India’s airline explosion

Indian airlines are hopeful India’s new civil aviation policy will eliminate some of the inequalities the industry has end used for several decades.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

February 1st 2017

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India’s airlines, shackled for years by high charges, double taxes at both national and provincial levels and high domestic fuel duties finally could be cut free from India’s past punitive civil aviation policies. Read More »

The Indian government late last year approved a long awaited National Civil Aviation Policy, which it said would lower the cost of flying and operating costs at the nation’s airlines.

But critics believed the government has been less courageous in formulating the country’s first formal civil aviation strategy in a country that is forecast to become the third largest airline market in the world.

Estimated to be worth US$16 billion this year, the Federation of Indian Chambers of Commerce and Industry (FICCI) and consultancy, KPMG has said that by 2020 only the U.S. and China will have more passengers flying every year than India.

The forecast brings forward the International Air Transport Association’s (IATA) prediction for India aviation expansion. It said India would become the world’s third largest aviation market in 2026.

“This is possible due to a host of factors, including increased competition, low-cost carriers, modern and expanding airports, improved technology at both air side and city side operations, foreign direct investment (FDI) and increased emphasis on regional connectivity,” said the report.

Last year, India’s domestic air traffic rose by more than 20%. The latest IATA figures, for November 2017, reported that domestic air traffic grew 22.3% for the month compared with China’s monthly expansion of 14.9%. India’s international traffic rose by close to 10%.

The CAPA consultancy said Indian domestic air traffic will exceed 100 million passengers this year compared with 81 million passengers in 2015. Indian airlines recorded a collective operating profit of $1.29 billion in the 2016 fiscal year, a far cry from the rivers of red ink in their past annual reports.

Last August, the country’s largest domestic carrier, IndiGo, celebrated its ninth birthday by confirming an order for 205 A320neo aircraft. The carrier’s president, Aditya Ghosh, said the purchase “further reaffirms IndiGo’s commitment to the long-term development of affordable air transportation in India and overseas”. In 2005, IndiGo ordered 100 A320s. It is now a customer for 530 of the type.

In January, another Indian LCC, SpiceJet, ordered 100 B737 MAX aircraft, with options on another 50, in a deal estimated at $22 billion at list prices. SpiceJet has a fleet of 40 airplanes.

Also in January, budget airline, GoAir, firmed up an order for 72 A320neo as it prepared to expand its network on international routes. Owned by the Wadia group, it has committed to 144 A320neos. It accepted the first of the type last June and now has 23 of the aircraft in its fleet.

At Air India, the Indian government announced that the flag carrier would almost double its fleet in the next four years with the purchase of more than 100 new jets.

“Over the next 20 years, Boeing forecasts India will need 1,740 new airplanes worth $240 billion,” said the U.S. planemaker’s senior vice president, Asia Pacific and India sales, Dinesh Keskar. “India’s economy and the country’s potential for air travel growth - both for leisure and business - continued to be strong. We remain confident in the Indian commercial aerospace market.”

The key to the forecast success of Indian aerospace is prime minister, Narendra Modi’s new aviation policy. Announced last year, the Civil Aviation Policy overhauled rules dating back to the 1930s. It contains measures that should lower the cost of flying in India and boost the country’s air connectivity.

The long-awaited reforms will bring down airfares on many under-served regional routes, particularly those located far from India’s major metropolises, the government said.

In a boost for domestic carriers, amendments to the 5/20 rule were included in the aviation policy overhaul. The now defunct rule required airlines to operate for five years and have a 20 plane fleet before they could fly internationally.

The revised policy requires airlines to have 20 aircraft in their fleets to launch international services but they no longer need to operate for five years before can fly abroad.

The new rule benefits younger airlines such as AirAsia India and Air Vistara. More established carriers, such as IndiGo and Jet Airways, who have had to fester for five years before they could expand their networks beyond domestic services, complained in vain that the revised rule had introduced an uneven playing field to the industry.

