Indian Airlines Dust Off Their Growth Plans After Recession

Emerging Markets India
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Aviation Week & Space Technology Jun 14 , 2010 , p. 56
Neelam Mathews
New Delhi

Slowdown changes the shape of Indian commercial aviation, favoring growth of budget carriers


Indian airlines are cautiously looking at growth plans again as they recover from a recession that produced combined losses of $2 billion in the last financial year.

The downturn has strengthened the low-cost model, with one of the three largest carriers moving more capacity into a new no-frills division. Budget airlines have emerged from the recession with a bigger share of traffic. The biggest of them, IndiGo, says it wants to buy 150 aircraft.

Although other Indian airlines are still holding back before placing further orders, sooner or later they will have to go back to the manufacturers to accommodate growth. The Ministry of Civil Aviation forecasts that Indian airports will handle 160 million domestic passengers in 2020, compared with 44 million in 2009. That implies a 12.5% average annual growth rate in this decade.

Domestic airlines in India operate around 400 aircraft; 150 are with government-owned Air India. This number has grown from 305 in March 2007.
Entry into global alliances will be a key development for the Indian airline industry.

Airbus forecasts that Indian customers will buy 1,032 aircraft between 2009 and 2028. Boeing sees demand for 1,000, and will revise its forecast in July. The company expects Indian carriers to begin ordering aircraft again next year.

While Boeing is optimistic, it points to rising oil prices as a risk. Oil prices above $90 per barrel could suppress demand for aircraft, says Dinesh Keskar, president of Boeing India.

Domestic traffic in the first four months of the year was 12% higher than a year earlier, but Boeing expects just 8% growth on international routes.

Neither Air India nor Jet Airways is enjoying strong demand on international routes. Jet Airways has responded to the overcapacity by leasing three Boeing 777-300ERs to Thai Airways for three years. Four other Jet Airways 777-300ERs are on dry lease with Turkish Airlines.

Signaling that the worst is over, Jet Airways Chief Executive Nikos Kardassis says “The leasing of our widebody 777-300ERs is among the last steps to fully achieving this objective of aligning deployed capacity with current demand.”

At Air India the process might have a little further to go. The state airline is in talks with Boeing to replace three 777-300ERs it has on order with 10 737-800s. The carrier is obviously seeking to rebalance the type of capacity it will deploy, to suit the relative strength of short-haul markets, notably domestic services.

Rebalancing can be achieved inside the aircraft, too. “There is a need to look at configurations,” says Keskar. “Large business- and first-class [cabins] are not much in demand.”

An important shift is the move to no-frills economy service by the network carriers Jet Airways and Kingfisher Airlines. In May of last year, with a domestic market share of around 16%, Jet Airways introduced a quick-fix response to weak demand—Jet Konnect, a pure budget brand to deploy on the most price-sensitive routes, known as Category 2 and 3 routes (which exclude the seven biggest cities), where its full-service operation could not make money. Jet Airways also operates a wholly owned 25-aircraft budget carrier, JetLite.

Kingfisher did not go as far as adopting the full budget model, but it converted more aircraft to an all-economy configuration.

Jet Airways’ plan worked. At least 185 flights of the 385 were converted to Konnect flights and by October of last year, Jet’s market share had jumped to around 20%. Including JetLite, the airline had a 26% market share.

As market growth resumes, demand for business travel is recovering. The result has been an unusual hybrid configuration on some Jet Konnect aircraft: a small, eight-seat business class, with the rest of the aircraft devoted to no-frills economy. The service is called Konnect Select. The business-class passengers get 102-cm. (40-in.) pitch seating, hot meals and lounge access. The carrier says the business-class fares will increase the revenue from such flights by 8-10%.
Budget carrier IndiGo ranks fourth in the Indian market, but it has signaled major expansion plans.

