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Air India's Mammoth Aircraft Order Is Set To Change The Indian Skies

With the Air India aircraft order of 470 aircraft, Indian aviation has squarely landed on everyone’s radar.

<div class="paragraphs"><p>An Air India Boeing 747-400. (Source- Wiki Commons)</p></div>
An Air India Boeing 747-400. (Source- Wiki Commons)

With the Air India aircraft order of 470 aircraft, Indian aviation has squarely landed on everyone’s radar. With India poised to be the third largest aviation market by the end of the decade, it is with much enthusiasm that stakeholders are finally seeing stability in the Indian skies. Stability in terms of anchor airlines, credit risk, and forward planning—to begin with and economic growth prospects coupled with geopolitical dynamics, this could very well be Indian aviation’s time to shine.

The Air India Order—Breakdown 

The order breakdown includes 250 Airbus aircraft, which include 140 narrowbody A320 NEOs, 70 narrowbody A321 NEOs, and 40 widebody A350s. It is expected that while the narrowbodies will service the domestic sector the Airbus wide-bodies are to largely serve the ultra-long haul segments. This is interesting, as currently the entire long-haul and ultra-long-haul fleet consists of Boeing aircraft. On the Boeing side, the announcement includes a total of 220 aircraft, including 20 787 aircraft, 10 units of the 777, and 190 B737 Max aircraft. Both of the agreements with the original equipment manufacturers include options for additional deliveries, thereby locking in capacity plans for several years. The aircraft will be powered by CFM engines for narrowbodies and GE engines for widebodies.

It is widely assumed that to finance the order book, Air India will go for a strategy that includes sale-and-leasebacks as well as ownership of widebody assets. Industry sources indicate that Air India would ideally like to own these over the life of the aircraft, borrowing strategies from some European competitors. As details emerge on how soon the orders will be inducted, the financing of the orders, and the estimated fleet, additional assessments will be possible. Evenso, pari passu, the order clearly indicates a fleet renewal, which will help with costs, capabilities, and the customer experience. Not to be lost is the announcement that, at some point in the future, the Tata group—parent of Air India—is working on bringing commercial aircraft manufacturing into the country. Effectively, this means that Airbus may set up an assembly line in India. The government will likely push for a similar outcome with Boeing, and it certainly helps that there is already a joint venture with Boeing on the defence side to co-produce Apache helicopter fuselages and aerostructures. In the years ahead, a similar JV for commercial aircraft would be much sought after. 

With this order in place, the Tata group airlines now have committed capacity plans and can go ahead with the execution. That said, as the airline planning adage goes, "order the aircraft, spec the aircraft, and deploy the aircraft." As such, the order is only the first part of the equation.

Air India's Mammoth Aircraft Order Is Set To Change The Indian Skies

The Order is Also Informed by Market and Geopolitical Dynamics

Air India’s order is also informed by market dynamics. Specifically, a market where one competitor, namely Indigo, has more than 55% of the market and is growing. To put it in perspective, Air India, after combining four entities—all majority owned by the Tata group—namely Air India, Air India Express, AIX Connect, and Vistara, will still only have about 25%–28% of the market. Altogether, Tata Group airlines have a fleet of 220 aircraft, compared with the formidable Indigo, which has an active fleet of 308 aircraft. Given that Indigo’s fleet is mostly a narrowbody fleet of 266 aircraft, there is a fair gap to be covered.

In the final analysis, it is the deployment that translates into cash flow and eventual profits. So with the order in place now, the focus has to be on specifications, which include engine selection, maintenance contracts, cabin configurations, layouts, and range specifications, and then on the deployment of the assets, where the right aircraft is deployed for the right routes. And a price-sensitive market coupled with constrained airports and a growing trend towards segmentation means that razor-thin margins (if any) continue to be a reality.

Finally, there are the geopolitics, and from an aviation perspective, there are challenges and weaknesses seen in markets such as Vietnam, Thailand, Indonesia, and Malaysia. 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, have also seen challenges. As such, on a relative basis, India stands out.

The Order Has to Be Followed by Solid Execution Capabilities

Success for Air India as for others is measured at the margins, and ambitious plans call for even more deft and flawless execution. This is because the record of profitability for the Tata-owned airlines has been patchy at best, along with the market reality that a consumer has several choices. For domestic travelers, there are five airlines competing largely on the same routes and largely with similar fleets, similar networks, similar financing, similar products, and similar price offerings. Add to this an exponentially improving road and rail network, and the consumer can simply not be taken for granted. On the international front, as Air India works on its product, foreign competitors like Emirates, Qatar, Singapore Airlines, Lufthansa, and British Airways are only going to get more aggressive with pricing, products, and offerings. All of this will demand forward planning.

Air India's Mammoth Aircraft Order Is Set To Change The Indian Skies

While the last year, especially Q3 (October to December for the Indian financial calendar), was surprisingly resilient, this cannot hold on a sustained basis. The quarter saw occupancy factors that averaged 85% for stronger airlines and pricing levels that were 15%–20% higher than usual. These were driven by medium-term changes, notably capacity constraints for Indian and foreign airlines alike.

With approximately 171 million travellers taking to the skies in 2022, 2023 will almost certainly outdo this volume. But the softening of yields is already being seen, and the quality and nature of demand are changing. Fare wars are all but certain, and the question is not if but when.

Most recent forecasts call for 137–145 million domestic passengers and another 55 million international passengers taking to the Indian skies in 2023. Between five large airlines flying 650 aircraft and a potential orderbook of over 1200 aircraft, stakeholders are standing by. The Air India order is certainly the right step—for the airline, for the Tatas, and for India as a country. But at the end of the day, capital also demands a return, and the jury is out on when that return will come, the rate of the return, and the quantum of the return.

Satyendra Pandey is the Managing Partner for the India based firm AT-TV engaged in Transactions, Advisory & Technical Services 

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.