Civil aviation ministry begins review of Air India’s turnaround plan

Mumbai : The civil aviation ministry has asked SBI Capital Markets to review Air India’s turnaround plan in view of changes in the operating environment and the airline’s inability to reduce losses.

In FY15, the airline is expected to post consolidated net loss of about Rs 5,400 crore, which is identical to the loss in previous year despite substantial savings in the fuel bill. The gains have been offset by lower than expected revenue, an increase in engineering and maintenance costs and lease rents.

The airline’s accounts are yet to be audited and the profit and loss figures are provisional in nature.

Air India is facing increasing competition from both no frills and full service airlines in domestic and international routes. The turnaround plan, which was approved in 2012, also did not contemplate the Jet-Etihad alliance and proposed relaxation of government’s norms on international flying (5/20) – two factors which will impact Air India’s growth.

Also the plan needs a review in light of fluctuations in currency rates and fuel price, an Air India executive said.

As per provisional numbers, while capacity deployed and passenger revenue grew 9% to Rs 15,450 crore it was about Rs 500 crore lower than expectation. The revenue was lower despite increasing passenger feed from Star Alliance partner airlines. Total revenue including income from charters, cargo and Haj flights is pegged at Rs 21,000 crore.

The airline spent Rs 8,400 crore on fuel as against an initial budget estimate of Rs 9,600 crore. Its daily spend on fuel has now reduced to about Rs 18 crore from Rs 27 crore earlier due to lower jet fuel prices.

As a result, the national carrier has generated a surplus of Rs 2,600 crore over variable costs in FY15, up from Rs 1,107 crore in the previous year. Also now about 80% of its operations meets variable costs.

The variable costs do not include interest and depreciation charges, which still remain high. Despite financial restructuring, the airline’s interest bill has remained unchanged at around Rs 4,000 crore, owing to bridge loans for acquisition of Boeing 787s, interest payment to oil companies and borrowings to meet shortfall in government’s equity infusion.

For FY16, Air India is targeting earning before interest tax depreciation (Ebidta) of Rs 2,000 crore, nearly four times its FY15 Ebidta.

The executive said increase in Ebdita has been factored on further gains in fuel bill, increase in load factor and yield, benefit from route rationalisation and savings from hiving off engineering and ground handling subsidiaries.