India’s finance ministry has rejected a bailout package for Air India

• The finance ministry turned down a proposal from the civil aviation ministry to infuse ₹300 billion into the struggling airline.
  
• Instead, it has proposed that Air India’s non-core assets and subsidiaries be transferred to a special purpose vehicle ahead of their eventual sale.
  
• The proceeds from the sales will be used to pay down Air India’s debt.

Earlier this month, the finance and civil aviation ministries of the Indian government were reported to be discussing a ₹110 billion bailout plan for Air India, following the failed sale of a 76% stake in the national carrier.

The civil aviation ministry eventually submitted a proposal to the finance ministry for a ₹300 billion capital infusion into Air India in order to trim the carrier’s debt burden and pay employees and vendors. However, the request was rejected by the finance ministry yesterday owing to the lack of a clear turnaround plan for the airline.

A potential fix for the debt problem

Instead, the finance ministry proposed a stop-gap solution for Air India’s financing woes. It has told the civil aviation ministry to hive off all of Air India’s non-core assets and subsidiaries, which includes its various real estate assets across the country, into a special purpose vehicle (SPV). A SPV is usually created to isolate and secure a company’s monetisable assets in the event that it goes bankrupt.

These assets will be then be sold to pay down the Air India’s debt. The carrier currently has ₹500 billion worth of debt obligations, over 40% of which has been categorised as “unsustainable” or unable to be paid down with current cash inflows. Most of Air India’s revenue goes towards servicing interest payments. It spends around ₹50 billion annually on interest payments alone, which is far from a financially sustainable way of doing things.

The civil aviation ministry increased the proposed amount for the bailout package because it felt the original amount was inadequate since most of it would have gone towards debt payments and very little towards improving Air India’s core operations.

This is likely why previous bailouts for the carrier failed as most of the funds infused were used to pay down debt. In essence, Air India was “borrowing” taxpayer funds from the government to pay back other creditors. This time around, the finance ministry refused to invest any more capital in Air India until the civil aviation ministry provided a viable plan for its long-term functioning.

Hence, the sell-off of assets to pay down the unsustainable debt is envisioned to be the first step in a turnaround plan as it well help clean the carrier’s balance sheet, which in turn will increase its valuation ahead of a renewed sale process. Concurrently, the Indian government is also planning to sell Air India’s engineering and transport services subsidiaries in the near term.