Air India proposes buying of aircrafts against leaseback

Air India is proposing to shift from sale and leaseback to outright purchase of 15 of the 27 Dreamliner aircraft it has ordered, in a bid to save about $225-300 million as part of the turnaround plan.

A proposal to this effect has been sent to the government for approval, as the national carrier feels that the shift to the outright purchase system would provide a much better internal rate of return, airline officials said here.

While leaseback turns out to be more expensive in the long run, an airline does not get the benefit of the residual value of an aircraft after its lease expires as it is enjoyed by the lessor, they said.

Sale and leaseback is a financial transaction where one sells an asset and leases it back on a long term and continues to use it without owning it.

The sources said the redelivery cost (after the lease expires) of a widebody aircraft like the Dreamliners is very high at almost $20 million while for narrow-bodies it is about $10-12 million.

Such high redelivery costs would be avoided if the planes are owned by the company, the officials said.

Air India, which has seven aircraft on leaseback and has offered five more through that process, now plans to turn to the outright purchase mode for the remaining 15, they said.

At present, the airline has a total of 17 Dreamliners in its fleet with one more slated to be delivered in December.

The last of these planes is to be delivered by September 2016.

Under the future global accounting system International Financial Reporting Standards which would become mandatory for all nations in a few years, all long-term leases would have to be shown as both assets and liabilities which would also enhance the burden on the airline's aircraft leases, the sources said. 

Air India is also evaluating whether to induct the latest Airbus A-320 neo (New Engine Option) aircraft into its fleet after 2017, which the manufacturer claims to be a major fuel-saving airplane.

In one of the largest orders in terms of number of aircraft, IndiGo had last week ordered 250 of these A-320 neos.

On the financial front, Air India's financial and operational parameters have shown a marked improvement between April and September this year, registering an 11 per cent growth in network revenue at Rs 8,114 crore up from Rs 7,289 crore reported during the same period last year.

The airline was able to achieve this despite the period being a lean season when most airlines report a decline in the number of passengers carried.

The passenger load factor at 73.5 per cent on domestic and 74.8 per cent on international sectors exceeded the target of 73 and 74 per cent respectively, thus increasing the yields at a time of stiff competition posed by the no-frill carriers and their low fare offers, the officials said.