Budget 2012: Ailing Airlines like Jet Airways and Air India look to new ECB horizons

NEW DELHI: The big boys of the airline industry, both Jet Airways and Air India, may increase working capital loans on their balance sheets by 25% in the new fiscal year due to a difficult cost environment. They are also looking to cash in on the foreign borrowing tool announced in the Union Budget last week. 

Finance minister Pranab Mukherjee in his budget speech has proposed that airlines be allowed to raise working capital through external commercial borrowings (ECBs) with an annual cap of $1 billion.

"We would need up to 500 crore of working capital loan in 2012-13. If cash flow improves with better ticket pricing, the need for these loans could come down from that level. However, if fuel jumps, it could even increase that requirement," a senior official from Jet Airways told ET. Right now the Naresh Goyal-owned airline has 2,000 crore of working capital loans on its books.

 Similarly, cash-strapped Air India is also looking at the ECB route to raise nearly 5,000 crore as working capital debt in fiscal 2012-13. 

"We would like to avail of the maximum possible within the limit of $1 billion," a senior official from Air India told ET. The national carrier has a colossal 22,000 crore working capital debt already on its books. 

Working capital measures the amount of liquid assets a company has to build its business or to meet the costs of its day-to-day operations. For airlines, working capital is used for payments of fuel, airport and vendor charges and salary disbursements. 

The ECB sop will enable airlines to lower their interest cost on these much-needed funds and save 5-6% on cost of borrowing. 

"We think the ECB loans could help us substitute our rupee loans with dollar loans and bring about savings in However, others have also expressed concerns on how useful this tool would be in reality for airlines as their balance sheets are in a mess. "Requirement for working capital is increasing on a daily basis since the industry is not making cash. That is the need of today. 

But will airlines be able to avail it easily is a concern because of their deteriorating financial state. You can push Indian banks to lend to such companies with negative net worth, but not European," Deloitte Touche Tohmatsu senior director Vishwas Udgirkar said. 

Similarly, Dubey thinks that banks may be a bit wary of lending to airlines and may charge a premium, while airlines may also need to hedge on the currency risk. 

The Indian airline in

interest cost," the official from Jet Airways said. 

Sector analysts believe that external commercial borrowings are a much-needed lifeline for the airline industry, which was finding it exceedingly difficult to access credit due to continuous losses. 

ECB was not allowed for airlines earlier. For sectors like hotels, hospitals and software, where it was permitted, the limit was just $200 million. MoreoverECBs had to be a long-term loan with a maturity of five years for any amount above $20 million. 

"Our preliminary estimate is that airlines in India would save 150-300 basis points on their working capital interest through the ECB route," global consultancy firm KPMG director (aviation) Amber Dubey said. 

While rupee loans cost 13-14% in interest charges, foreign loans would cost 4-5%, and 3-4% hedging cost, would result in the net benefit of the loan being cheaper by about 4-5%. 

dustry has a total debt of up to 70,000 crore, while the industry is estimated to accumulate losses of 13,000 crore this year. 

SOURCE