Wednesday, September 1, 2010

Airlines in trouble = Passengers in trouble + Banks in trouble

The heat of the problems that Paramount Airways has been having with the Directorate-General of Civil Aviation and the aircraft financiers (GE Capital Aviation Services) is now being felt by Andhra Bank which had to call its Rs 42-crore loan to the airline as a non-performing asset and make provisions for it says Business Line (Andhra Bank hits air pocket with Paramount Airways, August 26, 2010).  Paramount and GE Aviation say each owes the other.  The airline is aggrieved as to why the DGCA should take sides in a commercial dispute. The net result is Paramount has stopped functioning and has become a NPA in Andhra Bank's books. 

Hummingbird feels that if there is a contractual dispute, there are courts to sort out the problem and the DGCA shouldn't have intervened in a way that derailed the private airline and incapacitated it from repaying its dues to its bankers.  One can agree if its a matter related to safety. 

Hummingbird cannot feel bad at the irrational pricing and reckless expansion programme announced by almost all the airlines even as they were bleeding a slow death.  Hummingbird is pained at the reckless lending by banks to such suicidal airlines.  The net result is visible to everyone today -

Source:  Mint, June 28, 2010

The net result is that Banks are now doing a debt recast for airlines - so that what happened to Andhra Bank with respect to Paramount Airways doesn't happen to them.  Hummingbird wonders whether any of the banks seriously thought of 'risk' while lending.  Instead of thinking through the implications of the ruinous pricing policy being pursued by the airline industry before giving loans to the airlines, the banks are now stating various reasons including the cyclical nature of the industry, a tough operating environment, capital intensity of the sector and the long breakeven period, for justifying why the debt recast should be done entailing lower interest rates, conversion of overdue interest into principal, etc.  

Hummingbird is not convinced - this was a purely commercial (and conscious) decision to lend to the airlines.  Now that the repayments are not coming, banks cannot (and should not) do a debt recast, at a time when the peak of the problems faced by the airline industry is over.  A more honest and transparent way, is to recognise NPAs wherever it is, provide for in the books of accounts and spruce up the 'risk management' practices in the banks.  That would ensure that atleast in future such reckless lending doesn't happen.  

One more worrying factor is the citing of 'long gestation' periods / long break-even periods for the debt recast.  Banks are predominantly collecting deposits for the short term.  Hummingbird wonders as to why in such a situation, they lent to airlines which (they now say) take long time to break-even?  What was the role of 'Asset-Liability-Management-Committee' in such banks?  Or, are all these internal control(s) / process(es) a mere eye wash?  

Mint says that RBI has censured banks for not following prudent norms before lending to airlines and putting themselves in a tight spot. It has recommended that banks take tangible securities as collateral for future loans instead of depending on promoter guarantees and brand value. The reckless pricing war was visible to everyone.  Poor financial position of the airlines tempts them to cut corners (they call it cutting costs) and end up playing with lives of ordinary passengers. Recently it came to light that SpiceJet illegally allowed children, who should have been given separate seats, to travel on the laps of adults to accommodate more passengers on a Delhi-Mumbai flight earlier this month.

Mohan Ranganathan writing in Business Line (June 23, 2010) terms it as "Conscienceless on aviation safety".  After listing a series of near disasters, he concludes by saying - "Political interference and judicial apathy have contributed to the lowering of safety and moral standards in Indian aviation. Commercial considerations have been the prime focus. Unless all those involved in regulating the sector start listening to their consciences, the tragedy in Mangalore is not going to be the last."

Supporting reckless expansion in an industry which followed suicidal pricing policies was the mistake of the Banks.  What started as a problem of the respective airlines, has been converted into the problem of the lenders and passengers.  No one has a clue as to when the next air accident will happen.  If only one bank is in trouble, then the concerned Bank Chairman would be in trouble.  If all the banks are in trouble, then there is no problem for any single bank!  As far as the airlines are concerned, when they expanded capacities they wanted loans and they got it.  Today, when they want these debts to be restructured, they will get it.  What about the poor tax payer whose money gets blown in such reckless projects?  What about the passengers whose lives are compromised due to poor safety procedures?  Hummingbird has no answers and wonders where we are heading...