(Adds details, background)

NEW DELHI Dec 29 (Reuters) – Air India’s
banks will own a chunk of the loss-making state carrier after
its board approved issuing preference shares worth 75 billion
rupees ($1.42 billion) to lenders led by State Bank of India
as part of a financial restructuring.

A spokesman for the airline said it was not yet decided how
big a stake the banks will own.

Earlier this year, lenders to private sector rival
Kingfisher Airlines took a stake in the loss-making
carrier controlled by liquor baron Vijay Mallya.

A consortium of Air India’s lenders last month gave broad
approval to its financial restructuring, a source had told
Reuters, providing relief for the cash-strapped airline reeling
under $4 billion of debt.

Air India’s lending group has 26 banks. In addition to State
Bank of India, IDBI and Bank of Baroda also
have heavy loan exposure to the airline.

The restructuring plan must be approved by the federal
government before it is implemented.

India’s airlines are struggling with surging oil prices,
high sales tax on jet fuel and below-cost pricing driven by
fierce competition, leading to losses for most of them.

Indian airlines are forecast to lose up to $3 billion in the
fiscal year that ends in March 2012. State-owned Air India,
operating on government life support, is expected to account for
more than half of that, the Centre for Asia Pacific Aviation
(CAPA) has said.

Air India said its passenger revenue rose 12.3 percent in
November, compared with the year-ago period, and domestic load
factor stood at almost two-thirds of its total capacity.

Kingfisher in March issued shares equivalent to 23.4 percent
of the airline to a consortium of 13 banks, also led by State
Bank of India, after conversion of compulsory convertible
preference shares at 64.48 rupees a share. The stock closed on
Thursday at 21.25 rupees.
($1 = 52.99 Indian rupees)

(Reporting by Anurag Kotoky; Editing by Tony Munroe)