Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the enhanced bank facilities of Air India Ltd (AIL).

 

The ratings continue to centrally factor in the strategic and economic importance of AIL to its ultimate parent, Tata Sons Pvt Ltd (Tata Sons; ‘CRISIL AAA/Stable/CRISIL A1+’), the strong managerial linkages between the entities, the established position of AIL in the airline industry and its strong financial flexibility on account of being part of and managed by the Tata group. These strengths are partially offset by its modest financial risk profile and susceptibility to risks inherent in the aviation business.

 

The ratings also factor in the Tata group’s articulation of the intent to maintain majority shareholding in AIL and to assist the company in meeting its obligations in full and on time.

 

CRISIL Ratings notes that on August 30, 2024, AIL announced that it has received the necessary regulatory approvals for the merger of Tata SIA Airlines Ltd (Vistara) with AIL and it will become effective in fiscal 2025. The merger of AIL’s wholly owned subsidiaries, AIX Connect Pvt Ltd (AIXC) and Air India Express Ltd (AIEL; CRISIL AAA/Stable/CRISIL A1+) is also expected to conclude during fiscal 2025. The conclusion of these mergers is expected to result in operational synergies for AIL and AIEL, through optimization of flight routes and cabin class offering among others and enhance its competitiveness both in full-service carrier (FSC) and low-cost carrier (LCC) segments. This could lead to an improvement in its overall operating performance and will remain a key monitorable.

 

During fiscal 2024, consolidated revenue (including Vistara) grew 25% to Rs 66,800 crore, on the back of strong growth in fleet and healthy passenger load factor (PLF) supported by robust growth in passenger traffic in both the domestic and international segments. AIL’s consolidated operating margin (including Vistara) improved to 3.4% in fiscal 2024 from negative 2.3% in fiscal 2023, backed by capacity expansion across its network, firm passenger yields and lower fuel costs. Moderation in operating costs (except fuel) through unfolding of synergy benefits, along with fleet addition and expected growth in passenger traffic volume, should drive further improvement in the profitability over the next few fiscals.

 

Despite AIL receiving capital infusion during the year, net debt (including lease liabilities) increased as on March 31, 2024 primarily because of capital advances towards purchase of aircraft, capex and funding of losses. CRISIL Ratings understands that AIL is also expected to receive additional equity infusion over fiscals 2025 to 2027. Despite this, the net debt is expected to rise in the near term on account of the increase in lease liabilities owing to the fleet expansion as well as the proposed capital expenditure (capex) towards refurbishment, spare engines and capital advances for purchase of aircraft.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of AIL and its wholly owned subsidiaries. AIEL and AIXC and joint venture, Air India SATS Airport Services Pvt Ltd (CRISIL A+/Stable/CRISIL A1). CRISIL Ratings has also combined the business and financial risk profile of Vistara given its impending merger with AIL.

 

CRISIL Ratings has applied its parent notch-up framework to factor in the support available to AIL from the ultimate parent, Tata Sons.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• High strategic and economic importance to and strong articulation of support from Tata Sons: AIL, is strategically and economically important to the Tata group. Tata Sons has invested Rs 2,700 crore towards purchase of AIL (including AIEL) through its wholly owned subsidiary, Talace Pvt Ltd (Talace). The acquisition of AIL has made the Tata group the second-largest aviation player in India. The economic importance of the AIL group (collectively includes AIL, AIEL, AIXC and Vistara) is accentuated by the equity infusion in fiscal 2023 and further infusion during fiscal 2024. Tata Sons has infused sizeable equity in AIL so far and another round of equity infusion is expected this fiscal post the conclusion of the merger of Vistara.

 

Tata Sons provides strategic inputs and is engaged in the turnaround of the AIL group. Mr. N. Chandrasekaran, the chairman of Tata Sons, is the chairman of the board of directors of AIL. Many seasoned professionals from the Tata group have been inducted in AIL to turn around the business.

 

Tata Sons has an excellent track record of extending need-based support to subsidiaries and group companies, as seen in the case of Tata Teleservices Ltd (CRISIL AA-/Stable/CRISIL A1+). CRISIL Ratings understands that the Tata group will continue to hold majority stake in AIL and will assist the company in meeting its obligations in full and on time.

 

• Established position in the airline industry: The AIL group is a leading Indian player in the international traffic originating from, terminating at and transitioning through India, with a market share of ~23%, in terms of passengers carried from April to July 2024. In domestic operations too, the group has a healthy market share of ~29% in terms of passengers carried during the same period.

 

Moreover, the AIL group is the only Indian player that owns wide-body aircraft (49 in total), resulting in the ability to fly non-stop, long-haul flights to North America, Europe, United Kingdom and Australia. The company plans to open several regional hubs across the country to strengthen its network. Moreover, fleet addition through its strong order book with aircraft manufacturers should strengthen its market position over the long term. The ongoing fleet and network expansion should strengthen the already established market position of AIL.

