After registering its first quarterly loss in ten consecutive years due largely to price wars, Indian budget carrier IndiGo said on Wednesday said it will neither reduce deliveries nor cut capacity in the near future as it prepares to accept more A320neos from Airbus. The carrier announced a $98 million loss in the three months ending September 30 against a background of an unsustainable level of low fares in India’s domestic market.
“Aviation in India is going through pressures from excessive gasoline prices, rupee depreciation, and intense competitors, all of which have impacted our profitability this quarter,” explained IndiGo co-founder and interim CEO Rahul Bhatia. “Regardless of this troublesome setting, IndiGo stays nicely positioned because of our value construction and robust balance sheet.” Fuel constitutes more than 40 percent of total costs in India while about 50 percent of costs excluding fuel gets denominated in foreign currency, said Bhatia. “Typically in the airline industry, you would expect to see higher fares to cover the increased costs,” he noted. “However, that has not happened here.”
During a summit held earlier this month in Jeju Island, South Korea, Association of Asia Pacific Airlines director general Andrew Herdman highlighted India’s fiscal “paradox.”
“India has the fastest growing market has the worst profitability,” he said. “This relentless growth [has led] to Air India losing money, IndiGo is squeezed towards breakeven, and Jet Airways is feeling the pinch towards cash flow. It is a paradox that the fastest growing market is losing the most….It is very challenging.”
Still, Bhatia adamantly declared that IndiGo would not change its long-term capacity strategy. “I do admit there will be a bubble for the next couple of quarters,” he said. “We are not building this airline from quarter to quarter. We are looking at the long term.”
Aware of the perils of price wars, IndiGo “is not leading the charge of low airfares,” said Bhatia. He added that IndiGo had to withdraw a fuel surcharge implemented in May as competition continued with ruthless fares.
IndiGo added 20 aircraft in during the quarter ending in September, taking its fleet to 189. It launched five new destinations and 35 new routes during the period. It now serves more than 1,300 city pairs, via either direct or one-stop service, and it operates more than 100 daily departures out of each major metropolitan city in India: Delhi, Bombay, Bengaluru, Kolkata, Hyderabad, and Chennai. Bookings have started for six new international destinations and, with November’s Airbus 321neo deliveries, the airline plans to add medium-haul international points. Bhatia called any prospect of flying long-haul service with widebodies “more aspirational.”
As the Asia-Pacific region experiences international air traffic growth of 8 percent per year, unease grows over the likely inability of infrastructure capacity to keep pace with fleet orders in the next two decades. The region, according to Airbus and Boeing, will receive 40 percent of the globally ordered fleet, or more than 16,000 airplanes, “equal to the U.S. and Europe together,” stressed Association of Asia Pacific Airlines (AAPA) director general Andrew Herdman at the group’s recent Assembly of Presidents on Jeju Island, South Korea.
"We are gathered here in search of answers on what can we can do to effectively respond to our rapidly changing environment,” added Korean Air president Walter Cho. “The Asia-Pacific market is driving global aviation growth and is growing rapidly. We have our challenges in the aviation industry with economic fluctuations, shifting political interests, and spread of protectionism. Information technology is convenient but also a threat to safety and security.”
While politically fragmented and diverse, the Asia-Pacific region generates a third of the world’s GDP, thanks largely to a rapidly growing middle-income segment in China and India driving consumption patterns. Herdman explained of the world’s 20,000 flight segments, the 10 busiest domestic routes reside in the region; the route between Seoul and Jeju Island tops the list with more than 200 daily flights.
The International Civil Aviation Organization forecasts that over the next 20 years the world will require 620,000 pilots, 1.3 million aircraft maintenance professionals, and 125,000 air traffic controllers. The Asia-Pacific region alone accounts for 35 percent of those requirements.
However, the industry must address infrastructure planning and funding to sustain the region’s growth patterns, said Herdman. “Who and how this will be funded is a big discussion,” he explained. “Infrastructure planning is critical. It is not a long-term problem but a ‘now’ problem.”
In the future, tough issues include increasing fuel prices, rising competition among airlines, and shrinking profit margins. “Overall, I still expect Asian airlines in aggregate to make substantial profits, but it seems pretty clear that it will be lower than the levels we’ve seen in previous years,” said Herdman. “Even though oil prices are rising, consumers are still getting the benefit of [low] fares. The challenge is how this oil increase will be passed on.”