The major domestic airlines also are unhappy about the fact that they will be taxed to subsidize flights by smaller airlines to unprofitable regional destinations.

Narendra Modi insisted in a tweet that the new aviation policy gave impetus to affordability, regional connectivity, safety and infrastructure, which was vital for ‘Transforming India’. “It will transform the sector and greatly benefit passengers,” he said.

International Air Transport Association director general and CEO, Alexandre de Juniac, said in Delhi last October that the country’s air transport sector is contributing to the country’s social and economic development through eight million jobs and $72 billion in GDP.

“I know the air transport industry here has been through particularly tough times. It is good to see many Indian airlines posting profits. But the sector is still in loss territory in terms of net profits and has many challenges,” he said.

“The debt burden is massive. Regulations are onerous. Taxes and charges are high. There is uncertainty in the business environment. The good news is that demand is strong. The domestic market has been expanding at an annualized growth rate of 20% or better for 20 successive months.

“The quality of domestic connectivity is clearly improving. Compared with last year, flight frequency is nine per cent higher and airport pairs—or routes served—have grown by seven per cent. In real numbers, the 120 million passengers travelling on routes to, from and within India will more than double to 278 million.”

De Juniac added this “potential will not be realized without a supportive policy framework. So I congratulate Minister Raju, Secretary Choubey and all who helped in framing India’s first civil aviation policy,” he said.

“It contains some very encouraging elements. These include developments on open skies, code-sharing, self-handling and foreign direct investment (FDI). On the latter, India has actually jumped the queue to become one of the most progressive nations in the world by allowing 100% FDI in airlines.

“The policy also contains areas where we have concerns such as the mandating of hybrid till for regulation of airports and the plans for a levy to cross-subsidize regional flights.”

Many analysts argue that despite some improvement, operating costs still represent a major threat to Indian aviation. High fuel import taxes meant that about 50% of an Indian airline’s costs go towards fuel while a pilot shortage has pushed cockpit salaries to global levels.

India head of aerospace and defence at global consultancy KPMG, Amber Dubey, said recently that most of the large cost overheads in Indian aviation - fuel, leases, maintenance, airport charges and interest rates - are among the highest in the world.

“There are shortages of commanders. Bringing in expat pilots is costly and time-consuming. Overall, the Indian market is one of the world’s costliest and toughest for airline operators.”

India’s airlines are banking on rapid growth and higher passenger numbers to alleviate the industry’s endemic high costs. India’s expanding middle class increasingly is opting for air travel over the traditional train.

Until now in India, air travel is mostly confined to the urban third of the population and is still out of reach for hundreds of millions of travelers in India. Experts believed the country’s aviation sector has vast untapped potential, with only 100 million of India’s 1.2 billion people taking an airline flight last year. India’s rickety aviation infrastructure also could hold back forecast growth as only 90 of the country’s more than 460 airports are operational, they said.

But it is not all bad news. Airbus is investing $40 million in a pilot and maintenance training center in Delhi that is scheduled to open by year end. It also has signed an agreement with Karnataka-based Aequs Aerospace, an aircraft component manufacturer, to supply more than 100,000 titanium machined parts for its A320 new engine option (NEO) aircraft.

Tata Advanced Systems (TASL) and Boeing have committed to a joint venture centre of excellence for manufacturing aerostructures, initially for Apache helicopters, but intended for collaboration on integrated systems development opportunities in the long term.

Other aerospace projects include an MRO joint venture where Rolls-Royce and auto components maker, Bharat Forge Ltd (BFL), that will supply critical and high integrity forged and machined components for a range of aero engines.

The government has taken a number of initiatives to help reduce airline costs including the removal of customs and excise duty exemptions for tools and tool-kits used in MRO processes.

The Directorate General of Civil Aviation (DGCA), India’s aviation regulator, signed an agreement with the United States Technical Development Agency (USTDA) for India Aviation Safety Technical Assistance Phase II, aimed at bringing in systemic improvements to operation, airworthiness and licensing.

