fact, is only on paper this is the bone of contention. Since the 2007 merger of Air India and Indian Airlines, there has been a lot of bad blood and human resource problems in the merged entity, leading to strikes on certain occasions. Though the top-level management was merged earlier itself, integration of the middle and lower level management and employees of Grade I and II was not carried out till August 2012. No attempts were made to standardise hiring policies for the rank and file. Air India has a five-day week; Indian Airlines has a six-day week. Indian Airlines pilots were promoted unconditionally once in six years while Air India
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pilots complained they got their turn after 10 years - if there was a vacancy. The ground handling teams of the two airlines continue to operate separately. Integration of human resources of erstwhile Indian Airlines and Air India finally began after five years of their merger, with the management coming out with seniority lists of about 4,500 officers as per the recommendations of Dharmadhikari Committee. The other challenges include inefficient top level management, large workforce postmerger, aircraft and ticketing system, and leaky financials. Air India has had four chairmen in the last six years with no one biting the bullet on tough decisions. Success is difficult with so much instability at the top. The merger brought together two disparate entities and created a behemoth with 30,517 employees - 214 per plane. Singapore Airlines has 161 while British Airways has 178. Air India's high employee-aircraft ratio is expected to come down to 110 per aircraft once 19,000 employees are transferred to two new proposed units - one for ground handling and the other for maintenance, repair and overhaul (MRO) operations. But, even here, workers want to be deputed rather than transferred. Airlines have successfully worked at eliminating expenses without hurting the service experience is to have a fleet with a single aircraft type. After the merger, Air India continues with both Boeing and Airbus-made planes: the international operations are run mostly by wide-body Boeing 777 jets, while domestic routes mostly use A320S. The result: high operations, maintenance, and manpower costs. Air India was also hurt by the delay in integrating the two airline reservation systems. A single system allows it to sell tickets under one airline code, join alliances and ink code-share agreements. It took until February 2011 for a common reservation system to come up. No business enterprise, not even one backed by the sovereign, can survive years of losses with no turnaround visible. The airline's total debt, as of financial year 2011, was Rs 44,000 crore. About half of that is from long-term loans for aircraft purchase. A CAG report termed the purchases a "recipe for disaster" . While acquiring some 110 new planes may have made strategic sense for the national carrier in the mid-2000s, Air India did not have the financial health to sustain an expenditure of Rs 40,000 crore. Unions at loggerheads: There are two strong unions representing pilots from the erstwhile companies, and they are still at loggerheads. One is the Indian Pilots' Guild, representing Air India employees, and the other is the Indian Commercial Pilots' Association for pilots from Indian Airlines. In May 2011, nearly 700 members of the Indian Commercial Pilots' Association went on strike, demanding parity of pay and better conditions. They alleged that their colleagues on international routes earned up to $4,500 a month more than them. The striking pilots were from the former Indian Airlines and were allowed to fly mainly domestic routes while the Air India pilots flew mainly international routes. That meant the latter group received added
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incentives like international allowances, stay and other benefits. Then the staffs from the Indian Pilots Guild, representing pilots from the Air India faction, went on a strike in 2012 about who gets to fly which aircraft. The issue was related to flying 787 Dreamliner. Industry in debt: As shown in figure 1, Five of India's six main carriers are losing money. Low-cost carrier Indigo is the only profitable airline in the country. The industry has a combined debt of nearly $20bn. Some of the problems that the airline faces - such as high fuel costs and tough competition - are common to other companies in the sector. But employees point out that both Air India and Indian Airlines were profitable companies prior to the merger. Now the company is in severe debt and owes billions of rupees to fuel suppliers. In a bid to raise more money, the government is also looking at selling off some of the airline's assets, such as property, and letting go of parking spots at airports. Lack of policy clarity in State-owned enterprises (SOEs): Since 1991, most of our SOEs have continued to exist without a clear sense of national purpose, with the threat of privatisation and creeping disinvestment hanging over them. Air India, like other SOEs, suffers from this fundamental existential malady. It is not only unfair but disingenuous to expect AI to perform satisfactorily under such circumstances. This model brought in its wake the economic stagnation of the 1960s and 1970s, from which the economy broke out only after the reforms of the early 1990s. The share of the private sector increased across the entire economy. The fact that NTPC, ONGC, BHEL, GAIL, EIL, SBI and some others continue to turn in sterling performances, despite this mortal handicap, is only a testimony to individual brilliance in some cases, prevalence of hidden or overt subsidies, or the government implicitly guaranteeing their survival. Plight of being a national carrier: Politicians in power and bureaucrats have always treated Air-India as a milch cow. Air India is not run on commercial or professional lines, but on political considerations, offering freebies to the all and sundry in the government. At present, Rs 800 crore has been held back for payment of VVIP duties and Rs. 200 crore is owed by the defence department. The airline is always at the beck and call of our political leaders and senior officials, with schedules being changed and passenger reservations being cancelled because of the exigencies of official travel. These factors rendered Air India an undependable carrier, its market share sinking to a pitiable 15 per cent in April 2011 despite the airline having the largest fleet by far.

