Editor’s Note:This is a World Bank document prepared to provide a loan to Air India in 1957. Excerpts from the full document (available as the attached pdf file) are provided below.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
DESCRIPTIVE MEMORANDUM ON AIR INDIA JET PROJECT
February 19, 1957
1) Rupees 4.80 = U.S. $1.00
2) 1 £ sterling ...U.S. $2.82
Air India the Indian-flag carrier on world routes, is enlarging and modernizing its fleet by the purchase of long-range jets. The company is arranging dollar loans to help finance the foreign exchange costs of the project. The Bank has been asked to participate in this financing.
Air India International Corp. (Air India) is the successor by nationalization, effective August 1, 1953, to Air India International, Ltd., which started operations in June 1948. Operations have grown from a single weekly frequency between Bombay and London to 11 services a week along routes from India to the UK and Continental Europe via the Middle East and Near East, to Southeast Asia and Japan, to British East Africa, and to Australia.
In 1952, the Government decided to nationalize the Indian airline industry. The Air Corporations Act, 1953, established two separate corporations: (a) Air India, responsible for all long-range international services under the Indian flag; and (b) Indian Airlines, responsible for all domestic services and some short-range services to nearby countries.
Ownership and Management
Air India is a government corporation with no formal equity capital.
Management is exercised through a Board of Directors, appointed by the Government for indefinite terms of office, who report to the Ministry of Communications. The Chairman is a leading industrialist (J.R.D. Tata) who has held this post since the inception of the predecessor.
By law, Air India and Indian Airlines have a monopoly of scheduled air transport services "from, to, in or across India" except so far as the Government may, by agreement with other governments, permit foreign airlines to serve the country. Air India's only competition into and out of India is thus from foreign carriers. Such competition is governed by bilateral agreements which regulate, e.g. flight frequencies, seating capacity, terminal airfields and traffic rights en route.
Air India carries about two-thirds of the passenger traffic between India and overseas. The flight network totals 22,100 route miles. It connects Bombay, Calcutta, Delhi and Madras with (a) London via Cairo, Rome, Geneva and Paris; (b) London via Karachi, Beirut/Damascus, Zurich and Dusseldorf/Prague; (c) Tokyo via Bangkok and long Kong; (d) Sydney via Singapore and Darwin; (e) Nairobi via Aden/Karachi. By arrangement with Indian Airlines, Air India also flies some connecting flights along internal routes.
The fleet in service consists of 8 Super-Constellations, bought new since mid- 1954, plus 3 Constellations taken over from the predecessor company. The only aircraft on firm order are 3 Boeing 707 jets, for early 1960 delivery, which will be powered by Rolls-Royce engines. In addition, Air India has placed a contingent order for the prompt delivery of 2 new Super-Constellations, conditional on Lockheed's finding a prompt buyer at a satisfactory price for the 3 Constellations. The fleet in sight is thus 3 Boeing jets plus 10 Super-Constellations.
Operations and Traffic
The 8 Super-Constellations presently provide 6 return flights weekly to London, two return flights weekly to Nairobi, and once-a-week service to Sydney. The 3 Constellations operate twice a week between Bombay and Tokyo.
Operations and traffic have been growing much faster than industry averages. In the current fiscal year as compared with three years ago, Air India had double the route mileage, flew twice as many aircraft hours, operated 2.5 times as many capacity ton-miles, and carried 2.5 times as much revenue traffic (Annex I). This demonstrated ability to find added work for added equipment is exceptional even in a growth industry like air transport.
The average Air India passenger flies about 2,720 miles. This is a comparatively short haul for a long-range international carrier. It reflects the fact that much of the traffic en route to London, Tokyo or Sydney starts or ends at intermediate points such as Karachi, Aden, Bangkok and Singapore.
Operating revenues have multiplied from $6.6 million a year in 1953-54 to $18,9 million a year in 1956/57 (Annex 2:). Passenger traffic contributes about 70% of revenue, air mail 15% and air freight most of the remainder (Annex 3 ). Passengers and freight are carried at International Air Transport Association tariffs and mail at Universal Postal Union rates.
Three-fourths of revenue comes from intermediate and terminal traffic on the Bombay-London route (Annex 3) This is largely due to the route's good load factor, some 65% (Annex 4). Load factors on the other routes are substantially lower.
Air India utilizes its fleet with reasonable intensity considering that capacity has quadrupled in 3.5 years and that payload normally lags behind capacity in the course of airline growth. The overall load factor has averaged about 60% since mid-1953, with some fluctuations, but the passenger load factor on each main route has been increasing. The Super-Constellations are in active use about 7 hours, 10 minutes daily, the Constellations, 7 hours, 38 minutes.