Overall, there is little doubt that India’s airline sector has huge potential and that growth will continue at a high rate for many years. But also it is agreed that to properly capture the potential of this market, the government must reduce industry taxes. Airlines must do their bit too by pulling back from the vicious price wars of recent years.

Air India still “sick” says chairman Lohani When Ashwani Lohani, the chairman and managing director of state-owned Air India, spoke to the media in Delhi last month, he was asked if he still would call the carrier a sick company. “Yes I would,” he said. “I will call it sick as long as we don’t meet our total expenditure from our revenue. “I have said that on a year-to-year basis we will make it profitable. This is in my hands. What is not in my hands is the 50,000 crore (USA$7.5 billion) debt we have. If we don’t find a solution to that, then God only knows.” At the same briefing he  said neither Jet Airways or the Gulf carriers were the biggest threats to Air India. “My biggest threat is debt, not Jet. Remove that and we will beat everyone hollow,” he said. There are signs India’s flag carrier is reducing its massive debt. It ended 2016 with an operating profit of $15.3 million after several years of poor performance. However, it has had help along the way. In 2012, India’s government said it would spend $4.3 billion to bail out the carrier, financial support that is being meted out to the airline in stages. To date, bailout funds of $3 billion have been injected into the carrier. Subsidies aside, Lohani said a lower fuel price was the number one contributor to Air India’s improved operating performance. Lohani has never been shy about the airline’s past poor performance. He has publicly laid much of the blame for the national airline’s woes on the merger of Air India and domestic carrier, Indian Airlines. “A merger that really never happened, which in the process resulted in a chaotic situation, is at the back of all ills we are witness to,” he posted in a hard-hitting blog last year. Lohani also believes there is too much competition in India and that this situation has resulted in higher costs and declining yields. “You can’t do much about it. You can fly the aircraft more and fill seats as much as possible,” he said. “Our yields have fallen by 7%, and domestic yields are down by 15%-16%. “But our revenues have risen by 3%. So, we have made a 10% impact on revenue through efficiency. We increased utilization of our fleet. For example, we introduced four international flights last year.” Air India operates 107 aircraft including 22 A319-100s, 24 A320-200s and 20 A321-200. The first of 14 A320neos will arrive at the carrier this month. Its fleet also includes five B747-400s, three B777-200LRs, 12 B777-300ERs and 21 B787-8 Dreamliners. Three more B777-300ERs will be delivered between January and March 2018 and six B787s will begin arriving at the airline from August. One criticism that has long been aimed at Air India is it overstaffing, a claim Lohani dismisses.He pointed out that a freeze on recruitment was imposed 18 years ago when staff numbers were extremely high. “The problem of a huge staff count isn’t there anymore. That is an incorrect perception. We banned recruitments 18 years ago. At that time the staff count was higher. The perception has remained but today we are short of staff. We have started recruiting pilots and cabin crew, but haven’t started hiring in other categories such as commercial staff, personnel and finance. We would like to recruit 200 people immediately in the non-operational departments. The overall requirement number is much larger.” Another possibility on the horizon is that Air India may buy back some B787s it did sale and leaseback deals on. Lohani doesn’t think sale and lease back has worked well for the carrier. He argues that leasing of planes is a very costly proposition, although it does have the advantage of not having to pay upfront. “But the amount which a company pays regularly (the lease rental) is much higher than what it would have to pay had it purchased the aircraft by taking a loan. The premium on selling planes to lessors is not much, just a couple of million dollars. The lease cost of one Boeing Dreamliner 787 plane is $1 million a month. For a year, for 21 Dreamliners, it’s Rs 1,800 crore ($251 million). If I had purchased, my outgoing in terms of interest costs on loans would have been Rs 1,000 crore ($139.4 million). Going forward, I would definitely do outright purchase of planes.” As for the debt, a debt restructuring proposal is “still in the works” and Air India is also looking at the possibility of LIC (listed investment company) involvement.