Nevrekar
25th Feb 2008, 02:39
Airlines face credit fears
Praveena Sharma / DNA MONEY
Monday, 25 February , 2008, 08:20
As airlines try to counter soaring aviation turbine fuel (ATF) prices, slowdown in demand and overcapacity, the spectre of credit crisis is hovering over them.
Airlines fear that if losses due to these factors continue, they might fall out of favour with banks and financial institutions.
Budget carrier SpiceJet Ltd chief financial officer (CFO) Parth Sarathi Basu says that even though his airline enjoys (credit) limits from banks today, it may not be the same next year if the red ink on the balance-sheet spreads further.
"Today, we have the support of some of the nationalised banks, but we have accumulated losses, and if that continues next year, then it may become difficult for us," says Basu.
Basu revealed that SpiceJet did not have any plans for raising funds. A year back, the no-frill airline raised around Rs 320 crore ($80 million) from Tata Group, private equity funds Texas Pacific Group Ventures, Istithmar PJSC and Goldman Sachs.
"Since we have decided not to own any aircraft, we do not need the capital. All our aircraft (18) have been bought on sale and leaseback agreement. This way, we lose out the depreciation that we could have earned on the assets," says Basu.
And it is not just SpiceJet, which is sacrificing depreciation to fund its aircraft purchase. Credit crunch has forced other airlines also to go in for sale and leaseback and capacity rationalisation.
Industry sources say shortage of funds has compelled the Mallya-owned Deccan to defer delivery of some aircraft and GoAir to rationalise its fleet.
Analysts believe that if the credit crisis in the aviation industry sets in completely, it will slow down capacity addition in the market, which would balance out the demand and supply situation. This, they believe, will improve profits of efficiently run airlines.
"Many airlines have diluted their equity because of heavy losses. These airlines may face difficulty in raising funds from the banks and this could affect their expansion plans. It is a self-balancing mechanism, which will work well for the industry," avers an aviation analyst with a broking firm.
ICICI Bank joint managing director and chief financial officer (CFO) Chanda Kochhar says there is no general squeeze on lending to players in the aviation sector; it was based on case-to-case basis depending on the business model of the airline.
"There is nothing like holding back from lending to airlines. There is no renewed decision to do so. It is a known fact that aircraft financing has long gestation period, and depends on the business model of an airline," says Kochhar.
Praveena Sharma / DNA MONEY
Monday, 25 February , 2008, 08:20
As airlines try to counter soaring aviation turbine fuel (ATF) prices, slowdown in demand and overcapacity, the spectre of credit crisis is hovering over them.
Airlines fear that if losses due to these factors continue, they might fall out of favour with banks and financial institutions.
Budget carrier SpiceJet Ltd chief financial officer (CFO) Parth Sarathi Basu says that even though his airline enjoys (credit) limits from banks today, it may not be the same next year if the red ink on the balance-sheet spreads further.
"Today, we have the support of some of the nationalised banks, but we have accumulated losses, and if that continues next year, then it may become difficult for us," says Basu.
Basu revealed that SpiceJet did not have any plans for raising funds. A year back, the no-frill airline raised around Rs 320 crore ($80 million) from Tata Group, private equity funds Texas Pacific Group Ventures, Istithmar PJSC and Goldman Sachs.
"Since we have decided not to own any aircraft, we do not need the capital. All our aircraft (18) have been bought on sale and leaseback agreement. This way, we lose out the depreciation that we could have earned on the assets," says Basu.
And it is not just SpiceJet, which is sacrificing depreciation to fund its aircraft purchase. Credit crunch has forced other airlines also to go in for sale and leaseback and capacity rationalisation.
Industry sources say shortage of funds has compelled the Mallya-owned Deccan to defer delivery of some aircraft and GoAir to rationalise its fleet.
Analysts believe that if the credit crisis in the aviation industry sets in completely, it will slow down capacity addition in the market, which would balance out the demand and supply situation. This, they believe, will improve profits of efficiently run airlines.
"Many airlines have diluted their equity because of heavy losses. These airlines may face difficulty in raising funds from the banks and this could affect their expansion plans. It is a self-balancing mechanism, which will work well for the industry," avers an aviation analyst with a broking firm.
ICICI Bank joint managing director and chief financial officer (CFO) Chanda Kochhar says there is no general squeeze on lending to players in the aviation sector; it was based on case-to-case basis depending on the business model of the airline.
"There is nothing like holding back from lending to airlines. There is no renewed decision to do so. It is a known fact that aircraft financing has long gestation period, and depends on the business model of an airline," says Kochhar.