For any airline to be eligible for restructuring, the current ratio has to be equal or higher than 0.4 and the debt to EBITDA ratio has to be equal to or less than 5.50.
Recommendations of the K V Kamath
panel for Covid-related stress have failed to enthuse airlines, with industry executives and experts saying the sector doesn’t stand to benefit from the same. The very high parameter set in the resolution framework is a huge challenge, they said.
The committee has advised lending institutions to mandatorily keep five key ratios in mind while framing resolution plans — total outstanding liabilities to adjusted tangible net worth; total debt to Ebitda; current ratio; debt service coverage ratio; and average debt service coverage ratio.
For any airline to be eligible for restructuring, the current ratio has to be equal to or higher than 0.4, while ‘debt to Ebitda’ has to be equal to or less than 5.5.
“Ideally, if an airline is working with a positive current ratio — it is a bad signal of its performance. Therefore, current ratio of a typical airline in India will never exceed 0.3. Hence, 0.4 is a relatively high ask,” said the CFO of a private carrier.
A second executive pointed out that the net worth of all airlines
had eroded completely, except for IndiGo. “Asking for a ‘debt to Ebitda’ ratio of 5.5 doesn’t make any sense.”
The panel defended the high parameters for the sector, saying that airlines
use the cash-and-carry model for revenue, thereby creating almost zero debtors and higher current liabilities in the form of advance from customers. These advances constitute approximately two months’ of sales for airlines.
“In theory, it sounds solid. However, in a condition where airlines have to give heavy discounts and yet remain unsure of getting flyers back, the cash-and-carry revenue model theory doesn’t work. Airlines are selling tickets at discounted prices, while fixed costs like airport charges, lease rentals, and jet fuel cost remain high, thereby negating the theory,” said the CFO cited above.
Similarly, getting working capital loans will become difficult, given there is no certainty over passenger flow picking up.
“Bankers have always been unfavourable towards lending to airlines as they aren’t sure if airlines can service their debt even if repayment periods are stretched by two years,” said a public sector bank executive.
The major factor is the multiple bankruptcy cases involving airlines that have made banks uneasy.
“Kingfisher and Jet Airways went bankrupt, leaving a hole of more than Rs 15,000 crore in banks’ books. Naturally, everyone is doubly careful when lending or restructuring loan books of airlines,” the executive said.
Experts said that it would be difficult for airlines to get existing loan facilities restructured, and to raise fresh loans unless promoters infuse cash.
“The promoter has to show intent and infuse cash in order to increase confidence of lenders,” said Kapil Kaul, CEO (South Asia) of aviation consultancy CAPA.