Another key development will be the entry of Indian commercial airlines into global alliances, and that process will extend even to the budget carriers. “I can see a hybridization of budget carriers with no frequent-flyer programs starting to do a loyalty program and also becoming regional partners of the larger alliances,” says Kapil Kaul, head of the India and Middle East unit of Sydney-based think-tank Center for Asia Pacific Aviation.

The global alliances have made no secret of their view that India offers an important gap to be filled. As Air India prepares to enter the Star Alliance, the Oneworld Alliance will fill one of the largest gaps in its network with the addition of Kingfisher, which expects to officially join next year. It became a member-elect of Oneworld on June 7.

Jet Airways has preferred case-by-case cooperation with other airlines rather than alliance membership, but the Star Alliance says it is in discussions with Jet. According to an airline industry official, SkyTeam also has been wooing Jet.

If Jet joins SkyTeam, then the three big Indian airlines would be evenly shared among the three global alliances.

Financing for Indian airlines has become cheaper thanks to the country’s ratification in July 2008 of the Cape Town Convention, a treaty that standardizes transactions in moveable property, especially aircraft and aero-engines. Air India’s holding company, National Aviation Co. of India Ltd. (Nacil) is the only one in India to make use of it so far.

With the convention in force in India, the U.S Export-Import Bank was willing to charge less for extending $1.1 billion in financing for Boeing aircraft for Air India. The Indian government also gave Exim Bank a sovereign credit guarantee covering Air India’s obligations.

“This support has enabled Air India to raise finances for acquiring these aircraft at competitive rates of interest as compared to commercial financing,” says Nacil Chairman and Managing Director Arvind Jadhav.

Air India’s net savings because of the Cape Town Convention could be as high as $50 million, Boeing says.

The Boeing 777-200LRs and 777-300ERs covered in the financing deal will be operated by Air India’s mainline operation, while 737-800s will be operated by Air India Charters Ltd. These purchases represent the third phase of Air India’s 68-aircraft fleet renewal plan. Exim Bank previously approved a $1.2-billion financing in 2007 and a $548.8-million financing in 2008 to support NACIL’s acquisitions of Boeing aircraft.

Although most Indian airlines have refrained from ordering more aircraft during the recession, some are now considering fleet expansion again.

IndiGo, which ordered 100 A320s in 2005, recently requested government approval to buy 150 aircraft, which it says would be delivered between 2015 and 2025. The aircraft order could be made official at the Farnborough International Airshow July 19-25. Expected to be a mix of firm commitments and options, the order may well go entirely to Airbus to preserve fleet commonality, although the numbers are so large that IndiGo could easily consider a mixed fleet including more regional aircraft.

Of the 44 million Indian passengers who flew last year, 27 million were on routes that do not connect with any of the country’s seven biggest airports. Such routes are ranked as Category 2 (for example, to Kashmir, the Northeast and Port Blair) and Category 3 (the rest of India). Category 1 has just 24 city pairs between the seven major metro cities, while around 2,500 routes are possiblyuntapped in the other categories.

India has 261 narrowbodies and only 20 regional jets; more than 100 routes have fewer than 300 passengers a day.

With 62% routes of non-metros served by standard narrowbodies, India will need 200-250 regional jets in the next decade to feed its hubs, says Embraer’s Luiz Sergio Chiessi, vice president for market intelligence and the airline market. Embraer says it is in discussions with most Indian airlines.

Regional jets should become more common, and would also help to improve profitability by replacing standard narrow-body aircraft on thin routes. Air India, SpiceJet and Jet Airways are considering such aircraft, partly to take on roles that A320s and 737s are now undertaking. JetLite, which showed a strong turnaround in operating performance, plans to return all seven of its leased CRJs to the lessor by September and replace them with newer planes.

India’s government-mandated “social route” obligations force airlines to fly 10% of their services on low-density routes. Again, the opportunity for regional and turboprop aircraft is obvious.

But the market expansion is not without risks. In April, Embraer regional jet operator Paramount Airways shut down after failing to make lease payments, even though it enjoyed the advantages of the higher load factors and frequencies possible with moderately sized aircraft.