India’s Directorate General of Civil Aviation (DGCA) awaits a visit by a Federal Aviation Administration team from the U.S. on October 31 and November 1 to review compliance of safety oversight following an audit carried out a few months ago. If the Indian regulator hasn’t addressed major oversights, it risks a downgrade to Category 2 status, similar to that issued in 2014. Such an outcome would result in a grim deceleration in growth plans of domestic carriers with ambitions to fly to the West.
Recent incidents include an Air India Express Boeing 737-800 flying for four hours in a severely damaged state after clipping a perimeter wall and instrument landing system antennas at the airport in Tiruchirapalli on takeoff. Others include a case of a technician getting sucked into an engine, near midair collisions, and many bird strikes. Release of investigation reports generally takes at least a year.
Now the urgency has become apparent. Late last month, following several injuries resulting from a fall in cabin pressure aboard a Jet Airways 737-800 due to flight crew error, minister of civil aviation Suresh Prabhu ordered a safety audit of all scheduled airlines and airports. The authorities plan to release the report by October 25.
India has gone through at least four FAA and ICAO safety audits in the past four years. In 2014, the FAA downgraded it to Category 2 over issues such as lack of adequate numbers of flight inspection safety officers and training of officers for airworthiness. In July this year the FAA, under its International Aviation Safety Assessment (IASA) program, found similar problems.
“The increase in incidents has put a focus on training and compliance,” said Vishok Mansingh, CEO of Indian low-fare carrier Trujet. Mansingh said as the average age of the workforce falls and more qualified people retire, regulators will need to practice still more vigilance. Meanwhile, the government has delayed plans to establish an independent civil aviation authority with its own budget. “We need an autonomous body to handle such imminent issues,” said Mansingh.
Matters of major concern to the FAA include the poor financial state of airlines, midair engine failures, a shortage of flight operations inspectors (FOIs), and lack of type-trained instructors. According to a senior ministry official, of the 85 FOIs required, the DGCA employs 75. “The workforce shortage is a result of funds not being enough,” he said. “We require ministry approval for everything. The process is slow in coming.”
As competition gets tougher and fares hit their lowest levels in years, yields suffer along with the financial health of carriers such as Jet Airways and Air India. Some 20 Air India aircraft sit grounded as the airline cannibalizes them for spare parts and Jet Airways counts at least six AOGs for the same reason.
The DGCA, meanwhile, recently released its 2018-2022 five-year National Aviation Safety Plan “supporting prioritization and continuous improvement of aviation safety,” according to a statement in a report from civil aviation director general B.S. Bhullar.
India's SpiceJet took delivery of its first CFM Leap-1B-powered 737 Max 8 on October 12. (Photo: Boeing)
CFM International expects to meet its target for delivering 1,100 engines by the end of the year, as a once six-week schedule lag progressively dwindles thanks to what CEO Gael Meheust attributes to a strict dual-source supplier policy. “Production will be in line with the projected schedule by the end of this year,” said Meheust as he addressed reporters in New Delhi this week. “For each (engine) part, we have a dual supplier and sometimes even three…. [a reason] we have made the ramp up fast…We are on track for the next year.” He confirmed to AIN that the present production rate per year would nearly double to 2000 in 2020.
Referencing a turbine disc issue in Leap-1As for the Airbus A320neo and a batch of flawed metal discovered last May in some Leap-1B engines powering the Boeing 737 Max, Philippe Couteaux, executive vice president of sales and marketing for the GE-Safran joint venture, stressed that the problems had nothing to do with the engine’s design. “It was not a design issue,’ he said, but a “yield issue.”
“We are working with suppliers to improve the yield,” said Couteaux. “We are closing the gap actively….This year we will deliver more Leap engines than [CFM-56s]. We have never stopped delivery through all these months.”
Earlier this year, Indian budget carrier SpiceJet signed a ‘Power by the Hour’ contract with CFM to support 300 Leap-1Bs, and Vistara has signed a letter of intent covering delivery of another 50 A320/321neos powered by Leap-1As. Meawhile, the Leap's predecessor, the CFM56, has built a 64-percent market share in India versus its competition. “This has helped us develop a market for the Leap. [India] is a very promising market,” explained Couteaux, adding that particularly Indian carriers needed more efficient engines to counter a fuel cost burden that accounts for 34 percent of all their total expenses compared with 24 percent for the rest of the world. With entry into service of Jet Airways and SpiceJet Boeing 737 Max jets and Vistara’s A320neos, CFM faces a welcome challenge to satisfy the Indian market. “We need to produce engines to cope with the increase in fleet sizes,” said Couteaux.