Restructuring of Air India

A turnaround plan of 5 steps 1. 2. 3. 4. 5. Infusion of equity Conversion of short term loans to long term loan Reduction of interest rate Operationalisation of MRO and ground handling subsidiaries Resolving integration issues with Indian Airlines

A consortium of 19 banks, led by State Bank of India, has approved the financial restructuring plan of Air India. The plan, which includes debt restructuring of Rs 18,000 crore by the banks and a committed equity infusion by the government, will require Cabinet approval. Of the Rs 22,000-crore high-cost working capital debt of the airline, banks will restructure nearly Rs 18,000 crore Rs 10,500 crore will be converted into long-term debt with a repayment period of 10-15 years and the remaining Rs 7,400 crore (approximately) will be repaid to banks through a government-guaranteed bond issue. The official said the amount of Rs 7,400 crore would have a moratorium of 12 months and the Rs 10,500 crore of six months. We will be able to save around Rs 1,000 crore immediately in the first year after the restructuring plan is implemented, he added. Air India has debt of over Rs 43,000 crore Rs 22,000 crore short-term and Rs 21,000 crore longterm. It has an annual interest outlay of Rs 2,700 crore. Of the Rs 2,700 crore, Rs 1,600 crore goes to service working capital loans and the rest to service low-cost loans taken for aircraft acquisition. In the second stage of the financial restructuring plan, the government has to infuse equity in the airline till 2020-21. A Group of Ministers (GoM), headed by finance minister Pranab Mukherjee, had recommended an infusion of Rs 23,000 crore in the airline till 2020-21. As part of the restructuring plan, the government announced in the Budget an infusion of Rs 4,000 crore in financial year 2013, raising the airlines equity base to Rs 7,345 crore. The infusion is over and above the Rs 3,200 crore infused in the last two financial years. The airline will utilise Rs 4,000 crore for its dues. It has to clear dues of Rs 2,500 crore to oil companies; Rs 1,200 crore is due to be paid to airport operators and Rs 580 crore in employees salaries. This is the second time that banks have approved a debt restructuring plan for Air India. In the plan approved earlier, banks had to convert Rs 10,500 crore of short-term loans into longterm and convert Rs 7,400 crore into equity shares. The banks later objected to converting debt into equity in the carrier, as they were not sure about the companys revival and the finance ministry had rejected any board-level representation for banks. Air India has accumulated losses of over Rs 20,000 crore. It is losing Rs 15 crore a day. On 12th April 2012, the Cabinet Committee on Economic Affairs approved the Turn Around Plan (TAP) and Financial Restructuring Plan (FRP) for Air India. The Minister informed in a
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Press Conference that the Cabinet Committee on Economic Affairs (CCEA) has taken up the issues relating to TAP and FRP of Air India today and decided to approve them. The approval of the TAP and FRP by the CCEA would help Air India in getting (i) upfront equity support of Rs.6,750 Crore, (ii) GOI Guarantee for repayment of Principal amount and payment of Interest on the Non-Convertible Debentures of Rs. 7400 crore proposed to be issued to financial institutions, Banks, LIC, EPFO etc. and used to repay part of Working capital loans, (iii) equity for Cash deficit support of Rs.4,552 crore till FY 2021, (iv) equity for already guaranteed aircraft loan of Rs.18,929 Crore till FY 2021, (v) Induction of already contracted for aircraft which include 27 B 787 and 3X B777-300ER on a sale and lease back basis. The banks have also approved conversion of short-term/working capital loan of Rs. 11,000 crore into long-term loan. TAP and FRP had been prepared by the management of Air India in consultation with SBI Caps and vetted by an independent consultant M/s Deloitte. The FRP and TAP were also examined by a Group of Officers constituted by the Group of Ministers (GOM) on Civil Aviation. The GOM had recommended the TAP and FRP for approval of CCEA. The releases of various tranches of equity, however, would be subject to achievement of various laid down milestones that includes Pay Load Factor (PLF), On Time Performance (OTP), Fleet utilisation, Yield Factor, rationalisation of various emolument structure of the employees etc. An Oversight Committee shall be constituted to monitor and ensure that the milestones are achieved before the release of tranches.

