IN FOCUS: Indian airlines reap rewards of consolidation

Kingfisher's near-farcical travails are indicative of the hard times that have brought suffering to a host of Indian start-up carriers

By: Ellis Taylor

 

India's Kingfisher Airlines could be compared to another famous bird - the Norwegian Blue in Monty Python's parrot sketch. The airline's chairman, liquor baron Vijay Mallya, says the airline has been merely resting since it was grounded in October last year. Mallya insists the carrier has a plan to be recapitalised and return to the air soon, albeit at a much smaller scale. This is not an ex-parrot, he insists.

Boeing Financially troubled, state-owned Air India has been trying to sell off various assets amid eye-watering losses

Playing the role of unhappy customer John Cleese are the airline's staff - many have not been paid for nearly eight months and face an uncertain future at best. Most recently, they have threatened court action to force the company to be wound down unless Mallya can show Kingfisher has a plan to revive the airline. Caught in the middle are a number of lessors and financiers, who are having trouble repossessing Kingfisher's fleet, and Airbus, which still holds orders for 92 aircraft from the airline.

Kingfisher is the latest in a number of Indian carriers to run into trouble by expanding too fast, leading to a bloodbath on the major trunk routes and the closure or merger of a number of airlines since the 2000s.

Harsh Vardhan, chairman of Starair Consulting, says those days were the "enthusiasts' introduction to the aviation market".

 

INITIAL FLOOD

 

Airbus India president Dr Kiran Rao agrees: "What we had in the mid-2000s, where we had a flood of start-ups, I don't think we will see those again."

However, the loss of a number of start-ups and the grounding of Kingfisher has helped the remaining carriers - notably Jet Airways, SpiceJet, IndiGo and GoAir - to become more sustainable. As Kingfisher wound down its capacity prior to its grounding, other carriers have been able to raise their fares to a more sustainable level.

Low-cost carrier IndiGo's chief financial officer Riyaz Peermohamed says the absence of Kingfisher and subsequent air-fare rises helped some carriers towards record operating profits during the second quarter of 2012, while others reduced their losses, a positive sign for an industry that has been awash in red ink for many years.

Increasingly, there is a sense that India's airlines are becoming more intelligent and are growing into their markets rather than trying hard to stimulate them.

Vardhan says the market is "more mature" than it was five years ago, "so any growth that takes place now is organic growth".

A major light on the hill is a recent change in government policy on foreign direct investment (FDI), which will allow foreign carriers to buy up to a 49% stake in domestic airlines.

 

SIGNIFICANT STAKE

 

Vardhan says this will take two to three years to make an impact but there has already been movement, with Etihad Airways tipped to take a significant stake in Jet Airways. In January, Jet confirmed it had been having discussions with Etihad, with an announcement expected soon.

There is also a strong belief among aircraft manufacturers and some analysts that the new policy on FDI will lead to the emergence of new carriers backed by foreign airlines.

The exception to the recent good news is state-owned Air India, which remains in the red. The government recently said it expects the flag carrier's losses to reach Rs4 billion ($74 million) per month. A previous bailout plan from the government had called for the airline to show positive earnings by the end of 2012.

The carrier has been trying to sell five Boeing 777-200LRs for some time, but to no avail. Sales of other assets, such as properties, have also been held up, while plans to spin off its ground handling and maintenance units have so far failed to bear fruit. Nevertheless, the Indian government has committed to supporting the flag carrier and looks likely to continue to bail it out, something which riles privately owned airlines.

Boeing Jet Airways will take delivery of its 10 787-8s in 2014 and 2015

As with airlines elsewhere around the globe, the high price of fuel has been another challenge, alongside the high level of taxes placed on it.

Antiquated regulations, such as those which limit international flying to those airlines with five years' experience and a minimum fleet of 20 aircraft, have also proven to be a challenge for some carriers.

Airbus and Boeing both believe India will become the second-largest aircraft market by 2031, driven by strong GDP growth and an upwardly mobile population demanding more air travel.

