ECB elixir for energising aviation

The Centre’s decision allowing individual airline companies to go in for overseas borrowing has come as a much needed shot in the arm for the aviation sector caught in rough weather, specially at a time when almost all domestic carriers, barring one, are in a deep financial mess.

The budget proposal to allow aviation sector to raise up to US$1 billion through external commercial borrowing (ECB) route for their capital requirements is likely to be implemented shortly. However, the ECB window would be available for one year only.

Experts say this brings aviation sector at par with other infrastructure sectors like power, which has been allowed in the recent past to raise their own working capital to bail them out whenever in trouble without depending much on the government fund.

They are also of the view that the current policy decision of allowing external commercial borrowing is the much needed dose, especially for debt-ridden private carriers like Kingfisher Airlines to raise working capital from overseas and the public sector behemoth Air India, which required monetary infusion on regular intervals to keep it going in the recent times.

So far, airlines were allowed to raise foreign capital only for import of capital equipment like aircraft. Incidentally, the Department of Industrial Policy and Promotion (DIPP) has moved a Cabinet note in this regard.

Rising operational costs, huge debts, workers’ standoff and expensive fleet have multiplied the aviation industry’s woes. Travel demand has grown but low fares have not allowed airlines to recover their cost. Almost every airline in the country is dogged by similar woes with high debt being the most common of them all. The reasons are not far to seek. Spiralling cost of aviation turbine fuel (ATF), global economic slowdown and low yield due to intense competition and consequent widening gap between revenue and expenses have contributed to their problem, former Joint Secretary of Civil Aviation, Sanat Kaul, said.

The country’s three biggest carriers – Jet Airways, Kingfisher and Air India – hold a combined debt of little over Rs 63,000 crore. The reasons are not far too seek. According to the returns filed recently by airlines with the DGCA, all scheduled airlines except IndoGo are in the red for far too long.

Industry sources point out that while the operational losses stood at Rs 26,000 crore between 2007-2010, it is expected to be around Rs 10,000 crore in 2011-12. Such being the scenario, the airlines being given more borrowing rights, in the form of ECB to revive themselves is expected to help them tide over the uncertain times.

ECB, according to analysts, will not only provide an additional source of much needed capital at low cost for the airline industry but also enable them to cushion themselves against the current financial crunch. The cost of borrowing from overseas is much lower than domestic debt and nearly 60 per cent of ECBs raised in 2011-12 cost 5 per cent less than the domestic borrowings, according to some estimates. While decision of FDI is keenly awaited by some airlines companies, allowing the sector to raise funds through ECB would come handy for them to meet their immediate financing needs. ECBs, which totalled US$35.9 billion in 2011-12, are considered attractive giving the borrowers additional avenue to raise large amounts from global financial market.

 However, the industry experts opined that setting the limit of $1 billion for the entire sector and $300 million for individual airlines was like throwing a lifeline which wouldn’t lift them from the whirlpool of financial distress they find themselves in. Hence, they argue that the sums allowed to be raised should be doubled so as to enable the country’s sinking aviation sector successfully come out of the problems.

“This is the opportune time to raise foreign loans for Indian entities as interest rates in most developed countries are lower than in India and the aviation sector should be allowed to get maximum benefit of the prevailing situation,” an aviation analyst said, adding that the government should raise the limit from $1 billion to $2 billion soon in order to aid them tide past their current problems. Mindful of the myriad problems faced by the aviation sector, the government, in the past couple of months has also come out with several other solutions, the most important among them being allowing domestic airlines to import ATF on their own. This move is expected to help them reduce overall costs as ATF constitutes around 45 per cent of their operating costs.  Another proposal for a Civil Aviation Authority, existing in countries like the US, Sri Lanka and Pakistan, with adequate financial and administrative flexibility to meet the functional requirements for an effective safety oversight system has been lauded by the aviation sector. This, analysts observe, would cut bureaucratic red tape and replace the present Directorate General of Civil Aviation.

The ECB route for the sector is being considered at a time when the government is actively considering a proposal to allow foreign airlines to buy up to 49 per cent equity of domestic carrier. The Centre’s impending decision to allow foreign carriers to own stake in Indian airlines is also seen as a crucial step with several of the domestic airlines deep in debt requiring sizeable capital infusion which currently is not available in the domestic market. With many international carriers such as British Airways, Singapore Airlines and Air Asia keen on investing in Indian carriers, the government’s move in this regard would be closely watched.

India is the 9th largest civil aviation market in the world and the recent estimates suggest that in next 10 years, domestic air traffic will touch 160-180 million passengers a year and international traffic exceed 80 million passengers. The sector, which is growing at the rate of close to 20 per cent and likely to generate about 2.6 million jobs in the next decade, needs to grow at a handsome speed, experts said, but were skeptical on the effects of the latest dose of Rs 30,000 crore to the state-owned carrier to turn around its fortunes.