Banks get seat on board for AI turnaround

Posted on    13 December 2011


The new monitoring board is expected to be established after the cabinet clears the turnaround plan


India’s aviation ministry has agreed to allow Air India’s lenders to be part of a monitoring board that will oversee execution of the state-run carrier’s turnaround plan over the next few years.


Air India’s debt recast plan was given an in-principle approval by banking regulator Reserve Bank of India (RBI) in November, after which it had asked a consortium of lending banks, led by SBI Capital Markets Ltd, to hold talks with the carrier and the aviation ministry and submit a final report.


One of the conditions sought by the banks from the aviation ministry, when both sides met last month, included having an oversight on the airline’s turnaround implementation.


“All the conditions have been largely agreed upon. They (lenders) will be part of the group,” said a government official, who declined to be named. “Some clarifications have been sought from RBI (by the aviation ministry), which are likely to come by early next week, after which it (turnaround plan) will go for cabinet approval.”


The new monitoring board is expected to be established after the cabinet clears the turnaround plan. It will be headed by top bureaucrats from various ministries, including finance, said a second government official, who, too, requested anonymity.


Air India chairman and managing director Rohit Nandan, in a 7 December letter to employees, said the plan was headed in the right direction and would allow the carrier savings of Rs1,000 crore—roughly equal to about five months salary for its 40,000 employees—annually in interest costs.


“The sincerity in purpose of the government of India, our bankers and other stakeholders has started to give shape to our revival strategy,” Nandan wrote, adding, “Our lenders/bankers have also given their nod, with some conditions, to the restructuring programme earlier approved by RBI. This would result in savings of Rs1,000 crore per annum on interest outgo alone.”


Air India has short-term loans of Rs27,000 crore and another Rs42,000 crore to buy aircraft taken from some 15 banks, including State Bank of India,Punjab National Bank and Syndicate Bank.


The debt recast of Air India involves equity infusion by the government over the next 10 years, conversion of short-term loans to long-term ones, reduction of interest rates, and operationalization of the maintenance and ground-handling subsidiaries.


The equity infusion in the carrier will depend on the recommendations of the monitoring board and linked to the airline meeting targets on cost-cutting, increasing revenues, flight occupancy and on-time performance. So far, the government has infused Rs3,200 crore in equity.


This will be the closest the banks will have a say in the running of the airline, which holds 17% domestic passenger market share. A proposal to allow banks to hold a stake in Air India and be part of the airline’s board had been discussed and rejected at the highest levels of the government, said the second official.


Vijay Mallya-owned Kingfisher Airlines Ltd, too, had a similar debt recast in March. Following this, a group of 13 lenders took a 23.21% stake in the airline in April at a 61.6% premium over the prevailing share, but are not part of the airline’s board or monitoring committees.


Jitender Bhargava, former Air India executive director, said the banks’ oversight on the turnaround plan doesn’t really matter, “unless somebody can muster the courage to take hard decisions and induce systemic changes in Air India’s ability to perform”.


“Hasn’t the committee of secretaries been overseeing the (past turnaround) plan for so long,” he asked, referring to a committee established in 2009 under the cabinet secretary. “What have they achieved? Has Air India shown any improvement? Unless you take hard decisions...the same employees plus the same policies won’t take you anywhere.”


Tarun Shukla


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