Global and Indian companies’ line up for a pie of the Indian skies, notwithstanding the handicaps

Air India – in its new Tata-led avatar – is moving towards a decision on a $50 billion jet order, arguably one of the biggest in the history of the aviation industry, which could lift this sector out of its pandemic-induced morass.

Global and Indian companies’ line up for a pie of the Indian skies, notwithstanding the handicaps
Industry experts say the deal would be worth some $50 billion at list prices, but closer to $20-25 billion after steep industry discounts, given the state of economic downturn. (Photo source: PTI)

By Ranjit Bhushan

In mid-July, an Airbus forecast caused waves in the rarefied world of aviation. According to this projection, India is the world’s fastest-growing air travel market. There was a good reason for this prognostication. Air India – in its new Tata-led avatar – is moving towards a decision on a $50 billion jet order, arguably one of the biggest in the history of the aviation industry, which could lift this sector out of its pandemic-induced morass. There is little doubt that the size of this Air India deal, once it goes through, will reinvigorate a sagging world aviation market.

What had set off the race towards a pulsating finish was its proposed final orders – the purchase of 70 wide-body jets including Airbus A350s and Boeing 787s and 777s, and up to 300 narrowbodies, industry insiders revealed.

Split mega deal

The new Air India owner, Tata Group, wanted this mega allocation to be split between Airbus and Boeing, the world’s two biggest airline manufacturers.

That the deal could not come in time to galvanise the recently concluded, sedate Farnborough Air show on July 22, is probably more of happenstance.

Both global majors are making a `final push’ with the order, their executives making the customary dash to India to close the deal.

With the stakes being sky high, no easy decision can be expected and the outcome at this stage – even despite the declared intent – remains unknown.

Just how high are the stakes?

Boeing CEO Dave Calhoun flew to India ahead of the Farnborough Airshow, which began on July 18, keen to showcase a revival of its 737 MAX. While officially, the companies have withheld comments, there were indications that executives from Boeing, too, had visited India recently in pursuit of a combined order for 200-300 narrowbodies and 30-70 wide-body jets. The chase is clearly ‘in the works’ and no one group is letting go of it easily, as can be expected. 

Naturally, in a Covid-stricken world, with the global market a little more than gloomy, both the American firm and the European consortium are keen on concluding deals in the depressed wide-body market section.

What’s the purchase worth?

Industry experts say the deal would be worth some $50 billion at list prices, but closer to $20-25 billion after steep industry discounts, given the state of economic downturn.

Of particular interest is Boeing’s revival of its 737 MAX passenger airliner, which was grounded worldwide between March 2019 and December 2020 after 346 people died in two crashes, Lion Air Flight 610 on October 29, 2018, and Ethiopian Airlines Flight 302 on March 10, 2019.

The Boeing 737 MAX’s grounding notice was withdrawn by US’s Federal Aviation Administration (FAA), which recertified the aircraft in 2020. The change allowed Boeing to resume deliveries of its only current narrowbody product. Subsequently, more and more regulators have been giving the MAX the green light.

There is another factor propelling global companies to put their money in India– the country’s growth as a major aviation market. It is expected to overtake China and the United States as the world’s third-largest air passenger market by 2030, according to the International Air Transport Association (IATA).

Data released by the Department for Promotion of Industry and Internal Trade (DPIIT) in New Delhi shows that FDI inflow in India’s air transport sector (including air freight) reached US$ 3.06 billion between April 2000 and June 2021.

The government has allowed 100% FDI under the automatic route in scheduled air transport service, regional air transport service and domestic scheduled passenger airline. However, FDI over 49% would require government approval.

A pie of the Indian sky

What is on evidence are foreign and domestic aviation companies – together and alone – fighting for a pie of the Indian sky. Developments within the country, which hold the promise of upgrading aviation like never before, have compelled them to put their money where their mouth is.

Consider the following:

*** Billionaire investor Rakesh Jhunjhunwala’s Akasa Air is all set to begin its operations from Kochi. The airline services announced recently that it will operate 28 services on the Bangalore-Kochi-Bangalore sector from 13 August 2022, offering two flights daily.The first phase of operations will witness 56 flights catering to Kochi, Mumbai, Ahmedabad, and Bangalore. According to Deloitte India, “The entry of new carriers bodes well for the sector in the medium to long term as it adds more passenger-kilometres capacity to cater to growing demand and also adds a touch of fresh competition.”

*** IndiGo has signed an agreement to investigate the possibility of using sustainable fuel in planes `soon’.

*** Raghu Vamsi plans to build a US$ 15 million facility in Hyderabad to meet Boeing’s needs

*** Rare Enterprises, in partnership with former CEOs of IndiGo and Jet Airways, plans to start an ultra-low-cost airline to capitalize on the domestic air travel demand.

