In festive season bargain, Air India buys insurance for cheap

New Delhi, Oct 12: If e-commerce sites vied for eyeballs this festive season, insurers lined up with an array of offers for national carrier Air India, with the carrier walking away with an extremely lucrative $28 million cover for its 122 aircraft fleet valued at nearly $10 billion.

"We had a tough time in getting a good deal for insuring the fleet. As the market has been aggressively priced after the tragic Malaysia Airline incidents and bombings at airports, the premium charged by insurers in the international market was very high," a senior Air India official told IANS.

The Indian capacity to bargain saw the airline come out smiling in the main London-based insurance market.

"The hull and war insurance premium has escalated over the recent years. Our $28 billion cover is the most price efficient and best suited for us," said the official.

Recently, the aircraft war insurances prices have appreciated by 200-250 percent in the international market and that of hull insurance by 25-30 percent.

New India Assurance has provided the cover, with AIG being the main underwriter.

Given that the airline is at a crucial turnaround stage, where its revenues are increasing while losses are being contained at every stage, the insurance deal will further help it consolidate its balance sheet.

With one of the youngest fleets in the industry at an average age of 8.6 and only five years if the average age of new aircraft is considered, Air India is in a position to gain considerable savings in maintenance, insurance payouts and utilisation over the coming years.

The airline was recently given enhanced certification by IATA's operational safety audit unit - one of the first to get this - which represents a high degree of safety.

Air India has been able to contain its losses thanks to a Rs.30,000 crore ($5 billion) government bailout under a turnaround plan (TAP) and a financial restructuring plan (FRP) that have set very stringent conditions for each level of payout that the airline receives.

These included maintaining a healthy on-time performance, high load factor, closing of loss-making routes, restructuring of operations and leasing out aircraft.

High fuel and interest costs, falling yields coupled with an enormous employee-aircraft ratio had caused the airline to post provisional operating losses of Rs.3,200 crore in 2012-13, which is now estimated to have reduced to Rs.2,200 crore.

The EBITDA (earnings before interest, taxes, depreciation, and amortization) of the airline is positive, with improvements in operational and fianacial performance.

The high employee-to-aircraft ratio which once stood at 263 employees per aircraft is now down to under 100, which is far better than other airlines of similar size, especially in Europe, due to the hiving-off of non-core activities like ground handling and engineering into subsidiary companies.

The airline is laden with a cumulative debt of Rs.40,000 crore, including aircraft loans and as short-term loans to maintain its operations. The airline is aiming to turn cash positive in the next two-three years and PAT (profit after tax) positive thereafter.

IANS