Beleaguered Air India has obtained $1.1 billion of structured trade financing, provided by J.P. Morgan and guaranteed by the Export-Import Bank of the US (US Ex-Im).
The export credit agency financing will be used to fund the purchase of 11 Boeing aircraft that the state-owned airline received in 2009 and is supported by the full faith and credit of the Indian government. US Ex-Im initially approved the loans in June 2009 but they were not paid out until last month.
Arvind Jadhav, chairman and managing director of the National Aviation Company of India (Air India's parent company), said in a statement that US Ex-Im's backing has enabled the airline to "raise finances for acquiring these latest state-of-the-art technology aircraft at competitive rates of interest as compared to commercial financing".
That Air India cannot receive a competitive rate of financing in the private sector is not surprising. In an interview last year, Paul Ng, global head of aviation at law firm Stephenson Harwood, told FinanceAsia that in the first half of 2009, the cost of aircraft financing rose "a few hundred basis points". While the increase is not on the level of, say, financing Dubai's debt, the additional percentage points do add up in terms of annual interest payments on a multi-billion dollar aircraft order.
Export credit agency-backed financing comes at comparatively lower interest rates because a government assumes the risk of a transaction. These structures increased in popularity after the September 2008 collapse of Lehman Brothers and the ensuing lack of commercially available trade financing in the global marketplace.
US Ex-Im backed $70 billion worth of loans in 2009, the highest in the agency's 75-year history, according to its own account.
The increase in aircraft financing costs aside, Air India's own financial woes likely also deterred creditors. Since the 2003 deregulation of India's airline industry, Air India has lost market share to its competitors, Jet Airways and Kingfisher, and at the same time has been forced to deal with inadequate infrastructure and high legacy operating costs. Even after the government-backed 2007 merger between Air India and Indian Airlines, the country's state-owned domestic carrier, the company has fared no better; it posted a net loss of Rs55.48 billion ($1.19 billion) for the fiscal year ending March 31, 2009, which was more than double its 2008 net loss of Rs22.26 billion, and continues to bleed red ink.
The Centre for Asia-Pacific Aviation (CAPA) estimated in a recent statement that Air India's losses for the current fiscal year could top $800 million -- more than $2 million per day. The Sydney-based airline consultancy has said that the airline is on track to receive a $430 million cash infusion from the Indian government by March 31.
However, an Air India representative said the airline had not had any issues financing aircraft and the reason it used US Ex-Im-backed funding for its latest order was because it had used the agency before.
One reason behind the airline's continuing high costs is the fact that Air India's international flights and Indian Airlines' domestic flights are run as separate operations. In theory, synergies should be produced by combining staff and management but, except for the customer front-end, the two airlines continue to operate as two entities in spite of the fact that the merger has been completed. Some experts even consider the merger a failure and there are rumours of a demerger of the two carriers.
This is the third time the Indian flag carrier has used US Ex-Im credit guarantees to purchase aircraft since 2007. The airline received $548.6 million and $1.2 billion from the agency in 2008 and 2007 respectively. Standard Chartered Bank and ABN AMRO were the lenders behind those structured trade deals.
The latest $1.1 billion provided by J.P. Morgan goes towards the purchase of three Boeing 777-200LR, four Boeing 777-300ER and four Boeing 737-800 aircraft.
The Indian airline market has had a rough time over the past few years. According to CAPA, the country's commercial airlines have lost an estimated Rs260 billion since April 2006. This year, the consultancy expects them to lose as much as Rs70 billion ($1.5 billion).
J.P. Morgan is not new to structured trade financing deals. Last September it launched a $1 billion funding facility as part of the International Finance Corporation's global trade liquidity programme. And in 2008, the bank provided $5 billion of a $55 billion joint funding initiative with the World Bank agency to Pakistan's Habib Bank to boost trade finance activity.