***In December 2019, Vistara signed a code share agreement with German carrier Lufthansa. 

*** A little earlier, United Airlines, the third largest carrier in the world, started non-stop services between Delhi and San Francisco.

*** In the same period, VietJet Air-Vietnam’s low-cost airline launched its first direct flight between Hanoi and New Delhi.

*** US-based Delta Airlines began its non-stop daily flights between Mumbai and New York’s John F Kennedy International Airport in 2019, becoming the second carrier and first foreign airline to provide such a service. In a statement, Delta said that flights between India and US had increased by 60% in the last decade and New York is the largest US market to India with the biggest base of corporate customers.

*** Apart from VietJet, the other international airlines operating from India include Air Tanzania, Arkia Israeli Airlines, Azerbaijan Airlines, LOT Polish, Nok Air and NokScoot Air.

*** Virgin Atlantic has relaunched its service between Mumbai and London and Qatar Airways has signed a code share agreement with Indigo, giving the former greater access to the Indian aviation market. 

*** Emirates has signed a code share agreement with Spicejet.

Grab Jet’s space

To be sure, foreign, and local airliners have been keen to fill in the space left behind by Jet Airways, which suspended its operations in April 2019. The Naresh Goyal-founded airline was the largest player in the international traffic segment. While its absence meant that fares rocketed, it was also an opportunity for other airlines to try to grab the space and move in.

As per projections, India’s aviation industry is expected to witness Rs. 35,000 crore (US$ 4.99 billion) investment in the next four years. The Indian Government is planning to invest US$ 1.83 billion for development of airport infrastructure along with aviation navigation services by 2026.

Despite high capital investment and infrastructure costs, the airline space in India is highly competitive. There are close to 15 airline operators, a combination of large and small regional players. The large players include Spice Air, Air India, Indigo and Go Air, while the list of smaller airlines constitutes Vistara, Star Air, Air Deccan, and Air Heritage.

Most of them are low-cost carriers (LCCs), which put pressure on pricing of air tickets. As is often the case, airlines with weak balance sheets may not be able to absorb fuel price increases and need to pass it on to their customers.

However, airlines have begun to unbundle their services. In other words, operators now charge for services such as baggage and seat selection. While this could help reduce costs and aid revenue, these cannot be long term remedies to boost revenues.

While India’s domestic market is projected to grow by 6.6% a year on an average over the next two decades – more than three times the U.S. average of 2.1% – the country’s goal of significantly boosting air travel has been complicated by weak infrastructure.

Experts believe the explosion in air travel has taken place despite major bottlenecks in the form of high cost of aviation turbine fuel(ATF) – making it nearly 60 percent more expensive than in Singapore or Dubai, both major hubs. Jet fuel cost accounts for nearly 40% to 45% of the total costs, thereby presenting serious operational challenges. The high prices flow from an old political socialist axiom, which believes that flying was only for the rich and does not contribute to the country’s economic growth. 

ATF stress

ATF prices have been consistently rising over the past years, placing stress on the balance sheets of airline companies. As per recent news reports, airfares are expected to rise as the conflict between Russia and Ukraine is making fuel costlier.

Plus, ATF attracts VAT, which is variable across states and does not have a provision for input tax credit. High rates of aviation fuel coupled with high VAT rates are adversely affecting airline companies.

The government, in January 2020, has reduced the tax burden on ATF by eliminating fuel throughput charges that were levied by airport operators at all airports across India.

The central excise on ATF was reduced from 14% to 11% w.e.f. October 11, 2018.  State governments have also reduced VAT/sales tax on ATF drawn on Regional Connectivity Scheme (RCS) airports to 1% or less for 10 years.

For non-RCS-UDAN operations, various state governments have reduced VAT/Sales Tax on ATF to within 5%.  The Standing Committee on Transport (2021) has recommended ATF to be included within the ambit of GST and that applicable GST should not exceed 12% on ATF with full input tax credit. 

Add to it an old bugbear: the lack of aircraft maintenance infrastructure. The maintenance, repair, and overhaul (MRO) industry is not well developed enough to provide for cost-effective maintenance of aircrafts. The lack of a native aircraft manufacturing base, results in more imports of aircraft, thereby making the operations more capital intensive.

Some recent steps

Some recent steps taken by the Modi government have, however, set the ball rolling in the right direction. By 2028, the MRO industry is likely to grow over US$ 2.4 billion from US$ 800 million in 2018.Land allotment for entities setting up MRO facilities in India has been revised to a period of 30 years in September 2021, from the current 3-5 years as the government aims to make India a ‘Global MRO Hub.’