Operational efficiency is good. Air India's management and servicing of Super-Constellations, judged by the incidence of flight delays, compares well with that of other airlines using the same equipment (Annex 5). Only two aircraft have been lost from June 1948 to date; the first in 1950 by a crash in the Alps, the second in 1955 by the explosion of a time bomb en route from Hong Kong to the Bandung Conference. Although operating margins are narrower than average, this is mainly due to ultra-rapid growth of capacity.
Earnings and Finances
Air India earns small profits on a thin operating margin. Earnings after taxes have increased from the annual equivalent of $ 195,000 in 1953/54 to the annual equivalent of $585,000 in 1956/57 (Annex 2) Throughout the period, working expenses plus depreciation charges absorbed well over 90% of revenue. Investment return was nominal through 1955/56 but Air India is presently earning about 5% before taxes on its properties and 3% after taxes on the pro forma equity (Annex 6).
Air India's operations have generated a cash inflow of roughly $8 million equivalent through March 1957 (Annex 7). The entire amount has been applied to renewals, works now in progress, cash compensation of the predecessor's shareholders, and working capital. It compares with $22 - $23 million equivalent paid since August 1953 for added flight equipment and ground facilities from Government capital advances.
Air India has adequate working capital at present, a moderate debt load for the value of its flight equipment, and a high ratio of pro forma equity to debt (Annex 8). The carrier's financial structure is therefore sound.
DESCPIPTION OF JET PROJECT
Equipment Costs and Contracts
Air India needs more aircraft to cope with growing traffic, and might fail to hold. its share of the business unless, like its competitors, it acquires jets. For these reasons, Air India has just ordered for early 1960 delivery, three Boeing 707 jets of the 420 model which will be powered by four Rolls-Royce Conway engines each. These three planes have the same service potential, roughly 60 million capacity ton miles a year, as ten Super-Constellations; Air India will thus have sufficient equipment by 1960/61 for flying 120 million capacity ton miles a year compared with 42 million actually flown in 1956/57.
The project includes the purchase of: (a) three jets powered by 12 original engines: (b) radio, galley, and other aircraft auxiliaries: (c) 9 spare engines: (d) other initial snares and stores: (e) some overhaul facilities, a test cell and other special equipment and (f) a flight simulator (Annex 9). It will cost an estimated $ 23.0 million equivalent including $22.1 million in foreign exchange to pay the full purchase price of the equipment. Of this, $16.8 million will be payable to US suppliers, mainly for airframes and the remainder ₤ 1.9 million, will be payable to U.K. suppliers, mainly for engines.
Only the jets and their original engines have so far been ordered under a contract with Boeing, signed January 31, 1957. The contract specifies a purchase price of $ 15.5 million subject to various additional charges which may or may not materialize. Of the face amount, $12.7 million is payable to Boeing directly and ₤ 1.0 million to Rolls-.Royce for Boeing's account.
Neither Santa Cruz airfield at Bombay nor Palam airfield at Delhi is capable right now of taking big jets. By early 1960, however, the runways at both fields will have been lengthened, widened, and strengthened, approaches will have been cleared, taxiways and aprons will have been enlarged. The Government is undertaking these works, estimated to cost 8.4 million equivalent, in order to facilitate jet service by all airlines.
PROPOSED METHODS OF FINANCING
The local currency costs, $0.9 million equivalent, would be met from retained earnings over the next three years. The dollar costs, $16.8 million, would be financed by loans from US commercial tanks and the IBRD. Definite arrangements have yet been made to finance the-sterling costs, ₤ 1.9 million.
Various US commercial banks have agreed to lend Air India, for the express purpose of financing the dollar costs, the sum of $11.2 million, equal to two-thirds of those costs as now estimated. A Credit Agreement to this end was signed January 31, 1957. The credit will be open from July 1, 1959 until September 30, 1961. The latter is the earliest date, per the Boeing contract, on which Air India can cancel without penalty should delivery be delayed by causes beyond the manufacturer's control.
The Credit Agreement is expressly conditional on: (a) an IBRD commitment to lend $5.6 million, equal to a third of the dollar costs, on first-in terms as regards drawdown and lest-out terms as regards repayment; (b) a guarantee of the full debt service by the Government of India; (c) an undertaking by the Reserve Bank of India to assure the availability of dollar exchange for debt service; and (d) satisfactory arrangements to raise the sterling funds needed to pay for the engines and other British-made equipment.
The Credit Agreement spells out detailed financial covenants binding on Air India until the loans from the commercial banks are fully repaid. Some require positive action by the corporation. Others enjoin it from taking certain action or allowing certain events to occur.
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