Air-India and Indian Airlines last placed sizeable orders for new aircraft more than 10 years ago. Over the past decade they have considered fleet modernisation and expansion on several occasions, only to see growth deferred, mostly because of government bureaucracy.

As a result they have been prevented from expanding as foreign carriers boosted services to and from India, cutting into their market share. But their frustrations may soon be in the past, as both are now further along in fleet modernisation studies than at any other time over the past 10 years.

The Indian Airlines board decided early last year to order Airbus A320-family aircraft and the carrier is awaiting government approval to firm up a deal. Air-India is, meanwhile, formally assessing proposals from Airbus and Boeing for 10 A340-300s or 777-200ERs, plus seven options, and for 18 A321s or 737-900s.

Air-India managing director J N Gogoi says the widebody studies are the most important, as new long-range aircraft are necessary for growth, primarily for services to the USA, which is its most important market.

Gogoi says the airline's board will make a type selection soon, after which he expects the government to take around six months to approve any deal. However, the Indian Airlines board put in its request for approval to order the 43 A320-family aircraft in March 2002 and the request is still pending.

The French government recently stepped in to try to push things along at Indian Airlines. French prime minister Jean-Pierre Raffarin met with his Indian counterpart, Atal Behari Vajpayee, in New Delhi early in February and pressed for a quick approval of the Airbus deal.

Fleet growth

Indian Airlines plans to retain its fleet of around 40 A320s after it acquires new aircraft, although the new narrowbodies will replace its five ageing A300s as well as 11 737-200s that are used by subsidiary Alliance Air. Plans call for the  43-aircraft deal to comprise a mix of: 20 A321, 19 A319 and four A320 types.

At Air-India, the carrier has over the past few years modernised its fleet somewhat by leasing newer Airbus A310s to replace ageing Boeing 747-200s, which Gogoi says are inefficient and keep maintenance costs high. "Dry leasing more A310s has reduced our operating costs and the maintenance costs," he says. "It was a very important move for us."

Air-India now operates 17 A310s - eight of which it owns and nine on lease - making it the largest operator of A310 passenger aircraft in the world. The rest of its fleet is made up of 747s, including four -200s, two -300 Combis and seven -400s.

New aircraft are desperately needed, however, not only for growth and efficiency purposes, but also because government rules bar Indian carriers from leasing aircraft that are more than 15 years old.

"The A310 has basically come out of the manufacturing line and the government here says we can't lease aircraft that old," says Gogoi. "In the next couple of years, A310 aircraft that are less than 15 years old are going to be very limited. So growth, by taking aircraft on dry lease, is going to reach a limit."

Gogoi says Air-India believes in "growing moderately and conservatively", as it cannot afford to grow too quickly - even though it may be able to fill dozens of additional aircraft because of pent-up demand. "Seventeen wide-body aircraft over five years - that is the growth that we can absorb, financially and commercially," he says.

Tax issue

While Indian Airlines is hopeful its fleet expansion proposal will be approved soon, it has some concerns about the financial burden this will place on it because of taxation issues. It is now pleading with the ministry of finance to eliminate withholding taxes on foreign loans for purchased aircraft.

Deputy managing director V Kashyap says the withholding taxes are "crippling", effectively forcing airlines to borrow domestically at higher interest rates. As a result airlines in India - both private and government-owned - generally turn to dry leasing, which Kashyap says is only an "interim solution" for fleet modernisation and expansion. Like Air-India, Indian Airlines has modernised its fleet somewhat in recent years by dry leasing.

Kashyap says the carriers have been asking the government to eliminate the high withholding taxes for some time but those requests are now being stepped up.

"It's ridiculous as everyone understands so simply that aircraft have to be imported into this country, and aircraft being a high-value asset it has to be purchased with debt service," says Kashyap. "If you go for external commercial borrowings, in India today external commercial borrowings have withholding taxes. If you borrow in India you don't pay those taxes, but borrow abroad and you pay the taxes, in addition to the interest. So you're making it basically impossible for people to go for new aircraft."

He adds: "We have been making do with the leased capacity so far, but sooner or later we have to get rid of these 20-year-old birds, which not only are difficult to maintain but also drink a lot of fuel."

Source: Airline Business