India: Airlines may have to resort to desperate measures, say experts

Mumbi: Cash-strapped Indian airlines have no way out but to sell planes or ask their promoters to bring equity, experts and bankers say.

Auditors of some listed airlines have cautioned that accumulated losses of $6 billion in the past five years are eroding the net worth of the carriers, putting them in a desperate situation to raise fresh funds.

India’s beleaguered airline industry will have to seek innovative sources of funding with traditional avenues drying up as a record $2.5 billion loss will be added in the current fiscal and existing providers of capital are increasingly nervous about the sector’s viability, according to the consulting firm Centre for Asia Pacific Aviation (Capa).

Most recently, S.R. Batliboi and Associates, auditors to India’s second largest low-fare carrier SpiceJet Ltd, warned the airline’s losses are eroding its net worth. It said the company’s accumulated losses of Rs1,078 crore have substantially eroded its net worth indicating “the existence of a material uncertainty that may cast doubt about the company’s ability to continue as a going concern.”

In September 2011, Vijay Mallya-controlled Kingfisher Airlines Ltd set alarm bells ringing among investors after auditors B.K. Ramadhyani and Co. raised questions on the carrier as a “going concern” unless it infused requisite funds to meet obligations. The auditors said that accumulated losses of the airline were more than 50% of its net worth.

Deloitte Haskins and Sells, auditors of Jet Airways (India) Ltd, commenting on the firm’s December quarter earnings said “the appropriateness of the assumption of going concern is dependent upon the company’s ability to raise requisite finance or generate cash flows in future to meet its obligations, including financial support to its subsidiary.”

State Bank of India (SBI) chairman Pratip Chaudhuri said airlines will find it tough to get more loans from commercial banks. State-owned Air India Ltd, which can come up with government-backed bonds to raise fresh funds, is an exception.

Air India secured permission to convert its Rs18,000 crore of short-term loans into long-term loans and out of that Rs7,400 crore will be converted to government-backed bonds.

“The promoters will have to bring in equity as other sources are drying up. Raising debt for airlines is difficult at this stage. But airlines have to bring in efficiency also to stay afloat,” Chaudhuri said.

Capa said Indian banks, which have loaned $6-6.6 billion in working capital to airlines, are worried about their exposure to the sector and are reluctant to restructure loans (some of which have already been classified as non-performing assets) given to carriers, including Air India.

“The deteriorating operating performance and the uncertain regulatory environment mean that there is limited interest from private equity funds. And placement of American and global depository receipts is extremely challenging given the weakness in international capital markets. Most carriers have limited non-aircraft assets that can be monetized, with the exception of Air India which has substantial property interests,” Capa said.

Airlines are trying to address the problem in different ways. Mahantesh Sabarad, an analyst at domestic brokerage Fortune Equity Brokers (India) Ltd, said airlines have been addressing net worth erosion by raising fresh capital (as in the case of SpiceJet) and selling some of their assets (like selling and leasing back aircraft). “Sale and leaseback has helped Jet Airways raise Rs975 crore and SpiceJet raise Rs185 crore in the past seven years. Jet Airways, by revaluing assets in fiscal 2008, added Rs2,662 crore to its net worth as a result,” Sabarad said.

Jet Airways has also changed the depreciation method (slower depreciation rather than accelerated depreciation) on aircraft in fiscal 2010 with retrospective effect from fiscal 2008 and gained Rs916 crore. The airline did this once again (on simulators) in fiscal 2011 and gained Rs122 crore.

Sabarad said revaluing assets and changing depreciation methods are generally termed unhealthy practices by investors. “However, Jet can be excused for the depreciation change because they were earlier resorting to accelerated depreciation method. Auditors have generally mentioned the fact of erosion of net worth in their observations, but have not “qualified” the accounts so far,” he said.

A senior Jet Airways executive who didn’t want to be named said market conditions are not conducive for raising fresh funds and admitted he is seeking the assistance of government to secure additional working capital. “But a sustainable solution to net worth erosion is at least a 25% increase in air fares,” he said.

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