Vardhan believes the market will be able to sustain a 10-15% growth rate during the next 10 years, with Airbus and Boeing projections following a similar trend.

Most of that growth will be catered for by the existing carriers which, collectively, have more than 500 aircraft on order. The majority of those are A320s and 737s, highlighting how the domestic market continues to be dominated by narrowbodies. However, Air India and Jet Airways are also set to take delivery of a number of widebody aircraft to grow their international services.

Boeing and Airbus both expect the vast majority of sales during the next 20 years to continue to be narrowbodies for the domestic market. Significantly, IndiGo and GoAir will be among the earliest operators of the A320neo, with orders for 150 and 72 respectively.

Rao thinks Air India may choose the Neo to replace its sizable fleet of A320-family aircraft in the future, and also says the manufacturer will pitch the aircraft to Boeing operators Jet Airways and SpiceJet. "It's quite understandable that with the high fuel prices and the Indian taxes, the Neo really works in India," he says.

Not surprisingly, Boeing is confident Jet Airways and SpiceJet will look to order the 737 Max to replace their 737NGs, possibly later this year. It also expects Air India Express to order the Max to replace its 737-800s.

 

CSERIES OPPORTUNITIES

 

Although the market has focused on the 150-200 seat segment, Bombardier believes the smaller CSeries could present new opportunities for Indian carriers in the medium term. It is keen to secure an Indian customer for the CSeries. While the CSeries is smaller than the current mainstays of the Indian fleet, Torbjorn Karlsson, Bombardier vice-president Asia-Pacific sales, believes it could present new opportunities for Indian carriers: "We're always having conversations with customers in India, but we really need to see a number of strategic things play out first."

He adds that the changes to FDI regulations will reshape the current landscape in India, creating new roles for the 110- to 140-seat aircraft that have not been exploited before.

On the other end of the scale, Rao believes more carriers will look to upgrade to larger narrowbodies to take advantage of the lower operating costs and deal with increasingly slot-constrained airports.

IndiGo has already indicated it may convert some of its outstanding A320 orders to the A321 to meet higher demand on certain routes. "Airports like Mumbai, Pune and Goa are some of those where we could deploy these larger aircraft. There is a lot of demand on these routes and we should be able to fill up an A321 if we use them on these services," says Peermohamed.

But few believe the growth will require airlines to deploy more widebodies on domestic services. With most flights being less than three hours, Rao and Vardhan say widebodies are not viable on most services.

"The difficulty today is that there isn't enough traffic to use a widebody permanently on domestic - but on a mix of domestic and regional there probably is," says Rao.

Both Airbus and Boeing are confident about their prospects for selling new widebodies to Indian carriers in the future. Air India has taken delivery of six 787-8s and has a further 21 on order as well as three more 777-300ERs, while Jet Airways will take delivery of its 10 787-8s in 2014 and 2015. Air India has started to deploy its 787s on services to Frankfurt, Dubai and Paris, as well as some domestic services.

Jet Airways is also taking delivery of new A330-300s, which are replacing its smaller -200s on services to Europe. Kingfisher also operated the A330 and is the only carrier in the country to have ordered the A350, although few believe it will ultimately take delivery of the aircraft.

In December, Boeing's then senior vice-president of Asia-Pacific and India sales Dinesh Keskar said the 787 had "barely scratched the surface" in India. Keskar believes widebodies will become the main choice as the international market grows, and fragmentation of these routes will mean no market for larger aircraft, such as the 747-8 Intercontinental and A380. "Smaller aircraft like the 777 and 787 make more sense in such a market," he says, while admitting that with so many aircraft still to be delivered, he does not expect to see a widebody order this year.

 

SUSPENDED FINANCING

 

Across the board, new orders may have to wait until the airlines can show that their finances are in order, particularly as lessors and financiers have been burned by the Kingfisher experience. DVB Bank, in particular, has suspended financing aircraft for Indian carriers after India's Directorate General of Civil Aviation refused to de-register two A320s it had repossessed from the carrier in 2012.

