Air India, a relic of state ownership threatened by losses, bloated costs and more nimble rivals, needs to secure a massive debt and operational overhaul if it is to survive in a market growing at 20 per cent a year.
The airline has not posted a profit since merging with former duopoly partner Indian Airlines in 2007 and relies on handouts from New Delhi to survive. It is behind on its payroll obligations and was forced one day last month to cancel a handful of flights because it had not paid its fuel bills.
Air India and 26 banks are in talks to restructure $4 billion of working capital debt in a deal that would force lenders including State Bank of India to accept equity in the carrier and cut lending rates to about 8 per cent from 11-13 per cent, saving it $133 million in interest costs.
Banks are not happy about the plan but may have no choice.
"There is no other option for banks but to go for it. But what they are asking for is not reasonable," said a banker involved in the ongoing negotiations. "If it is reasonable, we will approve it," he said.
Even if it can persuade banks to revise a payment schedule for $3 billion in local currency debt due on June 30, Air India needs a drastic revamp or privatisation that may require more money and political will than the government can muster.
With New Delhi opposed to privatisation but unwilling to put it out of business and banks poised to agree to a restructuring for lack of a more attractive option, Air India may well limp along in its current zombie state.
"Fundamentally, Air India has reached a dead end," said Kapil Kaul, chief executive for the Indian subcontinent and Middle East at the Centre for Asia Pacific Aviation (CAPA).
"From a business case standpoint it should have ceased to operate a few years back had it been a private company."
LOSING MONEY, MARKET SHARE
Air India lost more than $1 billion in the year that ended in March 2010, the last year for which it posted figures. Its domestic market share has dropped to fourth from third, behind private sector rivals Jet Airways , Kingfisher Airlines and budget carrier IndiGo.
A recent 10-day pilot strike forced it to cancel 90 per cent of domestic flights, costing it nearly $56 million, further denting an already battered image and prompting it to lure back customers with costly discounts.
Air India, which is scheduled to take delivery of the first of its 27 Boeing Dreamliners by the end of the year, may defer some deliveries, according to people familiar with the matter. The carrier itself says the orders are on track.
The government of Prime Minister Manmohan Singh has been pushing for the airline to be restructured, but has otherwise been quiet on its future.
An earlier turnaround plan by the airline was rejected by creditors and the government as unrealistic. Air India then hired consultants Deloitte Touche Tohmatsu to come up with another proposal.
The latest plan would focus on a hub-and-spoke route model, cut costs by redeploying staff and unload non-core real estate. It plans to lease some of the 14 vacant floors in its landmark building in south Mumbai to raise about $1 billion over five years, according to a banker.
"It's a Catch-22 situation for them," said one person familiar with the plan. "On the one hand you require more investments to regain market share, but your financial position does not allow you to invest."
And rivals are investing heavily in an Indian aviation market growing nearly 20 per cent a year.
Last Thursday, budget carrier GoAir said it ordered 72 Airbus planes worth $7.2 billion. Earlier this year, IndiGo placed a $15.6 billion order with Airbus for 180 planes in what it called the biggest-ever commercial jet order.
MANAGING MOUNTING DEBT
Air India has more than $9 billion in debt as well as outstanding dues both to airport developers and state oil firms, which since December have forced it to pay for its fuel as it uses it, not on credit.
