Thursday, February 23, 2012

Flying Into Profitability? Why Air India Express is planning to return or sublease four of its 21 aircraft

In a bid to turn profitable independent of its parent, Air India Express is keen on returning or subleasing four of its fleet of 21 B737-800 aircraft and reducing the revenue sharing with Air India from 25 per cent to 12.5 per cent. Air India Express’s losses have also been mounting along with those of its parent company and now stand at Rs 1,500 crore (accumulated losses).

But these are, however, a small fraction of Air India’s accumulated losses, which according to some recent estimates have touched a jaw-dropping Rs 20,320 crore. Also, the airline is saddled with working capital loans of Rs 21,200 crore, fleet acquisition loans of Rs 22,000 crore and vendor dues of Rs 4,600 crore.

According to company sources, Air India Express has neither the pilots nor the routes to utilise 21 aircraft. Moreover, some of the aircraft that have been taken on lease are very expensive and, in some cases, they have almost no exit clauses built in.

According to airline officials, the carrier currently has 102 commanders whereas for its 21 aircraft fleet, it needs a minimum of 130. This is likely to go up once the new norms for duty hours for night flying come in.

As per the new rules, if one crosses two time zones in a day, then the rest period should be doubled. Since the Air India Express model was based on night flying, this will affect its operations a lot; it basically means having more pilots for the same aircraft.

Of the 21 aircraft, 17 are owned by Air India and four are on lease. Earlier, the airline had four more on lease, which they managed to return. But officials say the airline can do with returning another four planes as these are costing $1.2 million a month in lease rentals alone. “We are unable to utilise so many aircraft. We don’t have the pilots, but even more important, we don’t have that many routes and don’t require this size of fleet,” says one official. According to him, the ideal fleet size for the carrier is 18.

With not enough pilots and with a change in the duty-hour requirements for pilots on night-flying (which are due to come into force later this month), the airline is keen to sublease some of these planes. “The demand for B737s is quite high and we are exploring whether we can sublease these planes,” says an official.

The second factor that has been leading to losses is the fact that the airline has to share a large percentage of its gross passenger revenue with Air India from which it sources many services. “Which airline is profitable to this extent? If 25 per cent of the revenue goes, clearly Air India Express will remain heavily loss making,” says one official. It had been decided by Arvind Jadhav, the former chairman and managing director, that this revenue share would be cut by half to 12.5 per cent, which will give the airline a better chance for survival.

The civil aviation ministry and airline analysts argue that Air India Express could be hived off from the main company to effect a turnaround.

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