SPV to free Air India of debt in the works

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NEW DELHI: South Asia’s oldest airline, Air India, is seeking to jettison its decades-old debt baggage as part of a programme that would allow the country’s flag carrier to transfer loans to a dedicated company and create a capital structure underpinning its turnaround initiatives.

The idea of a Special Purpose Vehicle (SPV), which would hold the debt and assets of the airline founded in 1932, was discussed in a meeting called by minister of state for aviation Jayant Sinha in Mumbai last month.

Banks and Air India officials attended the meeting, after which the airline has started its spadework on the modalities of asset and debt transfer. Two senior Air India executives confirmed the move to  and added that details are being worked out. “The SPV idea was proposed and is being discussed and a lot of detailing is still being worked out before it is finalized,” said a senior Air India executive, who did not want to be identified.

Air India has debt of about Rs 45,000 crore on its balance sheet: Of the loans,Rs 14,000 crore are aircraft loans, while the rest are working capital funds that include non-convertible debentures of Rs 7,500 crore. The airline has an interest-servicing liability of about Rs 4,000 crore annually.

Air India CMD Ashwani Lohani had told in recent interviews that it is difficult for AI to become profitable with this debt baggage. “My biggest threat is debt, not Jet. Remove that, and we will beat everyone hollow,” Lohani told in January this year.

The Air India executive said details such as the duties either Air India or the SPV has to pay to transfer the ownership of assets for AI to an SPV company need to be finalized before the company decides to create an SPV.

Analysts said the move will allow Air India clean up its books. “Having SPVs with assets and liabilities, especially for non-aircraft-related debt, is a good idea. As much as possible, nonaircraft-related assets such as land and buildings should be leveraged to clean up the balance sheet,” said Kapil Kaul, CEO of Centre for Asia Pacific Aviation, an aviation consultancy firm, in India.

“However, without changing governance and ensuing accountability, nothing strategic will happen. We must not let one or two years of operating profit mislead us to do more tactical and short term changes as AI needs structural changes across the entire enterprise,” Kaul further said.

The current SPV plan to transfer debt is likely to be an alternative to the earlier plan to convert a part of the loans of public-sector banks into equity and give them board representation. Official sources in the aviation ministry said the idea did not find favour with the Prime Minister Office (PMO), which had discussed the proposal in a meeting held in January.

“The PMO did not like the idea of giving equity to banks in a loss-making airline. It, however, did not reject it either,” said a senior ministry official, who did not want to be identified.