Nevertheless, Rao says that from Airbus's perspective, the established carriers have generally been able to finance their existing orders without much trouble.

Although much of the boom in India's air travel market has been along trunk routes between major cities, many believe there will be a greater push into regional markets in the coming years. The government has been encouraging growth of the regional market. Some airports, particularly in the north of the country, have cut landing fees for turboprops, and there are also concessions on fuel taxes for the aircraft, which have encouraged larger carriers to add turboprops to their fleets.

ATR has been a major beneficiary of the growth of regional routes. Jet Airways operates a large number of ATR 72s and Kingfisher also operated a large fleet of the type prior to its grounding. Air India subsidiary Alliance Air also operates seven ATR 42s.

 

TURBOPROP PROSPECTS

 

Bombardier has also had some success with the Dash 8-Q400, although SpiceJet is the only operator so far with 15, plus options on a further 15. Karlsson believes the Q400 has good prospects: "The market has stagnated a bit recently, but as more carriers look to differentiate themselves they will find the speed and cabin comfort of the Q400 will be attractive."

He predicts another wave of turboprop orders in the near future, as carriers look to expand their networks to the smaller cities and towns which are incapable of sustaining narrowbody operations.

Vardhan agrees the market can support many more regional aircraft: "If you look at it, the regional market alone requires at least 100 aircraft today. Imagine what it will be tomorrow."

As turboprop operations have grown significantly, regional jets are almost non-existent in India. Alliance Air is the only carrier to fly smaller jets, operating three CRJ 700s. In 2009, Embraer received an order for five 170s from proposed start-up Star Aviation, and while the order still stands it is unclear when the airline is likely to take delivery of the aircraft, if ever.

Even as the industry matures and carriers look for new opportunities, Rao believes there will be no demand for regional jets as long, thin routes do not exist. "There is no value in connecting a very small city in the south of India to a very small city in the north of India, there simply wouldn't be the traffic," he says. "If you are just flying an hour, the speed of a jet makes no difference."

Boeing supports that view, and only sees demand for 15 regional jets in the country during the next 20 years.

Vardhan, however, is more optimistic and predicts a market for about 50 regional jets. He believes that as the main trunk routes reach saturation point in the coming years, new regional carriers will emerge to open up new city pairs.

Karlsson also sees a role for regional jets to open up thinner international services to the wider subcontinent and western China: "There is an opportunity for the CRJ from a broader perspective, particularly on routes around the subcontinent. If you are flying 600-700nm [1,110-1,300km], you are going to need a regional jet."

With the potential to develop new regional routes, India's National Aerospace Laboratories (NAL) has been working for a number of years to develop a 70-90 seat regional aircraft under the regional transport aircraft (RTA) programme. However, NAL has yet to formally launch the RTA programme and is grappling with difficulties in funding the aircraft's development.

It also lacks definition, as NAL has yet to decide whether to use jet or turboprop power for the aircraft, although it recently said it was leaning towards a turboprop.

 

INDIGENOUS OPTIONS

 

There are also doubts the aircraft will actually gain any sales, although Air India could be pressured to take it, particularly if the government remains its dominant shareholder. No other carriers have expressed an interest in an indigenous regional aircraft.

However, after years of turbulence, there is growing confidence that India's aviation industry is now well placed to sustainably manage market growth.

In the short term, most of that is expected to be absorbed by the deliveries of new aircraft, but longer term it is expected that new carriers will emerge, including some backed by foreign carriers. "Any new entrants will be well funded and well established by the FDI route," says Rao.

That is likely to drive the major airlines to open up new services internationally and also to regional destinations, creating new opportunities for regional aircraft manufacturers.

"Indian aviation is now coming of age," says Vardhan. "I think we are going into a more stable growth environment in the next six months or a year from now."