Having received flak for deciding to sell five of its seven year-old Boeing 777-200 Long Range (LR) aircraft to Etihad Airways at a “loss”, Air India (AI) has defended its move by saying that it would result in an annual saving of $100 million.
“The company will pay all the loans outstanding against these aircraft, which will reduce the interest and loan liability by $60 million a year besides $40 million by savings a year by way of maintenance costs.
The move will also discharge the Government guarantee given on these loans,” said a senior AI official, who did not wish to be identified .
Air India has agreed to sell these five aircraft from its fleet of eight Boeing 777-200 LRs for approximately $350 million, which works out to be $70 million per aircraft.
According to the official, the acquisition cost of these aircraft in 2007 was approximately $115 million to $120 million per aircraft.
Quizzed on the rationale behind selling these aircraft in just seven years, the official said: “Due to stiff competition, the yields on the non-stop operations could not be increased over a period of time. The fuel consumption was also high per seat mile for these aircraft. Besides this, the market for 777-200 LR was very limited, and the sale offered a good opportunity to retire the asset and extinguish the loans against these aircraft.”
“If we had waited to sell these aircraft, it might not have realised these prices in the coming years. The substitution of Boeing 787 and Boeing 777-300 ER on most of the routes operated by LRs have turned these routes cash-profitable, and thus has resulted in reduction in the cash losses. Thus, right-sizing the fleet with the right type of aircraft has helped us to reduce losses,” he added.
The official said the 777-200 LRs were mainly acquired to cater to non- stop operations between India and west coast of the U.S.
“However, due to changes in market environment such as high fuel prices, inability to increase yields on non-stop flights due to competition, point-to-point services offered by the Gulf-based carriers and higher seat mile costs, the LRs have turned out uneconomical,” the official said.
“We tried several simulations such as converting LRs to an all-economy configuration or deploying them on the Gulf routes but none of these worked. The high fuel cost and the low seating capacity of these LRs made them uneconomical to operate in a high cost environment,” the official added.
The government has cleared AI’s decision to sell these aircraft. They will be delivered to Etihad between January 15 and April 2014. The remaining three 777-200 LRs will be disposed of in the coming years after going through a tender process.
