Air India to seek Cabinet nod for strategic business units

New Delhi: In its bid to speed up a turnaround, Air India plans to seek the approval of the Union Cabinet to operationalise its six strategic business units (SBUs) when the government considers an equity infusion of Rs1,200 crore into the ailing carrier, reports PTI.

The civil aviation ministry, in a note to the Cabinet, is likely to seek approval for operationalising the SBUs relating to low cost airline, cargo, maintenance, repair and overhaul (MRO), grounding handling, engineering and related business so as to enhance the airline's revenues.

The Cabinet Committee on Economic Affairs (CCEA) may take up the issue later this month when it also considers infusion of Rs1,200 crore as equity, sources said. The government had in February infused Rs800 crore as equity into the carrier.

The government is looking at equity induction in a phased manner based on the performance parameters of Air India, they said.

In 2007, when the erstwhile Air India and Indian Airlines were merged into the National Aviation Company of India Ltd (NACIL), it was decided that the six SBUs would act as separate profit centres.

The NACIL, which wants to review all agreements with its 14 unions, is also likely to seek government's nod to start re-negotiations with the unions, two of which were de-recognised following a flash strike three days after the 22nd May plane crash in Mangalore.

At present, there are 10 wage agreements signed between these unions and the management. The employees' unions say that the airline wage bill was 18% of the total turnover as against a global average of about 22% of total turnover for most international carriers.

The unions have said that the management had assured them that their views would be considered before finalising the company's turnaround plan, but the two sides are yet to have any concrete discussions on it.

The plan for financial restructuring and turnaround till 2014-15 focuses on Air India achieving a break-even in its operations by 2015.

Under it, the national carrier intends to get working capital loans through a mix of bonds guaranteed by the government with longer tenure and bullet payments. The company could also sell or lease land and building to raise working capital.

In order to beef up revenue generation, the national carrier has decided to appoint a chief strategy officer (CSO) who would report to chairman and managing director Arvind Jadhav.

The CSO would be responsible for developing and managing the business transformation office (BTO) and ensure that the turnaround strategy is translated into action. The BTO would identify and track strategic initiatives through execution.

According to official estimates, Air India is expected to incur a loss of Rs5,656.62 crore in 2009-10. The airline had suffered a loss of Rs2,226.16 crore in 2007-08, which rose to Rs5,548.26 crore the following year.


RBI has enough reason to hike policy rates on Thursday: E&Y

Mumbai: Ernst & Young India today said that despite the steep fall in headline inflation in August, the Reserve Bank of India (RBI) is likely to persist with monetary tightening measures by hiking key policy rates by at least 25 basis points at its mid-quarter review on Thursday, reports PTI.

"At 13.8%, the July Index of Industrial Production (IIP) numbers are indeed very encouraging. And going by this number, it is very clear that there will surely be an upward correction in the demand for funds in the coming months," E&Y India national leader for global financial services Ashvin Parekh told PTI here.

"This in turn will lead the RBI to further hike the repo and reverse repo or short-term lending and borrowing rates by 25 bps in the 16th September review," Mr Parekh said.

He further pointed out that the drop in headline inflation in August is primarily because of the large basket of items reflected in the new WPI inflation data.

"Therefore, it is unlikely that the central bank will be guided by the August numbers. More importantly, the RBI will look at rising food inflation, besides the comfortable liquidity situation in the system, coupled with industrial expansion, which would be demanding more and more credit from next month onwards," Mr Parekh pointed out.

The government today released a new index for measuring wholesale price inflation, which revealed that prices rose by 8.5% on average in August vis-à-vis the base year of 2004-05. As per the old series with a base year of 1993-94, WPI inflation stood at 9.5% for the month, according to the commerce ministry.

Overall inflation in August witnessed a fall of 1.27 percentage points from 9.78% in July, as per the new series, which considers 2004-05 as the base year.

In the first quarter monetary policy review on 27th July, the RBI had hiked repo rate by 25 basis points (bps) to 5.75% and reverse repo by 50 bps to 4.5%, while leaving the cash reserve ratio unchanged at 6%. This was fourth successive hike since the January policy review.

Mr Parekh, however, felt there is no room for the central bank to take a harder than 25 bps hike as the inflationary pressures are waning now, thanks to the efficient supply side management by the government in the recent months.

Food inflation for the week ended 28th August stood at an elevated 11.47% after falling to under 10% in early August. The general inflation based on wholesale prices had declined to single digit in July at 9.97%, after being in double-digits for five months.

"Beginning next month, the now low credit off-take will get a major fillip with the corporates increasing their capacity addition as well as expansion. Going by our estimate, the economy is expected to log in 9% growth this fiscal and to achieve that, companies have to expand their capital expansion plans aggressively," he said.

"I see IIP clipping at 14%-15% through the rest of the months on the back of an expected 20% capital expansion by the corporates through the rest of the fiscal," Mr Parekh said.

As of end-August, the credit growth has been a tepid 18% against the industry's as well the RBI's projection of 22%. Last week State Bank of India (SBI) chairman O P Bhatt had said that "at around 18%, credit off-take has not been matching the expectation of the bankers and the RBI."

Further explaining the rationale for a rate hike, Mr Parekh said, the RBI move to deregulate savings and current accounts (CASA) deposit rates will automatically see that the cost of funds would go up.

"I see up to 75 bps jump in the cost of funds for banks as and when savings rates are deregulated," Mr Parekh said, and argued that there is a huge gap in savings account and fixed deposit rates now.

Another enabling factor for the RBI to hike the rates is the comfortable liquidity situation in the system, he said, and pointed out that it has also the cushion of not needing to manage a large government borrowing immediately.

"There is not much strain on the liquidity system."

Also, the high fund inflow into the system ensures that there is no reason for the government and the RBI to hold onto a low interest rate, Mr Parekh said.

On whether he sees an asset bubble build-up on the back of rising FII investments, he said, "going by the way the inter-bank money market is behaving, there are no such signs now."

"But if the capital markets gain over 5%-10% in the short-term, then there is a room for concern. But I don't see that happening in short to medium term.


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