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Air India to Reduce Losses As it is Poised to Enter the Star Alliance

Mar 17, 2014 11:23 am

Skift Take

Air India would benefit from entering the Star Alliance but its persistent financial troubles are not a real confidence booster.

— Dennis Schaal

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An Air India Boeing 787 Dreamliner prepares for a flying display during the 50th Paris Air Show at the Le Bourget airport near Paris, June 20, 2013. The Paris Air Show runs from June 17 to 23. Pascal Rossignol / Reuters


Air India Ltd. wants to cut its operating expenses by some 40% in the next fiscal year even as the state-owned airline prepares to post an operating loss of Rs.2,100 crore ($34 million) and a net loss of Rs.3,900 crore ($64 million) in the year to 31 March.

The national flag carrier expects operating losses to reduce by 42.85% to Rs.1,200 crore in 2014-15 based on higher projections for passenger and cargo revenues, according to its own estimates.

“The next financial year is going to be critical for us. Strict cost-control measures and revenue enhancement efforts are likely to result in at least Rs.1,200 crore reduction in our operating losses,” an Air India executive said, requesting anonymity.

Air India is expecting a 15% increase in its total revenue of Rs.21,500 crore next fiscal year, backed by an overall seat occupancy of 75% and an on-time performance of 85%. It also indicates a 9% increase in capacity or seats deployed to garner this growth.

The airline is expected to post a revenue of Rs.19,200 crore for 2013-14.

Mint has seen the estimates document.

The state-run airline posted a net loss of Rs.5,100 crore in the last financial year and has debt of nearly Rs.40,000 crore on its books.

Air India posted a net loss of Rs.7,100 crore in 2011-12 and is in the midst of a Rs.30,000 crore government bailout programme.

The airline will be able to offer more flight options after joining Star Alliance in the next financial year, the executive said. “The deadline of joining Star Alliance is June 2014 and we are preparing ourselves to comply with certain rules for the entry,” he said.

Star Alliance, a global grouping of airlines, had suspended its invitation to Air India in 2011 but renewed it in December after a unanimous vote against the backdrop of improved operating conditions in the Indian aviation sector. Entering the Star Alliance means Air India passengers will be able to use Star’s facilities like airport lounges, fly on a network of 21,900 daily flights to 1,328 airports in 195 countries and redeem air miles on airlines such as Deutsche Lufthansa AG, Singapore Airlines Ltd and United Airlines Inc.

Cutting losses and entering the Star Alliance are key milestones for Air India as competition is intensifying in the Indian aviation sector. Etihad Airways PJSC of the United Arab Emirates (UAE) bought a stake in Jet Airways (India) Ltd and Tata Sons Ltd is in the process of launching new airlines with Singapore Airlines and AirAsia Bhd.

However, experts are not enthusiastic about the government airline’s prospects.

“Air India will not survive unless it is taking radical measures to address the issues of bloated worked force and bloated salaries,” said Hormuz P. Mama, an aviation expert. Mama agreed that Air India’s losses are coming down year by year but said it needs to opt for structural changes to return to profitability.

“In principle, sure, they can manage it much better if they want to and are given freedom by government,” said Craig Jenks, president of New York-based airline consultancy Airline/Aircraft Projects Inc.

There is no interference from the government and there is more direction towards growth, a second Air India executive said, without elaborating.

The executive, who declined to be named, said two units of Air India — Air India Express, which is an international low-fare airline, and Alliance Air, a regional airline — will have increased revenue with the new fleet.

“Air India Express will have a revenue of Rs.2,200 crore for the next financial year against Rs.2,000 crore in the current financial year, while Alliance Air will have a revenue of Rs.275 crore (against Rs.230 crore). Air India Express will also have a fleet of 35 planes in the next fiscal from current 21 by way of leasing. We will be hiring new planes for Alliance Air too,” the second executive said.

Air India has plans to bring in 19 Airbus A320 aircraft to boost its domestic operations. “We have already agreed to take five Airbus A320 planes from China Aircraft Leasing Co. Ltd. All these five planes would be economy planes to compete with low fare airlines of the country,” the second executive said.

Mint could not immediately contact China Aircraft Leasing for a comment and an email sent to the company did not elicit any response.

The second executive said that Air India would lease 15 more planes from different companies and it would be mixed configuration, all economy and two-class configuration with business and economy classes.

“There are some routes that can have business class seats or premium economy class seats,” the official said. “We will deploy the planes and configure seats in such a way that it will compete with both AirAsia India and Tata-Singapore Airlines.”

The loss-making airline is also in the process of raising nearly $300 million to pay advance money to aircraft maker Boeing Co. of the US to fund four more Dreamliner planes.

Air India has already raised $200 million through a bridge loan from Bank of India for pre-delivery payments for its 13th and 14th Boeing B787 Dreamliner aircraft.

Mint could not reach Bank of India for a comment.

Air India took delivery of its 14th Dreamliner on 7 March, and will add six more planes in next financial year, taking the Dreamliner fleet to 20. The remaining seven will come in financial year 2015-16.

The Dreamliners are expected to turn around the fortunes of loss-making Air India. In 2005, the airline placed an order for 27 Dreamliners worth $6 billion from Boeing under the leadership of then-civil aviation minister Praful Patel.

“In principle Dreamliners should pay off, as in airlines, the operating cost is always much higher than the annualized equipment cost, and this is a very efficient airplane,” Jenks of Airline/Aircraft Projects said.

Air India is also in the process of selling some of its long-haul planes that are currently grounded. It has already sold five of its Boeing 777-200 LR long range planes to Etihad Airways for an undisclosed amount. ___

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