By HARSH JOSHI, Sept 20, 2010

 

Call it jet lag. Only this won’t go away after a good night’s sleep.

 

Weighed down by a load of debt and having failed to secure a bailout from New Delhi, India’s private airlines are now looking abroad for assistance. Jet Airways and Kingfisher Airlines have more than $4.9 billion debt outstanding between them — the legacy of an intense competition that had them spending heavily from 2005 to 2007 to expand routes and offer high-end services.

 

The splurge ended with the economic slump, but the carriers are now trying to reckon with the debt. Jet’s solution is to refinance the existing loans, but from abroad. Last month, it asked the Reserve Bank of India to allow it to borrow $750 million outside of India where it could find better terms and a deeper market.

 

Kingfisher, meanwhile is thinking of raising $200 million by selling shares to overseas investors. Last week it put that plan on hold, realizing that it first needs to work out a debt-restructuring plan with India’s banks before it can approach new equity investors.

 

It’s not clear that either approach will get off the ground. Global debt investors are in a risk-seeking mood, and Asia’s distressed debt funds — lacking many opportunities for investment lately — might be tempted by Jet Airways’ offering. Its debt load is high, but the carrier has been profitable for the last nine months after only two quarters of losses last year. The problem is India’s protective central bank doesn’t allow companies to raise debt abroad to repay domestic loans. It considers that a form of interest rate arbitrage.

 

Kingfisher, meanwhile, doesn’t have its rival’s track record. It has never posted a profit in its five years of existence and now looks out of place as India’s travelers shift to low-cost, no-frills flights. The funds it is seeking, meanwhile, would make only a small dent in the $1.2 billon that it owes.

 

Domestic solutions aren’t forthcoming, either. New Delhi has so far ignored calls for lower jet fuel taxes or an opening up of the sector to investment from foreign airlines. Asian airlines, with a strategic interest in tapping into India’s fast-growing travel industry, would bring to the table better management experience and a substantial source of long-term capital.

 

That’s one form of foreign aid Jet and Kingfisher really would benefit from.

 

Write to Harsh Joshi at harsh.joshi@dowjones.com

Source: Proshare