Mumbai: India’s oldest airline, Air India Ltd , plans to spend at least $1 billion in 2015 buying new aircraft to combat new entrants as well as existing airlines that are expanding their own fleets.

The state-run airline could add at least 20 fuel-efficient planes by leasing, or swapping existing orders with plane makers, two executives at the airline said, asking not to be identified.

Air India, with a debt of ₹ 40,000 crore on its books, is talking to Boeing Co. to get 10-11 fuel efficient Boeing narrow body planes instead of three large planes, they said.

Vistara, the new full-service airline promoted by Tata SIA Airlines Ltd, starts operations on 9 January.

India’s largest (by passengers carried) and most profitable airline IndiGo, run by InterGlobe Aviation Ltd, in October placed an order for 250 A320neo planes in addition to an existing order of 280 planes. In 2012, the Wadia Group-promoted low-fare carrier Go Airlines (India) Ltd, which runs GoAir, placed an order for 72 A320neo planes.

“To begin with, Air India plans to take delivery of five fuel-efficient Airbus A320ceo planes from China Aircraft Leasing Group Holdings Ltd from February 2015 to ramp up domestic capacity," said one the two officials cited above.

“Besides, Air India has plans to induct five Boeing B737-800s and five small ATR72 planes on lease for its subsidiaries Air India Express and Alliance Air involving a deal size of $900 million," this person added. Air India Express is a low-fare international subsidiary and Alliance Air a regional subsidiary of Air India.

The second person said that Air India has 18 Boeing B787 Dreamliner aircraft it will likely use on all routes to the UK, Europe, Far East, South East Asia and some parts of West Asia. “Three more Dreamliners are expected to join Air India’s fleet in the first half of 2015. With this induction, the Boeing 777-300 ER (extra range), larger planes will be exclusively used for flights to the US, including Newark, New York and Chicago."

This person added that Air India could also convert the orders for 777-300 ER into B737MAX with Boeing and use them for Air India Express. MAX planes are 13% more fuel efficient than the current narrow-body planes.

Kapil Kaul, chief executive officer (South Asia) at consulting firm Centre for Asia Pacific Aviation, or Capa, said the decision to lease 20 planes for the next two years is prompted by the need to replace the airline’s old A320 classics. He said most of the new aircraft will be in the all-economy configuration which will raise capacity marginally.

Air India will use the leasing and sale-and-lease-back model to fund its purchases.

“We will be leasing new planes and using the sale-and-lease-back mode for Dreamliners to ease the burden on our books," the first person said. Air India completed $1.2 billion worth sale-and-lease-back deals for 11 Dreamliner aircraft and arranged bridge financing for seven more valued at $770 million in 2014. It recently signed a $250 million leasing agreement with China Aircraft Leasing for five Airbus A320ceo planes.

The first person said Air India also hopes to raise some money from banks and has turned around “in route profitability".

He said, till December, “of the 60 international routes covered, variable costs of operations were entirely covered in 54 and total costs on 10 of the 54".

“On the domestic routes out of the 113 operated almost all routes covered the variable costs and 24 of them covered the total costs," he added.

Air India is expected to post revenue of ₹ 25,000 crore on a consolidated basis for 2014-15 out of which ₹ 23,000 crore will be from the pure airline business and ₹ 2,000 crore from subsidiary services such as ground handling, engineering, catering and hotels.

Capa’s Kaul admitted that lower jet fuel prices will help Air India’s domestic operations, but does not see it turning around under government ownership even though its operations have looked up in recent years.

Increased seat occupancy in business class is important, but a weak first class remains a concern for Air India, Kaul said.

“Financial year 2015-16 will be a critical year as new leadership will take charge in few months and more clarity will emerge about government’s intent and future direction on Air India. Need to see a decisive direction on Air India," he added.

The loss-making airline is in the midst of a bailout programme after the centre approved a ₹ 30,000 crore package to rescue the airline in April 2012. The airline is expected to post a net loss of ₹ 3,900 crore for the last fiscal, numbers for which are yet to be disclosed. It posted a net loss of ₹ 5,100 crore in 2012-13 and a net loss of ₹ 7,100 crore in 2011-12.

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