All eyes in India are focused skyward, as the government steps in to keep state-owned national carrier Air India flying. The company has begun restructuring its debt in what is the country's largest ever liability management exercise.
However, even with the jumbo INR224.68 billion rupees (USD$4.2 billion) financial recast, the airline still needs to make major operational and business changes as it seeks to earn its first profit in some five years.
The restructuring comes at a time when other private players are suffering too. Kingfisher Airlines, for one, is in severe distress and might even file for bankruptcy - and that after already having gone through a similar restructuring exercise.
Indeed, even with government assistance, the problems faced by Air India remain considerable.
Along with long-term borrowings for purchasing its fleet, the carrier's total outstanding debt stood at an unsustainably high INR431.12 billion rupees as at the end of September last year.
Its financial turnaround plans include a INR300 billion rupees equity infusion from the state, staggered until 2020, which includes INR67.5 billion rupees upfront, INR190 billion towards aircraft purchases and INR45 billion to fill wage bill and interest payment shortfalls.
On top of the equity, though, Air India is converting INR214.98 billion rupees of debt facilities into three parts - INR46.20 billion rupees of cash credit limits, INR104.48 billion of long-term and INR74 billion rupees of short-term loans.
In Air India's favour is that its 19 lenders are mostly public sector banks. They have agreed to provide relief to a fellow state-owned company by agreeing to haircuts and moratoriums.
On the long-term 15-year debt, Air India will be given a moratorium on interest for a year and a two-year moratorium on the principal amount. The long-term debt was also rejigged so that now it pays a uniform 11 percent interest rate to all lenders.
The haircut is similar on the short-term loans which Air India proposes to refinance via a 15- to 20-year INR74 billion rupees bond sale before September 30.
Again the government will be the key. As the bonds will be guaranteed by the state, they are expected to be picked up by pension and provident funds.
On top of that, the company has already announced plans to raise USD$1 billion from the offshore markets to replace expensive onshore debt with cheaper foreign money.
If the financial workout seems straightforward, more serious questions arise over the operational changes needed to reduce day-to-day expenses. Air India's employee cost is INR0.81 per ASKM (available seat kilometre) in the 2011 financial year, which is nearly double the industry average. (Jet Airways' is INR0.39 and Kingfisher's INR0.42.)
The company says it will rectify that by deploying proper planes on different routes, a strategy known as network modelling. The reengineering has been a long time coming. Air India started talking about an equity infusion from the government in 2010 and hired SBI Caps to work on the detail. But the exercise was dropped after an initial contribution, as soon as the company realised that the problem needed to be handled on a much higher scale.
The problem stemmed from a fast-deteriorating financial condition, compounded by Air India's dwindling market share. Between 2008 and 2011, the company reported cumulative net losses of INR201.92 billion rupees.
The proposals to deliver on a promise of positive EBITDA starting in 2013 include the spin-off of allied businesses - maintenance, overhaul and ground handling - which should help lower employee costs and bring in revenue.
"Air India has no option, it has to do all these changes within the set timeframe. In no circumstances should these fail," said a source.
If the company succeeds, though, hopes are that profitability may once again be restored.
Air India is on a par with peers using certain industry parameters, such as load factor and on-time performance.
And the carrier could in addition benefit from travel growth. Crisil, a local agency, has estimated domestic and international demand for the industry to grow at an annual pace of 12 percent between 2011-16.