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Air India to go ahead with Dreamliner aircraft buy

Zoom  Zoom Issue Date:2011-09-18   Source:ET Bureau   Browse:1146

NEW DELHI: Air India has decided to go ahead and purchase the 27 Dreamliner aircraft from Boeing despite poor financials and doubts about its ability to repay the 17,000-crore loans needed for the planes.

 

The Air India board, which met in New Delhi on Thursday, agreed that the 27 aircraft are essential to expand operations and swing the airline back into profitability. Rohit Nandan, the chairman and managing director, said that the board has recommended purchase but declined to elaborate. The recommendation will now be discussed by the group of ministers (GoM) who will take the final call when they meet some time next month.

 

The national carrier's fortunes have plummeted in recent years, thanks to rising fuel prices, the global slowdown and a hastily-arranged, ill-advised merger with Indian Airlines. Its monthly loss ( 600 crore) is equivalent to the market cap of a small-cap company and its brand image has been badly dented by a series of mishaps both in the air and on the ground. It has accumulated losses of 13,000 crore.

 

A number of people, including the civil aviation minister, Vyalar Ravi, have raised doubts about the airline's ability to pay for the purchase. Talking to ET a few days ago, Ravi had said that Air India does not have the money. "Well, everybody knows about the financial health of Air India. That is precisely the reason I say AI simply does not have the funds to pay for the Dreamliner Boeing 787 aircrafta¦that is the fact," he told ET two days ago.

 

Though Boeing has offered help in the form of loans at low rates from US Exim Bank, Air India's current financial predicament could impair its ability to service the loan. Its debt burden of 43,000 crore is likely to swell to an unmanageable 60,000 crore after the Dreamliner buy.

 

But the other big problem is that orders have already been placed and the aircraft is likely to be delivered in the next few months. Cancelling or restructuring the order now will be an extremely time-consuming and controversial exercise apart from leading to a diplomatic row between India and the US.

 

One AI member said that the board discussed the cost and the need for more aircraft. "Air India wants the Dreamliners but there are issues about repayment. Who'll pay for the loans remains the bone of contention," he said on condition of anonymity.

 

Air India had ordered 27 Dreamliners in 2005 as part of its aircraft acquisition programme of 68 aircraft worth 30,000 crore. The aircraft was supposed to be delivered three years ago but technical problems delayed production and Boeing is beginning world-wide deliveries only later this year.

 

In a recent report, the Comptroller and Auditor General (CAG) questioned the plan and faulted the assumptions underlying the purchase, causing acute embarrassment to both the government and the then civil aviation minister Praful Patel.

 

According to Air India, the delay in handing over the Dreamliner jets has caused the airline both opportunity and operational losses worth over $1 billion. The airline has sought compensation from Boeing on the grounds of loss of opportunities, business and market share, inability to use more fuel-efficient aircraft, leasing of jets at high cost and an additional interest burden on pre-delivery payments it made for the planes.

 

Nandan said that the board also discussed the issue of negotiating the right compensation.

 

ET reported in May this year that Boeing was ready to cover at least half of this loss by offering a compensation of around $500 million, almost three times more than what it was ready to pay earlier.

 

The Dreamliner is a 250-seater aircraft made of composite materials and is considered very fuel-efficient. The multi-version aircraft has a list price between $140 million and $200 million. Apart from Air India, Boeing also has an order from Jet Airways for 10 Dreamliners. Boeing's order book for the B-787 worldwide currently stands at nearly 900 aircraft.

 
 
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