Demand for Planes in India Set to Rrise

Thursday, 6th February 2014 at 10:31am

The Indian government set off a wave of reform in the aviation sector by reducing regulation in 2012 including allowances for overseas carriers to buy up to a 49% stake in domestic carriers. This has caused demand for new airplanes in the country to surge and intense competition between the stakeholders to gain a foothold in the ever expanding Indian market.

Etihad Airways has already bought a 24% stake in Jet Airways for US$600 million which aims to bring the Middle Eastern carrier into a more powerful position in the Indian market. Similarly AirAsia has announced plans to form a partnership with Indian conglomerate Tata to launch a budget carrier while Tata has also formed an alliance with Singapore Airlines to launch a full service carrier.

These new ventures will vastly increase the demand for new aircraft in India with CAPA (Center for Asia Pacific Aviation, a firm that conducts market analysis for the aviation sector saying that "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."

Bloomberg India has said that Jet Airways has plans to buy 50 aircraft from the American manufacturer Boeing. Boeing estimates that over the next 20 years 1450 new aircraft will be needed in the Indian aviation sector if growth continues at projected levels. This business will be worth about US$175 billion due to the huge projected rise in passengers which the company has deemed to be "the highest passenger traffic growth in the world".

French firm, Airbus, has similar predictions with their projections indicating that the global aviation market will need about $4.4 trillion worth of aircraft over the next two decades with India and China being the two markets that will contribute the most to this growth.

According the CAPA, a lot of Indian carriers are looking to place orders for new aircraft.

"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 said.

"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," CAPA added.

However, there are many domestic problems that seem to be threatening this projected growth in India. With the weak currency, high taxes and great competition between airlines, many airlines have been losing money over the last few quarters.

According the 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. "

However, there is great capacity for growth in India as only about a 100 million of the 1.2 billion people in India use air travel as a means of cross country travel with the majority still opting for travel by train. This means that with the right steps, there is huge capacity for growth and for convincing some of these people to choose air travel instead of railways.

Tony Tyler, the director general and chief executive of the International Air Transport Association (Iata) has said that the organization has projected a 6.6% growth rate in the next five years in the Indian aviation market.

"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."

Bloomberg reports that SpiceJet plans to buy 30 Boeing 737 jets while most of the other domestic airlines are Airbus customers.

The Etihad-Jet partnership should also yield rewards for both companies with Amber Dubey, the head of aviation at KPMG India saying that "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."

However, this needs to be done soon as "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."

There are also issues of safety with the US federal aviation administration downgrading the safety rating of Indian airlines from Category 2 to Category 1 which will stop Indian airlines from launching new routes to the US. Jet had planned to launch a new route to New York via Abu Dhabi but will now need to wait for further changes to the policy.

"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."

By: Pete Lee.