The Leap-1A started commercial operations with the A320neo in 2016. It has drawn 32 global operators and powers 268 aircraft in service. The Leap-1B, the sole option for the 737 Max, has collected 41 operators and powers 219 aircraft. Separately, the first two China-designed Comac C919s, powered by CFM International’s Leap-1C integrated propulsion system, have begun flying. “The third one is ready to fly next week, [on October 16],” said Meheust. Nexcelle developed the Leap-1C’s composite O-Duct thrust reverser, to which a unique one-piece configuration contributes to a reduced overall structural weight and larger acoustic treatment surface. Nexcelle is a joint venture between Safran Nacelles and GE Aviation’s Middle River Aircraft Systems.
The more than 5,000 CFM engines to which Chinese airlines have committed include more than 1,000 Leap-1Cs
As ailing Indian airlines struggle to cope with delays at congested airports, the ministry of civil aviation hopes a recently released policy on biometric digital processing of passengers at airports will bring reprieve to carriers as passenger-clearing processes get faster. The system, dubbed “Digi Yatra” (Digital Journey), does away with the need to show a boarding pass or identification at multiple checkpoints once a traveler completes a one-time registration. The system is not mandatory.
“Leveraging technology is the only solution to meet such challenging requirements,” said R.N Choubey, secretary of India’s Ministry of Civil Aviation.
The policy envisions a biometric facial recognition-led “ecosystem” for digital processing of passengers at airports such as Kempegowda International Airport (KIA) in Bengaluru, scheduled for implementation by February 2019. Jet Airways, Air Asia, and SpiceJet passengers would become the first users. Hyderabad International Airport will also launch the system in the first quarter of 2019, followed by five smaller airports in April.
Kempegowda Airport will use facial recognition as the screening process for passengers to board flights and move across different sections of the airport. The ministry has hired Portugal’s Vision-Box to provide the biometric self-boarding technology. Vision-Box designs, develops, and implements integrated, digital identity management methods. With increased congestion in the air and in terminal buildings, the flow of people will reduce cost of operations as turnarounds get faster and “we can perhaps get an extra flight in during prime time when slots are unavailable in Mumbai and Delhi,” Vishok Mansingh, CEO of India’s Trujet airline told AIN. He added that no need to physically check boarding passes and less human intervention will not only reduce lines, but it could also bring down the direct cost of manpower of airlines and security personnel at airports.
IT software provider SITA expressed confidence that the program will improve the flow of passengers through airports across India and eased capacity constraints across the country. “We have seen the positive impact of biometric identity management wherever we have deployed our Smart Path solution across airports in the Middle East; Brisbane, Australia, and the U.S.,” Maneesh Jaikrishna, SITA vice president for the Indian subcontinent and eastern/southern Africa, told AIN. Jaikrishina pointed to the successful implementation of the system at Orlando Airport, with the help of British Airways and the U.S. Customs & Border Patrol. “We showed how we could board international flights with 240 passengers in around 10 minutes,” he said. “Similarly, in India we can leverage the Digi Yatra initiative to make this country the most efficient travel system anywhere in the world.”
Meanwhile, experts expect facial recognition also to improve security because it virtually removes the threat of counterfeit identity cards. “This is expected to help tighten airport security and also enhance travel experience of passengers,” concluded Indian minister for civil aviation Suresh Prabhu.
A SpiceJet Bombardier Q400 gets a water cannon welcome at India's new Pakyong Airport, near the Chinese border.
India’s focus on enhancing air connectivity to hilly, remote, and underserved airports under its Regional Connectivity Scheme (RCS) appeared to sharpen Thursday as budget carrier SpiceJet launched the first flight to the new greenfield Pakyong Airport in the northeastern state of Sikkim. Pakyong is India’s 100th airport and SpiceJet's ninth destination under the RCS.
SpiceJet operates India’s largest regional fleet, now flying more than 20 Bombardier Q400s and holding an order for 25 more. “SpiceJet has always been a firm believer in the growth story of India’s smaller towns and cities,” said SpiceJet chairman Ajay Singh. “We have worked hard over the years to put these on the country’s aviation map.” The Pakyong airport lies about 35 miles from India’s border with China. It features 5,700-foot-long, 100-foot-wide runway with an apron that can accommodate two ATR 72s simultaneously. Construction to widen the runway to 250 feet for the Indian Air Force continues.
