NEW DELHI: Even before the ink is dry on the Budget proposal to let domestic airlines borrow up to $1 billion overseas for working capital, the aviation ministry has sought a doubling of the limit, as cash-starved carriers continue to bleed.
The aviation ministry has written to the finance ministry in this regard, even though South Block is yet to operationalise the window, which will be open for a year. There is no request to extend the duration, though.
With most airlines struggling with high domestic interest rates, the proposal was seen as one of the major highlights of the Budget to help them borrow cheaper. ECBs are used mainly for investments, not working capital, which is why the window was opened only for a year.
According to sources, the aviation ministry decided to take up the matter since airlines’ borrowing needs are already above the $1-billion limit. “The idea is to facilitate affordable funding for local carriers who have been complaining about unavailability of funds in the domestic market. We have written to the finance ministry, but so far, there has been no response,” an aviation ministry official said.
Banks are holding off on loans to domestic airlines which have weak balance sheets. And loans, when available, are considerably costlier than if they would be borrowing abroad. The carriers would need to pay 5-7% for loans from foreign banks, while domestic banks charge 12-14%. However, ECBs expose the borrowers to exchange rate risks.
“ECBs can benefit up to 300 basis points in interest rates,” M Shivkumar, senior vice-president (finance), Jet Airways, had told FE the day the Budget was announced. “It is a major relief for airlines seeking to bring down their interest costs.”
As per rough estimates, Kingfisher Airlines needs over R2,500 crore immediately in working capital loans to stay afloat. The carrier has a total debt of R7,057 crore and accumulated losses of R6,000 crore. Similarly, Jet Airways has borrowed roughly R3,000 crore from banks for working capital and R11,300 crore to buy planes. It is looking at securing a working capital loan of R1,000 crore.
However, the aviation ministry’s move has left some analysts cold. This is because they doubt the ability of Indian aviation firms to borrow from foreign banks as they have poor credit ratings and higher operating costs.
“I am not too sure if the ECB proposal will have an impact on airlines,” Kapil Kaul, chief executive officer, Indian subcontinent and Middle East for Centre for Asia Pacific Aviation said recently. “None of the airlines have any credit rating. Also, keep in mind that in 2012-13, costs will be at their peak; so, I doubt whether banks will be willing to lend to airlines.”
“There may not be many lenders to the Indian airline industry. If at all the proposal to increase the threshold to $2 billion is cleared, it would benefit only the ailing state-owned AirIndia,” Sharan Lillaney, research analyst (aviation, real estate), Angel Broking said.
Jagannathan Thunuguntla, equity research head at SMC Global, echoed similar sentiments. “Though the ECB would give airlines a cost advantage of around 5-6% along with the risk of foreign exchange fluctuation, the point is that even if you extend it to $2 billion, there are no lenders who would like to offer money to the sector,” said Thunuguntla.
The aviation ministry official, however, said that “our job is to create a model through which they (airlines) can approach lenders for funds. The rest is between the concerned companies and the banks.”