The Tata Group is set to take a ₹23,000 crore ($3.02bn) loan to fund its acquisition and operation of Air India. The conglomerate plans to tap Air India’s existing creditors for the loan but has requested far lower interest rates. Let’s understand what this means for the airline’s future.
Tata is looking to secure loans at low interest rates to kickstart the Air India deal. Photo: Getty Images
After Tata’s successful bid in October, the group has been busy papering over the transition with the Indian government. One of the essential parts will be how the salt-to-steel conglomerate will fund its acquisition. We now know more about the group’s plans this week.
According to The Economic Times, Tata has established a new subsidiary to handle the Air India deal, known as Talace. Talace is currently in talks with banks to secure a one-year loan to the tune of ₹23,000 crores ($3.02bn). Notably, this will be made at sovereign interest rates of 4-5%.
The one-year loan will be unsecured and marked for general purposes, making the terms particularly interesting. Photo: Getty Images
While lenders generally do not provide unsecured loans at sovereign rates (the rate at which governments can borrow), the Tata Group has a strong reputation. Talace is also making the deal with Air India’s existing creditors, bringing down Air India’s current 9-10% credit rate to under half.
Since banks usually charge above market rates for such a loan, typically 7%+, the Talace deal will require the passing of a special resolution. However, lenders all want to remain in Tata’s good books and do not want to lose the giant’s business. The terms of the deal are set to be finalized before Christmas.
Where will it go?
The use of the loan is quite clear. Talace will use a bulk of the loan to pay for the purchase of Air India, set at ₹18,000 crores ($2.36bn). Most of this will be used to transfer Air India’s debts, while a small amount of ₹2,700 crores ($355mn) will go to the government.
The remaining ₹5,000 crores ($657mn) will go toward Air India’s operational costs. This will likely include bringing in a new management team, settling pressing debts, and merging Tata’s other airlines. While Tata has to keep all employees for at least one year after the deal, they may also choose to hire a new set of employees to run the flag carrier.
Tata is considering merging Vistara and AirAsia India into the Air India framework to increase its market share. Photo: Pranjal Pande | Simple Flying
While this loan is for a considerable amount, Tata will require billions over the next decade to fund an expansion of Air India. This will include a fleet modernization program, refurbishment of existing planes, and an increase in the long-haul route map. However, this process will at least take a few more months or years before coming to fruition.
According to ET, Tata plans to implement a 100-day improvement program for Air India after its takeover. This time will see a drastic improvement in the carrier’s on-time performance, passenger complaint response, and a general improvement in the service standards.
This 100-day plan will allow Tata to show its impact on Air India and set the stage for more significant changes in the future. For now, the aviation industry is excitedly waiting for the January deadline when Tata formally takes over Air India.
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