Under Union Budget 2021-22, the government lowered the custom duty from 2.5% to 0% on components or parts, including engines, for manufacturing of aircrafts by public sector units of the Ministry of Defence.

In addition, investment to the tune of Rs. 420-450 billion (US$ 5.99-6.41 billion) is expected to boost India’s airport infrastructure between FY18-23.

Some results are showing. India’s passenger traffic stood at 188.89 million in FY22. In FY22, airports in India pegged the domestic passenger traffic to 166.8 million, a 58.5% YoY increase, and international passenger traffic to be 22.1 million, a 118% YoY increase, as compared to FY 2020-21.

Freight traffic increase

Between FY16 and FY22, freight traffic increased at a CAGR of 2.52% from 2.70 million metric tonnes (MMT) to 3.14 MMT. Freight traffic on airports in India has the potential to reach 17 MT by FY40. In FY22, the number of aircraft movements stood at 1,757,112.

The country is also addressing its big infra barrier – choked airports working way beyond their capacities. To cater to rising air traffic, the government has been working towards increasing the number of airports. As of 2022, India had 129 operational airports. India has envisaged increasing the number of operational airports to 190-200 by FY40.

The Regional Connectivity Scheme (RCS) of the government, known by its acronym UdeDesh ka Aam Naagrik or UDAN (Let the common citizens of the country fly), is the government’s regional airport development programme aimed at upgrading under-serviced air routes.

Its goal is to make air travel affordable and improve economic development in India. At the beginning of the scheme, out of total 486 airports, 406 were under-serviced airports, 27 were well-served airports; out of 97 non-RCS airports, while only 12 were operational airports, of the 18 participating airports under-served regional operational airports (Nov 2016) with regular scheduled flights.

Unserved, underserved airports

The UDAN scheme will add to this number by expediting the development and operationalisation of India’s potential-target of nearly 425 unserved, under-served, and mostly underdeveloped regional airports with regular scheduled flights.

However ambitious the project, it is hobbled by below-par infrastructure, dominance by larger airlines and the reluctance of regional airlines to fly on routes that are not lucrative enough, leading to high prices on certain remote routes.

UDAN is a key component of Prime Minister Narendra Modi’s National Civil Aviation Policy (NCAP), which was released by the government in June 2016. It will be jointly funded by the central government and state governments, and several states have come on board by signing the `Memorandum of Understanding’ with the Union government for this scheme. Over 92 lakh people have benefited from it and more than 1, 79,000 flights have flown under this scheme.

Despite the high-density traffic and number of airline companies, intense fare wars have been the bane of the Indian civil aviation industry, crippling many carriers in the bargain. With high operating costs and rising interest burden making their operations unsustainable, airline companies have often found themselves with their backs to the wall.

According to an ICRA study of March 2022, “elevated aviation turbine fuel (ATF) prices (higher by 68% on Y-o-Y basis in 11M FY2022) and continued fare caps continue to pose a major challenge for the profitability of the airlines. Thus, the Indian aviation industry is expected to report a net loss of Rs 250-260 billion in FY2022.”

It calculates that the airlines will have to pay much higher fuel bills in FY2023 owing to a sharp rise in crude oil prices amidst rising geo-political development surrounding the Russia-Ukraine conflict. “Accordingly, it is estimated that the industry will require an additional funding in the range of Rs. 200-220 billion over FY2022 to FY2024,” the ICRA study noted.

For aviation companies operating in India, it could hardly be considered music to their ears. “In the near term, the balance sheets of Indian carriers will remain stressed until the carriers are able to reduce their debt burden through a combination of improvement in operating performance and / or through equity infusion,” notes ICRA.

Gearing up for dogfight

As the months roll by, one of the world’s most competitive airline markets is gearing up for another dogfight. And the two biggest protagonists in this battle are IndiGo, with 51.3 per cent market share, and the Tatas, with a combined 26.6 per cent share across four airlines – Air India, Air India Express, Vistara and AirAsia India.

According to CRISIL Infrastructure Advisory, “Integration of the four airlines will need to be a well thought out strategy. The full-service airlines and the LCCs (low-cost carriers) can individually be merged. A lot of synergies can be tapped by merging Vistara with Air India, and AirAsia [India] with Air India Express, but all of this is expected to happen only in the medium term.”

Still, India represents a major growth for global and local airline companies, her aviation penetration among the lowest in the world. For instance, the total fleet size in India stood at 716 in 2020, while the fleet size of American Airlines alone is 994, while United Airlines stands at 950; in China, the fleet size of China Southern Airlines is calculated at 636; Air China is 448 and China Eastern Airlines has 574 aircraft. This allows airline companies to expand their business. Hence the beeline to India.

(The author is a senior independent journalist focussing on Aviation Sector. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Photos