For weeks, aviation stakeholders have been busy speculating about the Tata group and Air India aircraft order. Discussions on which OEM will come out ahead, the quantum of the orders and the timelines were commonplace. While pundits opined and pieces were published, the final number stunned even the most astute observers. In what is the largest aircraft order in history, the Tata group announced the intention to purchase of 470 aircraft including options for 370 additional aircraft.
The significance was highlighted by the fact that the Prime Minister of India and the President of France on the TV screen as the announcement was made. Statements from the UK Prime Minister and the US President were also made. And with that, Indian aviation has squarely landed on everyone’s radar. No longer to be taken lightly, India is well on its way to be the 3 rd largest aviation market by the end of the decade. It is Indian aviation’s time to shine.
The order details highlight intended strategy
The order breakdown includes 250 Airbus aircraft. These comprise of140 narrow-body A320 NEOs, 70 narrow-body A321 NEOs and 40 wide-body A350s. The narrow-bodies and wide-bodies are easily discernible by the number of aisles on the aircraft – one for the narrow-bodies and two for the latter. It is expected that while the narrow-bodies will service routes upto 6 hours, the Airbus wide-bodies are to largely serve routes of 7 hours and beyond.
There are also ultra-long haul ambitions which include flights of 10+ hours and this will entail bypassing hubs in Europe and Middle East towards providing direct air-links. On the Boeing side, the announcement includes a total of 220 aircraft including 20 units of 787 aircraft, 10 units of the 777s and 190 units of B737Max aircraft. Both of the agreements with the OEMs include options for additional deliveries thereby locking in capacity plans for several years to come.
This quantum of the order reflects replacement capacity as well as growth capacity. Currently, the Tata-owned airlines fly a fleet of 210 airplanes. Thus an entire fleet renewal and expansion is possible with this order. This will help with costs, capabilities and customer experience.
To finance the order book Air India will go for a strategy that includes sale-and-leasebacks as well as ownership of wide-body airplanes. And given their company history, commitment and credit rating the funds required is not even a topic of debate. Not to be lost is the announcement that at some point in the future, the Tata group is working on bringing commercial aircraft manufacturing into the country. Effectively this means that Airbus may set up an assembly line in India. (Currently the only Airbus assembly line in Asia is in China). The government will likely push for a similar outcome with Boeing. There is already joint venture that has been established on the defense side to co-produce helicopter fuselages and aerostructures, and in the future a similar JV for commercial aircraft would be much sought after.
With this order in place, the Tata group airlines – Air India, Vistara, Air India Express and AIX Connect - now have committed capacity plans and can go ahead with execution. The target marketshare of 30 percent is well within reach and the financing of these aircraft can actually be cash-accretive. That said, in airline planning there is an adage-- “order the aircraft, spec the aircraft & deploy the aircraft.” As such the order is only the beginning.
Geopolitical dynamics were leveraged in an interesting manner
In a strange way geopolitical dynamics have helped with this order. From an aviation perspective there are challenges and weaknesses seen in markets such as Vietnam, Thailand, Indonesia and Malyasia.
These challenges are impacting the airlines of these respective countries and are not limited to traffic flows. Russia continues to be a market where financiers are reducing exposure and limiting further business and SAARC markets notably Pakistan and Sri Lanka also have seen challenges. As such on a relative basis India stands out and indeed the Air India order includes aircraft that in normal course would have gone to Chinese airlines and to Russia’s main airline. These dynamics helped both with confidence and costs (read: negotiation) for the Air India order.
On the local front, the Air India accounts for the fact that one competitor namely Indigo flies a fleet of more than 300+ aircraft with a 55% marketshare and continued expansion. On fleet alone, to put in in perspective, Air India after combining four entities namely Air India, Air India Express, AIX Connect and Vistara will have a fleet of 220 aircraft and still only be at 25% - 28% of the market. Thus there is a fair gap to be covered especially in the airline business where amortisation of costs is critical.
But it is worth repeating that the fleet order is just the beginning and in the final analysis, it is the deployment that counts. Because deployment converts the cash-flow to profit (or loss) and so with the order in place now the focus has to be on execution. Yet again, this is informed by market dynamics where a price-sensitive market coupled with constrained airports and a growing trend towards segmentation informs both cabin and cargo configurations and associated aircraft economics.
Execution & excellence
The order has to be followed by operational execution and excellence. The legendary US Banker Walter Wriston famously opined that, “Capital goes where welcome and stays where well treated.” This is a mantra that Air India will have to hold. Because, success for Air India as for others is measured at the margins. And the path to profitability includes fighting for each seat and for each rupee. Given the scale and ambitions plans call for even more deft and flawless execution.
Overall, the market reality is that a consumer has several choices. For the domestic travellers there are five airlines competing largely on the same routes and largely with similar price offerings. Add to this an exponentially improving road and there are already traffic flows in both directions – that is from air to other modes and from other modes to air. On the international front, as Air India works on its product, foreign competitors are only going to get more aggressive with pricing, with product and with offerings. All of this will demand forward planning.
And behind the election of the order there is also a market reality where yields have started to soften, capacity has started to increase and competition has intensified. While Q3 was surprisingly resilient this cannot hold on a sustained basis.
With approximately 171 million travellers taking to the skies in 2022, 2023 will almost certainly outdo this volume. But this will come along with fare wars, capacity wars and talent transition. Occupancy factors which averaged 85 % for stronger airlines in Q3 and pricing levels that were 15 percent - 20 percent higher than forecast – were driven by medium term changes and are not sustainable.
Looking forward, India is well on its way to being the 3rd largest aviation market by 2030. GDP growth will average 6 percent to 7 percent for the next few years and likely hit double digits as structural changes start impact.
On the aviation front, India currently has five large airlines flying 650 aircraft and a potential order book of over 1200 aircraft. This market will likely consolidate further and stakeholders are standing by. Broadly, the Air India has heralded a new flight-path for Indian aviation. One of size, stability and scale. Now the returns on capital must follow.
— The author, Satyendra Pandey, is the Managing Partner for the aviation services firm AT-TV. The views expressed are personal.
(Edited by : C H Unnikrishnan)
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