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CAG criticises Air India's Boeing aircraft buy

NEW DELHI/MUMBAI (Reuters) - The Comptroller and Auditor General (CAG) on Thursday criticised the country’s national airline Air India Ltd’s (AIL) decision to buy 68 Boeing planes in 2005, a move which was approved by the government, saying it imposed an “undue long term financial burden on the carrier”.

Passengers speak to ticketing staff through the only open counter at the Air India ticket office at the domestic airport in Mumbai April 27, 2011. REUTERS/Vivek Prakash/Files

The auditor’s report, tabled in parliament earlier in the day, said the airline had initially planned on buying 18 smaller capacity and 10 medium capacity aircraft in January 2004, but submitted a revised plan in November for 50 medium and long range planes worth about $7.2 billion, and 18 more for Air India charters.

The CAG, in its report, said that the sudden increase in the number of aircraft to be purchased “does not withstand audit scrutiny”.

The bigger aircraft were used to fly on long haul overseas routes which turned out to be money losing.

“This sector on which American/Canadian airlines were already operating non-stop flights and based on which fact AIL was made to reconsider its fleet requirement, turned out to be a loss making sector right from the date of commencement and continued to be so,” the report said.

The single largest loss-making route for the airline was the India/USA route, which contributed between 41 percent and 90 percent of Air India’s total operating losses during the period 2005/06 to 2009/10, the report said. All international routes of the carrier were loss-making by 2009-10, the report added.

Air India is expected to post a pre-tax loss of 70 billion rupees for the year ended March, as per government estimates, hit by a bloated cost structure and stiff competition from nimbler rivals in a crowded aviation market.

The carrier, which recently appointed a new chairman, is in talks with banks to restructure $4 billion of working capital debt and is in the midst of implementing a turnaround plan which would focus on a hub-and-spoke route model, cut costs by redeploying staff and unload non-core real estate.

The firm has total loans of $9.5 billion, including $4.76 billion of long term loans on fleet acquisition.

The airline has not posted a profit since merging with former state-owned partner Indian Airlines in 2007 and relies on handouts from New Delhi to survive.

The federal auditor said it was unable to ascertain the detailed justification for the in-principle approval of the government for the merger.

It said the merged entity’s financial position had been “abysmally poor”, from 2004/05 to 2009/10.

“The potential benefits for the merger would have been far higher, had this been undertaken before finalization of the massive and separate fleet acquisition exercises undertaken by AIL and IAL (Indian Airlines Ltd.).”

Indian Airlines had in 2006 placed a separate order for 43 Airbus aircraft worth 83.99 billion rupees.

Reacting to the CAG report, Praful Patel, the former aviation minister whose tenure oversaw the aircraft acquisition and the merger, said the new aircraft were required to replace Air India’s aeging fleet.

“For 20 years, Indian Airlines and Air India did not buy planes and when this government came in 2004, we were left with very little choice. To run the airline, new planes were required. The competition had new planes,” Patel told newschannel CNN IBN.

“The fact is that whether its mergers or acquisitions these are all broadbased government decision making processes and they have been done with utmost transparency and clarity.”

The CAG report said that merged entity has been heavily dependent on debt and the government should promptly infuse more equity in a timely fashion to bring down the debt-equity level to industry standards.

The cabinet last month approved an equity infusion of $112 million into the ailing carrier.

($1=46.26 Indian rupees)

Reporting by Manoj Kumar and Aniruddha Basu; Editing by Subhadip Sircar and Rajesh Pandathil