New planes on the horizon as India’s aviation sector soars

With an aviation sector predicted to grow at the fastest rate in the world and a growing middle class catching the travel bug, India may spend about $175 billion on aircraft during the next few decades, it is forecast.

A Jet Airways plane near the Chhatrapati Shivaji International Airport in Mumbai. The company has been buoyed by investment from Etihad. Dhiraj Singh / Bloomberg News

Foreign investment into India's aviation sector is helping to drive a surge in demand for new aircraft in the country amid fierce competition to tap the local population's growing appetite for travel.

After the Indian government relaxed regulations in September 2012 to allow overseas carriers to buy stakes of up to 49 per cent, Etihad Airways last year took a 24 per cent share in India's Jet Airways as part of a US$600 million deal. AirAsia is setting up a budget carrier with Tata Group in India, the launch of which was expected last month but has been delayed, while Singapore Airlines (SIA) is launching a full-service airline with Tata.

“Several new entrants including AirAsia India, Tata-SIA and Air One are expected to add around 20 aircraft to the domestic market in [the next financial year], subject to receiving regulatory clearances as planned,” says Capa (Centre for Asia Pacific Aviation) India, an aviation analysis firm.

Jet Airways is considering buying 50 Boeing aircraft worth $2.5 billion, according to Bloomberg TV India, which cited anonymous sources.

Boeing has estimated India will need 1,450 new aircraft worth $175bn to cater to growing passenger demand over the next couple of decades, during which the aircraft manufactures projects that the country will "have the highest passenger traffic growth in the world".

The US company's French rival Airbus, meanwhile, has predicted that demand for commercial aircraft globally will reach $4.4 trillion over the next 20 years, with India and China being significant drivers of that demand.

Other Indian carriers are also looking at placing large orders for planes in the near future.

“IndiGo is also preparing another very large order for 200 to 250 aircraft, on top of the 191 aircraft it currently has on order,” Capa says.

“GoAir has been a sound and steady performer and may soon be permitted to launch international services and may look at another aircraft order. GoAir’s last of 20 aircraft on order is scheduled for delivery in the middle of this year, while the first of 72 A320 neos on order will not be delivered until 2016.

“The carrier may therefore look at another aircraft order to meet growth requirements during the interim period,” it adds.

But all this is happening at a time when Indian carriers are finding it hard to achieve profitability because of an array of factors including high taxes, a weak rupee, and aggressive discounting on air fares because of competition between airlines. Indian airlines collectively lost more than $500m in the quarter which ended last September, according to Capa.

“Indian airlines are struggling to stay afloat and make money – that is a far more important priority for them as opposed to the need to invest in new airplanes to meet demand,” says Saj Ahmad, the chief analyst at StrategicAero Research. “Indian airlines are discounting fares to entice people on board – there are enough planes, in my view. The demand just isn’t robust enough yet to warrant an Emirates-style cash splurge on new jets when they can’t even make use of the ones they have already. “

He adds the potential for growth is huge, however, if the right steps are taken, because of the country’s large population and rising spending power.

Although India has a population of more than 1.2 billion, only about 100 million people in India travel by air each year, taking both domestic and international travel into account, says Tony Tyler, the director general and chief executive of the International Air Transport Association (Iata).

Mr Tyler says Iata is forecasting 6.6 per cent annual compound growth over the next five years for India’s aviation market, which means the country ranks among the fastest-developing aviation markets in the world.

“The industry is showing positivity with more and more airlines announcing their start-up,” says Ravi Menon, the executive director of Air Works, an aircraft maintenance company in India.

“It definitely is showing signs of a revival after about a hiatus of almost two years of quiet and the Kingfisher [Airlines] saga.”

In another signal of improving conditions, Boeing is poised to win an order for 38 of its 737 Max jets valued at about $3.9bn from SpiceJet, the Indian budget airline controlled by the billionaire Kalanithi Maran, Bloomberg reported on Wednesday, citing people familiar with the plan.

The deal consists of 30 new orders and swapping an existing purchase of eight 737 NG jets for the upgraded Max model, said the people, who asked not to be identified. The transaction may be announced as early as next week at the Singapore Air Show, two people said.

A 737 sale will keep SpiceJet as a Boeing customer after the airline said last year it was considering switching to Airbus planes. The fleets of India’s discount airlines already are tilted toward Airbus, whose jets are used by IndiGo, the country’s biggest domestic carrier by market share, and Go Airlines (India).

Doug Alder, a spokesman for Boeing, declined to comment. S L Narayanan, the chief financial officer at SpiceJet’s parent Sun Group, did not respond to requests for comment.

Meanwhile, Etihad’s investment into Jet is set to benefit both carriers, analysts forecast.

“The Jet Etihad [deal] is likely to be a win win for both,” says Amber Dubey, a partner and the head of aviation at KPMG India. “Jet gets access to funds, global network and synergy benefits in procurement of ATF [jet fuel], equipment and people. Etihad gets access to the large Indian market and a bilateral quota equal to its local rival Emirates.”

But there are significant challenges and Jet may well be in need of more funds soon, Capa warns.

“Jet’s expected record loss in [the financial year ending March] 2014 is not an ideal start to the partnership, with capital being consumed by losses rather than to fund growth, the aviation organisation says.

“Etihad should not underestimate the challenges involved in a successful turnaround of Jet. A successful strategy will need to focus on Jet’s financial revival and not solely on feeding traffic volume into the Etihad network,” its adds.

“In [the current financial year] Jet Airways’ losses could wipe out almost the entire funds generated from the 24 per cent equity investment by Etihad. As a result Etihad may need to recapitalise the company in [the next financial year], which could include increasing its stake to 49 per cent. We expect that such a move could face regulatory challenges as it will bring the ownership and control issue into even sharper focus. It is possible to see Jet being de-listed in the near term.”

Also, a major setback to India’s airline sector came last week when the US federal aviation administration announced it was downgrading its safety rating for Indian airlines to Category 2 from Category 1. This prevents Indian carriers from launching new services to the United States, which could hit expansion plans of airlines, particularly those of Jet Airways, which just last month announced plans to relaunch a service to New York at the beginning of May with a stopover in Abu Dhabi.

“Indian airlines generally need a top-down overhaul if they aim to survive,” Mr Ahmad says.

“Reactionary moves like increasing FDI [foreign direct investment], allowing A380 flights and the like are just that – being adaptive, progressive and receptive to changing market needs is key – but, sadly, there is nothing in the Indian aviation sector which denotes that radical changes would ever make it beyond discussions.

“What is worse is that policymakers know this – that’s why India has been slow to open up its market to competition because its own Indian airlines would be decimated.”