Aided by Tata credit profile, Air India may find it cheaper to buy widebody jets

Air India is considering going with the purchase option for the widebody aircraft component of its record breaking order, instead of the more popular leasing option, said people familiar with the matter. These people said the creditworthiness of parent firm Tata Sons will allow the airline to raise funds at lower rates of interest for financing the aircraft purchase.

The Tata-owned carrier on Tuesday announced a 470 aircraft acquisition programme, the single largest order, by numbers, in the history of the aviation sector. This includes 70 wide bodies, involving a mix of A350s, B-787 and B-777-9.

While sale and leaseback has been the preferred mode of acquisition in India, an increase in lease rentals, because of tight aircraft supply, rising demand and interest rates, has made Air India interested in owning a portion of the fleet, said industry executives. Airline will take a final call near the time of delivery.

According to consultancy firm IBA, lease rates for new narrow-body aircraft are set to rise above pre-pandemic levels in 2023. Similarly, for wide-body aircraft like the A350 and Boeing 787, lease rates are set to increase due to lower production.

"Air India will exercise both sale-and-leaseback as well as ownership of primarily the wide-body assets. The excellent credit rating of the Tata Group will allow the airline to borrow capital at lower rates, helping it to own the assets unlike the other Indian airlines whose primary source of income remains income from sale and cashback. This also allows the airline to lease in the future and raise cash if needed," said an executive of a leasing firm.


Under the sale-leaseback arrangement, the aircraft owner sells the aircraft to the lessor, which immediately leases the aircraft to the entity that placed the order. This allows airlines to unlock cash while operating the aircraft. Financing of an aircraft is finalised six months to one year before delivery. From the new order, Air India is slated to get delivery of 25 Boeing 737 Max and 6 Airbus A350-900 by 2024 first half.

Thanks to Tata group's financial track record, the airline was able to win Power-By-Hour (PBH) agreements with engine makers GE and Rolls Royce, said people familiar with the development. The practice, which binds the engine manufacturer to offer replacement and maintenance for which the airline pays on utilisation basis, has been stopped by engine makers for most airlines. "PBH agreements are not attractive for engine makers, but due to the size of the order and Tata's profile, Air India got it from all engine makers," the executive said.

The airline negotiated the deal for over one year.