Air India says it saved money by selling aircraft to Etihad

Air India on Wednesday said it saved money by selling aircraft to Etihad Airways. The Comptroller and Auditor General had said that Air India sold its five Boeing planes to Etihad at a “significantly” lower cost than the “indicative” market price of the aircraft.

The national carrier sold five Boeing 777-200LR planes to the Gulf carrier for $336.5 million ($67.3 million per plane) in 2013, against a valuation of $86-92 million per aircraft obtained from two parties, M/s AVITAS and ASCENT, the Comptroller and Auditor General had said last week.

Explaining the rationale behind the sale in an exclusive chat with BusinessLine, S Venkat, Executive Director – Finance, Air India, said: “The issue is that the first time we went to the market, there were no buyers for the aircraft. The second time we went, there was only one party for leasing the aircraft and the leasing was at $600,000 per aircraft per month, which did not even meet our expenditure on the aircraft (loan repayment + interest repayment — about $1.1 million per month). So we decided there was no point leasing the aircraft.”

The winning bid from Etihad came in the fourth auction, which quoted the highest amount in an open auction.

“Etihad had quoted $336.5 million for all the five aircraft. That was more than sufficient for us to repay the loan obligation because we had a loan commitment of about $330 million on those aircraft. Secondly, that saved a lot of money as we could extinguish the loan and were able to save $20-30 million on maintenance costs; otherwise, those aircraft were just lying on the ground with very low utilisation.”

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Valuation vs selling price

Venkat agreed that the valuation of the aircraft was higher than the selling price, pointing out that the lack of buyers for the aircraft in the market was the primary reason the airline couldn’t sell it at the assessed price.

“There were very few of these aircraft in the market, so there was no benchmark on the price we had. We therefore had to depend on valuers. Valuers clearly told us that the aircraft won’t sell for more than 15-20 per cent lower than the valuation because there weren’t enough buyers for the aircraft. I think the money we got for the aircraft was very good as it helped both Air India and the government,” Venkat said.

He also dismissed all other allegations by CAG, which claimed Air India grossly understated losses. He said the airline was in constant discussion with CAG, explaining its stand, and that it followed generally accepted accounting practices.

“Air India has prepared its account for 2015-16 in line with the generally accepted principles and accounting standards in force issued by the Chartered Accountants of India,” he said. “The operating profit of ₹105 crore earned in 2015-16 is calculated on the basis of reducing the total expenditure, excluding only the financing costs from the total revenue. It is therefore the equivalent of Earnings before Interest and Tax (EBIT) and includes a provision of ₹1,867.78 crore of depreciation. Had depreciation been excluded from the expenditure, the operating profit would have significantly increased.”

Air India has set a target of ₹300 crore in operational profit for FY17 and ₹700 crore for FY18. According to the airline’s turnaround plan, Air India is supposed to turn a profit before tax by FY2022. But according to Venkat, the airline is confident of achieving the target by FY2020.

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