“There has been an astounding increase in regional aviation and an explosion of connectivity in previously unserved areas since the commencement of the RCS program,” said minister of state for civil aviation Jayant Sinha.
Regional air connectivity has become a priority in the mountainous region of the northeast bordering China due to a poor road network. The RCS, introduced less than two years ago, offers a string of initiatives, including fare subsidies and relief from taxes to airlines flying to the auctioned routes. It has received a further boost with the Indian Air Force’s modernization of numerous airfields in far-flung mountainous areas of the northeast under the Modernization of Airfield Infrastructure (MAFI) program in India.
MAFI has done much to boost the confidence of pilots worried about winter conditions. “Our capability to land in low visibility has improved a lot,” air chief marshal B.S. Dhanoa told AIN. Improved conditions now allow commercial turboprops and narrowbodies to land on the runways, thereby boosting tourism.
TATA Power leads the $293 million project and works with Raytheon as an implementation partner. Upgrades include integration of a Cat II ILS, airfield lighting systems, and high- and low-power VOR/DME systems.
The RCS will get a further boost as Phase 2 MAFI, which includes 37 bases, takes effect. Officials expect Phase 2 to include Srinagar and Leh, both tourist destinations in the north likely to attract regional airlines.
"The RCS has provided a big thrust to opening new routes and making them viable,” TruJet CEO Vishok Mansingh told AIN. “The subsidy sustains the market for three years and stimulates it as there are no pullouts by the airline.”
Indian international air service will get a boost once Iceland’s Wow Air on December 6 starts flying return service with an Airbus A330neo from Delhi to Reykjavík, offering passengers from the subcontinent a connection to any of the LCC’s several existing destinations in the U.S. and Europe. Selling promotional one-way tickets starting at $200, Wow has given rise to concerns about a fare war similar to those being waged among Indian domestic carriers. Most of the airlines involved had planned to fly medium- and long-haul flights to the West this winter, but the resulting losses have raised doubts about their implementation.
While low fares draw passengers, domestic airlines in India must cope with dizzying fuel prices, high taxes, rupee depreciation, and dollar escalation, making their operating costs far higher than those of international carriers.
More than 87 percent of Indian passengers fly to domestic destinations and the rest fly internationally. The U.S. and Canada rank as the fastest growing destinations for Indian travelers, welcoming some 20,000 arrivals a day. Data recently released by the U.S. Department of Commerce’s National Travel & Tourism Office (NTTO) shows that the number of Indians visiting the U.S. increased by 6.5 percent from 2016 to 2017. It noted that 1.29 million Indians traveled to the country in 2017, up from 1.21 million the previous year.
Wow Air’s low fares and 39 routes to the U.S., Europe, and London Gatwick via Iceland threaten to stall plans to fly West of even legacy carriers, including SIA-Tata Group-owned Vistara. Having reduced fares to compete with budget airlines on domestic sectors, it might face a similar situation now on international routes. Nevertheless, Vistara expressed confidence in its ability to compete internationally for the long term. “We have put in great effort to develop our international operations plan, taking into consideration industry dynamics,” said a Vistara spokeperson. “Our expansion roadmap is aligned with the delivery schedule of our new aircraft and product readiness.”
Meanwhile, budget market leader IndiGo has obtained slots for Gatwick and Hong Kong ahead of the start of planned medium- and long-haul operations this winter. As a point-to-point carrier, IndiGo will have to address Wow’s ability to offer onward connectivity to Europe. “It is a question of who offers the lowest fares,” said one analyst. “Wow Air via Iceland needs no alliances since it has available slots, infrastructure, and its own flights to Europe and Gatwick that could help it in offering lower fares.”
IndiGo holds to another point of view. It expects to tap its present voluminous regional/domestic traffic flying to London via Delhi once it starts its Gatwick flights. “IndiGo’s international plans involve the A320/321 family of aircraft and focus on new destinations like Kuwait, Abu Dhabi, Hong Kong, and others within six to seven hours flying time,” IndiGo chief strategy officer Willy Boulter told AIN. “We wish Wow well with their new services but their entry has no impact on our plan.”
Wow Air flies to 15 destinations in the U.S. Its latest expansion takes it to Orlando, which starts on December 18 with an Airbus A321 flying three times a week for $99. It launched its first U.S. destination, Boston, in 2015.