Air India Seeks Dollar Loan to Refinance Rupee Debt

Air India Ltd., the carrier which pays more interest on its debt than any publicly traded Asian airline, plans to borrow $300 million from overseas to repay costlier rupee obligations, according to a company official.

The carrier is in discussions with two overseas lenders, including one in the U.K., said the official, who asked not be identified as the person is not authorized to speak to the media. The dollar-denominated loan will carry an interest rate of 300 basis points over the London interbank offered rate, the official said. The three-month dollar Libor rate was unchanged at 0.274 percent yesterday. That compares with about 10.5 percent the carrier pays for rupee loans, the official said.

The former monopoly, which paid 34.8 billion rupees ($634 million) as interest in the year ended March 31, is cutting costs and resuming Boeing Co. 787 flights to regain market share. Competition is intensifying on overseas routes after Etihad Airways PJSC agreed to buy a stake in Jet Airways (India) Ltd. Air India, bailed out by the government four times in as many years, needs to lure more customers to continue getting state funds, said Civil Aviation Minister Ajit Singh.

“This will ease cost pressure on Air India and help them focus on expansion,” said R.K. Gupta, a New Delhi-based managing director at Taurus Asset Management Ltd. “They have access to limited money as working capital and the government can’t help any further. This will free up resources for meeting day to day expenses.”

Air India, based in Mumbai, raised 74 billion rupees selling 19-year notes last year to repay debt, helping it save about 2 billion rupees in interest costs, the official said.

Loss Narrowed

Air India’s annual interest payments are higher than the $511 million Korean Air Lines Co. paid in the year ended March 2012, according to data compiled by Bloomberg. That’s the most among Asia’s publicly traded airlines.

The closely held Indian carrier narrowed losses to 52 billion rupees in the year ended March from a record 75.6 billion rupees a year earlier. It targets to further reduce losses this year to 39.9 billion rupees, Chairman Rohit Nandan said on May 14. He declined to comment on the plan to borrow from overseas.

The company last year proposed raising as much as $600 million from overseas after the government allowed airlines to seek international loans for working capital needs and to refinance rupee debt. That plan didn’t go through as the March 31 window for concluding a deal closed, Nandan said May 14, without giving details.

Cost of Debt

Sovereign guarantee for Air India’s loans helps the carrier raise debt cheaper than it’s rivals. Air India’s average interest cost is 10 percent to 10.5 percent, the official said. Jet Air’s weighted average borrowing cost more than doubled in four years to 11.5 percent in the year to March 31, 2012, while for budget airline SpiceJet Ltd. it was 11.6 percent, according to data compiled by Bloomberg.

Indian carriers pay as much as 18 percent interest on short-term debt, and as much as 14 percent on long-term borrowings, according to a 2012 document published by the Ministry of Civil Aviation. Airlines have sought government help to access long-term funds at a fixed cost, it said.

“A national airline will always command a certain amount of credibility and respect,” said Mark D. Martin, chief executive officer of Dubai-based Martin Consulting LLC that advises carriers on cost optimization and fleet strategy. “But Air India has to be sharp when it comes to negotiating that money, it needs to hedge its currency risks to gain the most bang for its buck.”

‘Demonstrate Improvements’

The carrier has received about $1.7 billion in funding support from the government since April 1, 2009. The government last year pledged 300 billion rupees worth of bailout for the carrier through 2020 including for repayment of aircraft loans.

“The bailout is not unconditional,” Minister Singh said in an interview in New Delhi earlier this year. “We’ve set several parameters for them to demonstrate improvements including things like passenger load factor and on-time performance.”

Air India plans to boost revenue earned from overseas operations by adding new destinations and deploying fuel-efficient planes, Chairman Nandan said on May 15. The airline is expanding as Abu Dhabi-based Etihad buys a 20.6 billion rupee stake in Jet Air and AirAsia Bhd., the region’s biggest budget carrier, prepares to start its Indian operations.

Dreamliner Services

The state-run carrier, which resumed 787 Dreamliner services on May 15 after a four month grounding over a battery problem, plans to take delivery of eight more of the planes by December as its seeks to cap costs.

The Dreamliner, which burns less fuel as it’s lightweight because its made chiefly from composite materials, were grounded after an aircraft operated by ANA Holdings Inc. made an emergency landing on Jan. 16 after detecting smoke from the battery. Nine days earlier, a battery had caught fire on a Japan Airlines Co. 787 in Boston. No one was injured in either incident.

Air India will use the Boeing planes to add Birmingham, Melbourne, Milan, Moscow, Rome and Sydney as destinations this year, Chairman Nandan said.

Air India’s “turnaround plan is largely based on the 787 operations,” New Delhi-based Nandan said. “I’m glad the 787 will now be fully restored.”

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