Exhibit 1 Balance Sheet of AIR INDIA

Industry - Transport - Airlines Year Latest No. of Companies 44 SOURCES OF FUNDS : Share Capital 9485 Reserves Total -12865 Equity Share Warrants 0 Equity Application Money 45 Total Shareholders Funds -3336 Secured Loans 34629 Unsecured Loans 46583 Total Debt 81212 Other Liabilities 13456 Total Liabilities 91332 APPLICATION OF FUNDS : Gross Block 106646 Less : Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liability Net Deferred Tax 30109 0 76537 0 9755 4255 [Rs. in Crs.] 2012 2011 2010 15 26 32 2817 1500 0 27 4343 11965 15254 27219 735 32298 8381 -8603 0 7 -215 31427 37988 69416 12976 82177 5065 -2295 6 1358 4133 26971 37615 64587 13905 82625 2009 29 3849 4785 14 1418 10067 13865 19153 33017 57 43140 2008 19 1963 14749 0 80 16792 7427 27998 35425 0 52217 2007 21 1850 5884 0 47 7782 4842 12945 17787 0 25569 2006 22 1844 5428 0 5 7277 3639 7624 11262 0 18540

38042 14479 0 23563 0 4398 2737

90279 19124 0 71154 0 6177 4129

78485 15057 13 63414 0 15022 4459

41701 9330 0 32371 0 9497 2688

47333 8659 0 38674 0 8222 2060

21863 11510 0 10353 0 9565 425

24291 15543 0 8748 0 6454 375

3504 9298 3826 12673 29300

1141 3157 1076 5888 11262

1920 6093 3194 10908 22114

1934 5524 3429 13320 24207

1007 2570 2807 10339 16723

1783 5040 4897 8904 20624

1509 2908 5106 7819 17341

1796 3592 5007 6345 16740

32900 8632 41533 -12232 23 10810 2962 7848

14897 4781 19677 -8416 0 6243 1361 4882

25405 7744 33149 11035 9 9143 2487 6657 10

23029 7507 30535 -6329 14 8304 2269 6034

15132 5352 20484 -3761 65 4049 1770 2279

14115 5129 19244 1380 33 3746 1898 1848

7925 3991 11916 5425 35 807 1042 -235

8949 4483 13432 3308 60 422 827 -405

Other Assets Total Assets http://www.capitaline.com

5146 91332

5134 32298

5085 82177

10 82625

0 43140

0 52217

0 25569

0 18540

References
http://www.airindia.com http://www.bbc.co.uk http://www.thehindubusinessline.com http://pib.nic.in http://businesstoday.intoday.in http://www.business-standard.com CAPA REPORT - http://centreforaviation.com/analysis/air-indias-financial-crisisdeepens--usd13-billion-in-losses-in-three-years-something-must-chang-3801 Case study on AI and IA merger http://www.icmrindia.org/Short%20Case%20Studies/Business%20Strategy/CLBS087 .htm Report on Air India and Singapore Airlines http://jgbc.fiu.edu/index.php?journal=JGBC&page=article&op=viewFile&path%5B% 5D=17&path%5B%5D=20 Databases used o PROWESS o CAPITALINE

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