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Indian government to bail out Air India

Jun 24, 2009

NEW DELHI - The Indian government said Wednesday it will help state-owned carrier Air India tide itself over after the airline posted a loss of about $1 billion in the fiscal year ended March 31 and requested a huge bailout.

The government, which declined to specify exactly how much cash it will infuse into the national flag carrier, said its support comes with a caveat: The airline will need to restructure itself significantly to stem future losses, even as the Indian aviation industry remains in a tailspin.

"It doesn't mean there is a checkbook open to Air India," Civil Aviation Minister Praful Patel told reporters after meeting Indian Prime Minister Manmohan Singh. "It will be difficult for the government to keep continuing our support unconditionally."

Air India has been seeking financial assistance of $820 million from the federal government in the form of equity and soft loans to fund operations amid its losses.

To ensure the federal government's help, the airline will need to submit a cost-cutting plan to a cabinet panel within a month, including describing how it plans to cut labor costs and flight routes while streamlining aircraft maintenance and ground-handling, Mr. Patel said.

He added that the government expects the airline to become profitable within two years. If Air India doesn't restructure quickly or deeply enough, shedding some of the government's stake in the airline would remain an option.

"If they're unable to do it, I'm sure the government will have to think otherwise," Mr. Patel said.

The airline said earlier this week that it expects to cut $103 million in wage costs this year from the $620 million total it pays its employees annually. Air India has also asked senior staff to forego salaries for July, after earlier deferring pay for its employees by 15 days. Mr. Patel said the size of Air India's 30,000-person work force is also to blame for the airline's financial crisis, adding that there are 1,000 employees allocated only to "internal canteen services."

Mr. Patel had said earlier in the month that the government might consider an initial public offering of Air India shares to raise funds. On Wednesday he said the prospect was likely.

"This issue will come up in the future," he said. "The process for an initial public offering will happen after some phased steps are taken toward restructuring."

India's airlines have been suffering severely in an economic downturn that has reduced passenger traffic. Jet Airways Ltd., the country's largest private carrier by market share, last month reported a loss of $198.1 million in the year ended March 31.

The country's other two publicly listed carriers, Kingfisher Airlines Ltd. and SpiceJet Ltd., have yet to release earnings for the year so far, but analysts expect that the sector as a whole lost upward of $2 billion, or nearly one-third of the $6 billion in estimated losses by airlines world-wide in 2008.

To make matters worse, deeper problems remain that could cause trouble for India's airlines even if the country's slowing economic growth picks up. Increasingly, congested runways mean pilots have to burn expensive fuel as they circle in the air waiting to land, and a lack of secondary, smaller airports in larger cities such as Mumbai and New Delhi have left low-cost carriers paying the same landing costs even while they offer cheaper ticket prices.

Some relief for the industry could appear soon, however. Mr. Patel said the government should take a closer look at how much it taxes jet fuel. The single most expensive cost for carriers, jet fuel is taxed as high as 27%, and airlines in India have been clamoring for a rate cut to stem their losses.

Indian government to bail out Air India

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