Air India will reportedly take another short-term loan to refinance its current debt as part of the facility it availed after being taken over by the Tata Group last year. The airline will eventually borrow money in long-term arrangements, but not at least for another year until it finalizes its proposed merger with Vistara.

Short term loans

Air India plans to borrow around $2.1 billion from two of India's largest public sector banks – State Bank of India and Bank of Baroda. A report by The Economic Times (ET) says that this is part of the airline's short-term strategy to refinance its existing debt before it embarks on long-term borrowing solutions for its future business needs. A person familiar with the matter told ET,

“Tatas decided to continue with the existing borrowing arrangement for another year, though they will eventually make a long-term debt strategy. The loans are at a higher rate than last time, mirroring the sharp rise in the interest rates in the last one year.”

Air India at Kushok Bakula Rimpochhe Airport
Photo: Tooykrub/Shutterstock

Indeed, as pointed out in the report, Air India took billions in loans from the same banks last year at an interest rate of 4.25%. But following the Reserve Bank of India's revision of benchmark rates, Air India's latest loans will attract an interest rate of 6.50%.

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Long-term strategy

Air India's current loan is for one year, but the carrier eventually plans to enter long-term borrowing arrangements from government and private banks after it merges operations with Vistara. Sources have revealed to ET that finalizing merger formalities is a priority for the group's plans for Air India as this would determine the nature and the amount of funds needed for future growth. Another source added,

“Restructuring operations since the Tata takeover are still taking shape within the airline and the company wants to complete all formalities before they look at firmer banking partnerships, which will be long term in nature and most likely include a mix of public sector and private sector banks.”

Expenses

Rescuing Air India from its troubled past was always going to be expensive. But the Tatas were aware of the investment required for its transformation. The Indian conglomerate is keen on revamping pretty much every aspect of the airline, from its fleet structure and optimization to its approach towards customer satisfaction.

Air India is expected to add around 500 new airplanes in the coming decade and has already made several of its grounded fleet airworthy and added several more in short-term dry leases.

Air India Boeing 787 taking off from Frankfurt Airport
Photo: Vytautas Kielaitis | Shutterstock

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The Tatas have also committed $400 million to refurbish its entire legacy widebody fleet, comprising 27 Boeing 787 and 13 Boeing 777 aircraft. As part of its larger turnaround plan for Air India, the Tatas will need to infuse massive capital into the airline, and this would naturally translate into more loans in the future.

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Source: The Economic Times

  • Air India Tile
    Air India
    IATA/ICAO Code:
    AI/AIC
    Airline Type:
    Full Service Carrier
    Hub(s):
    Delhi Indira Gandhi International Airport
    Year Founded:
    1946
    Alliance:
    Star Alliance
    CEO:
    Campbell Wilson
    Country:
    India
    Region:
    Asia