Bloomberg News

Air India Aid Package Adds to Kingfisher Pain

March 13, 2012

India has already pumped 32 billion rupees into Air India since April 2009 as the carrier struggles with fuel and loan costs. Photographer: Adeel Halim/Bloomberg

India has already pumped 32 billion rupees into Air India since April 2009 as the carrier struggles with fuel and loan costs. Photographer: Adeel Halim/Bloomberg

Air India Ltd. (AIND) is set to get a 67.5 billion rupees ($1.4 billion) state bailout, almost double the amount the federal government has spent on new hospitals over the past three years.

The cash injection will be announced in the budget on March 16, said two people familiar with the matter. They declined to be identified as they aren’t authorized to disclose the information. The government may also pay off 180 billion rupees of plane loans over the next 10 years, one of the people said.

India, which is facing surging rates of diabetes and has the world’s highest number of people living with tuberculosis, has already pumped 32 billion rupees into Air India since April 2009 as the carrier struggles with fuel and loan costs. The unprofitable airline, the nation’s third-largest, has also helped prolong a price war that has contributed to losses at listed Kingfisher Airlines Ltd. (KAIR) and Jet Airways (India) Ltd.

“Spending on health care is much more important than propping up an airline,” said Prakash Gupta, head of Mumbai- based non-profit public-health research firm Healis. The government has put “a lot of money” into Air India already for no return, he said.

A spokesman for Air India declined to comment on funding. Satyendra Prakash, a Ministry of Civil Aviation spokesman, didn’t answer two calls to his work phone as he was travelling. Sheyphali B. Sharan, spokeswoman at the Ministry of Health and Family Welfare, also didn’t answer two calls to her office.

New Equity

The aviation ministry has recommended giving the carrier 199 billion rupees of new equity in the five years to 2017, according to a report submitted to the nation’s Planning Commission, an agency that designs five-year economic and social programs in India.

The Air India bailout compares with the about 38 billion rupees that the federal government has earmarked for new public health-care infrastructure since April 1, 2009, according to the budget document for the current fiscal year. State governments also have separate health-care budgets.

A shortage of investments means India has 9 hospital beds per 10,000 people, compared with the World Health Organization recommended norm of 30, according to the Planning Commission. The ratio of government hospital beds to population is 15 times lower in rural areas than in urban areas.

The country had 61.3 million people with diabetes as of last year, second only to China’s 90 million, according to the International Diabetes Federation’s website. About 1.5 million people in India were also infected with tuberculosis in 2010. That’s the equivalent to the population of Philadelphia.

‘Strong Government Involvement’

“There are many arenas where strong government involvement is not only justifiable but also desirable,” said Rishikesha Krishnan, a professor at the Indian Institute of Management, Bangalore. “The airline business is not one of them.”

Public spending on health in India is 1 percent of gross domestic product, according to the Planning Commission. The health ministry earmarked about 660 billion rupees to provide various health-care services and to pay salaries over the past three fiscal years.

Private hospitals take care of more than 60 percent of all patients in the country, the Planning Commission said in a report last month.

Air India has been unprofitable since its 2007 merger with state-owned domestic operator Indian Airlines Ltd. The Mumbai- based carrier piled up losses of about 181 billion rupees in the three years ended March 31, Vayalar Ravi, the then aviation minister, told parliament on Nov. 24.

Airbus, Boeing

The airline has failed to turn surging demand into profit as it struggles to combine operations following the merger. It has 263 employees per aircraft compared to 102 of IndiGo, the only profitable carrier in India.

Air India’s debts also swelled to 438 billion rupees following orders in 2005 and 2006 for 111 planes from Airbus SAS and Boeing Co. (BA) The tally includes 27 787 Dreamliners which the airline is due to begin receiving this year.

Air India has helped drag down earnings at other airlines by offering unprofitable fares, said Ajay Singh, co-founder of Chicago-based Orchard Group, which advises airlines on cost- cutting. Nationwide, airlines may lose $2.5 billion in the year ending March 31, because of fuel costs and competition, according to CAPA Centre for Aviation, an industry consultant.

“Air India continues to engage in a self-destructive fare war,” said Singh. “Aiding the carrier with no clear signs of operating performance improvements will only prolong the risks to the industry.”

Billionaire Mallya

Kingfisher Airlines, controlled by billionaire Vijay Mallya, has cut flights and ended a budget service as it struggles to pay employees, tax authorities and vendors. Last week, it was suspended from three International Air Transport Association payment systems after failing to settle accounts.

The airline, which reported more than 10 straight quarterly losses, has been trying to raise funds from banks and investors at least since November. Jet Airways, the nation’s biggest carrier, also delayed tax payments this month after posting four straight quarters of losses.

Jetfuel prices have jumped 18 percent in Mumbai in the past year, according to Indian Oil Corp. website. The combined debt of domestic airlines may reach $20 billion in the year ending March 31, according to the Ministry of Civil Aviation.

“Bailouts without performance guarantees haven’t historically worked,” Orchard Group’s Singh said. “That is just a way to kick the can down the road.”

To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net; Adi Narayan in Mumbai at anarayan8@bloomberg.net

To contact the editors responsible for this story: Neil Denslow at ndenslow@bloomberg.net; Jason Gale at j.gale@bloomberg.net

India has already pumped 32 billion rupees into Air India since April 2009 as the carrier struggles with fuel and loan costs. Photographer: Adeel Halim/Bloomberg

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