The measures in the Budget will bring down input costs for the airline sector, which has been reeling under mounting losses. The implementation of the Budget proposals will also go some distance in making India competitive in the maintenance and repair of aircraft market internationally.
The implementation of the proposals will allow the cash strapped Kingfisher , Jet Airways and the other domestic airlines to look to raise working capital from abroad. The ECB window is open for one year with a ceiling of $ 1 billion. Till now, airlines were allowed to raise foreign capital only for import of capital equipment like aircraft.
“This is a great saving to airlines as they can re-finance high cost working capital loans with Dollar working capital thereby resulting in a saving of 7 per cent per annum on loans borrowed. With a cap of $ 1 billion or about Rs 5,000 crore and an interest differential of about 7 per cent this should translate into a saving of about Rs 350 crore for the airline,” a senior airline official said. Almost all the airlines including Air India had been clamouring for such a move.
Analysts, however, caution that it might not be easy for all the airlines to get funds at cheaper rates from abroad given their current financial health. The three listed companies—Jet Airways, SpiceJet and Kingfisher — all reported losses in the last quarter.
“The proposal for external commercial borrowings (ECB) for the working capital might not be such good news as you need a good credit rating and balance sheet which can help raise funds. Indian carriers have huge debt and interest burden, continuing losses, mostly a negative net worth and some have business model issues,” said Mr Kapil Kaul, CEO, Centre for Aviation Pacific Aviation.
“Preliminary estimates are that this may save 150-300 basis points for working capital loans for airlines. But the major challenges would be the banks' reluctance to lend to the sector and the hedging costs,” said Mr Amber Dubey, Director – Aviation, KPMG.
Aviation experts feel that only those airlines that have higher dollar revenues are likely to benefit from the move as the repayment of the principal costs is in dollars. The ECB route was taken only for the aircraft procurement purposes till now.
Mr Dhiraj Mathur, Executive Director and Head of National Aerospace and Defense Practice, PwC, felt that airlines will now have to factor in the currency risks when going in for ECBs to refinance their high cost working capital. “While the announcements on the MRO sector will move India closer to the existing MROs in the region, greater clarity is need on some issues including what will count as export of services,” he added.
Welcoming the MRO sector proposals, the Managing Director, Air Works, Mr Vivek Gour, pointed out that domestic MRO industry still has to charge service tax of 12 per cent which none of its competitors in West Asia, Sri Lanka or South East Asia levy.
The national carrier Air India said that it was a “welcome move” and it will help reduce borrowing costs for airline companies. “The provision of Rs 4,000 crore as equity support to Air India as part of the Plan outlay is a welcome relief,” said Mr S Venkat, Executive Director – Finance, Air India. Commenting on the budget, Mr Vijay Mallya tweeted: “Good, balanced and pragmatic budget announced by FM.”