 

Weaknesses:

• Modest, albeit improving, financial risk profile: AIL had reported continued operating losses (adjusted for leases) over the past few years because of various factors such as restrictions on travel amid the pandemic as well as high fixed costs. In fiscal 2024, lower fuel costs and stable passenger yields resulted in a positive operating margin, while capital advances for the purchase of fleet and funding of losses led to higher net debt, thereby impacting the financial risk profile.

 

CRISIL Ratings understands that the new management is undertaking various cost rationalisation measures, which will be aided by the replacement of old aircraft with new aircraft. Also, the acquisition of AIXC and the merger with Vistara should bring in additional operational synergies. All these factors should help improve profitability and cash accrual over the medium term.

 

Net debt would rise on account of the increase in lease liabilities due to the fleet expansion as well as the proposed capex towards refurbishment, spare engines and capital advances for purchase of aircraft, despite the incremental cashflow from the planned retirals of old aircraft in the fleet. The financial risk profile will be supported by the equity infusion planned by the shareholders which will provide comfort against the cash losses. Still, the financial risk profile will remain modest over the medium term and will be a key monitorable.

 

• Susceptibility to risks inherent in the aviation business: Aviation Turbine Fuel (ATF) cost accounts for 35-40% of the total operating cost of players in the aviation industry. The ATF price is directly linked to global crude prices and, hence, is volatile. Players have limited ability to pass on price increases to passengers because of intense competition and likely adverse impact on passenger load factor (PLF). Elevated ATF price and high fixed cost have impacted the operating margin of AIL in the past and fluctuations in the operating margin owing to volatility in ATF prices will be a key monitorable.

 

Operations are also vulnerable to fluctuations in foreign exchange rates as lease rentals and maintenance cost, which account for 20-25% of the operating cost, are denominated in the US dollar. However, there is a natural hedge available to the company in the form of international foreign currency revenues which partly offsets the foreign exchange risk.

 

Furthermore, sizeable capacity additions planned by other players over the medium term would mean that players may have limited ability to pass on price increases to passengers because of intense competition to strike an adequate balance between the fares and PLFs. Also, the price-sensitive nature of the market may limit AIL’s ability to command premium pricing to an extent.

Liquidity: Superior

AIL has high financial flexibility, supported by the strong parentage of Tata Sons. On a consolidated basis (including Vistara), cash and equivalents were over Rs 11,707 crore, apart from unutilised limits of around Rs 6,000 crore as on March 31, 2024. Cash accrual and healthy liquidity should be sufficient to service debt over the medium term. Moreover, strong parentage of the company, should help the company refinance debt at favourable terms, whenever required.

Outlook: Stable

AIL will continue to benefit from its strong parentage and need-based support from Tata Sons. Moreover, the business risk profile will be supported by its established market position.

Rating sensitivity factors

Downward factors

• Downgrade in the rating of Tata Sons by one or more notches.
• Change in the strategic or economic importance of AIL to Tata Sons

About the Company

AIL, wholly owned by Talace, is an FSC operating in the domestic and international markets. Its wholly owned subsidiaries, AIEL and AIXC, are LCCs that focus on domestic and short-haul international operations. AIL has a unique and attractive international footprint across North America, Europe, United Kingdom, Australia and the Middle East. More than two-thirds of the revenue comes from the international market.

 

Vistara is currently a joint venture of Tata Sons (51%) and Singapore Airlines Ltd (49%). It is a full-service airline operating in the domestic and international markets. Its merger with Air India is planned to become effective in fiscal 2025, which would enable operational synergies including network and resource optimization.

About Tata Sons

Tata Sons is the principal investment holding company of the Tata group. Around 66% of the share capital of Tata Sons is held by public charitable trusts. The company holds core equity stakes in major group companies, including Tata Consultancy Services Ltd, Tata Steel Ltd, Tata Motors Ltd (CRISIL AA+/Stable/CRISIL A1+), The Tata Power Company Ltd (CRISIL AA+/Stable/CRISIL A1+), Tata Chemicals Ltd (CRISIL AA+/Stable/CRISIL A1+), Tata Investment Corporation Ltd (CRISIL AAA/Stable), Tata Teleservices Ltd, Tata Capital Ltd ('CRISIL AAA/CRISIL PPMLD AAA/CRISIL AA+/Stable/CRISIL A1+'), Tata AIG General Insurance Company Ltd (CRISIL AA+/Stable), Tata Industries Ltd (CRISIL AAA/Stable), Tata Play Ltd (CRISIL AA/Stable/CRISIL A1+) and Tata Projects Ltd (CRISIL AA/Stable/CRISIL A1+). Tata Sons is registered as a core investment company with the Reserve Bank of India.

Key Financial Indicators

As on / for the period ended March 31		2024	2023
Operating revenue	Rs crore	51,365	41,261
Profit after tax (PAT)	Rs crore	-6,692	-13,967
PAT margin	%	-13.0	-33.8
Interest coverage	Times	-1.18	-3.05
Adjusted debt / adjusted networth	Times	NM	8.30

NM: Not meaningful; above table reflects CRISIL Ratings-adjusted figures

Any other information: Not Applicable