India airborne: Don't look
down! By Priyanka Bhardwaj
NEW DELHI - As is true of so many things
in the world's second-most-populous nation, the
figures for India's aviation sector are
staggering, offering vast investment potential,
yet clouded by creaky infrastructure and red tape.
At 25% per annum, India's aviation sector is
one of the fastest-growing in the world, and
the 20 million air passengers of today are
expected to mushroom to 90 million by 2010.
By 2010, Indian carriers will
likely have bought at least 280 new planes, worth
an estimated US$15 billion. And this excludes the
$13.6 billion for 150 new planes that Indian
companies pledged at the Paris air show last
June.
Private airlines, many with
foreign backing, several of them budget, are
proliferating to challenge the supremacy of
government-owned Indian Airlines (IA) and Air
India (AI), which handle domestic and
international air travel respectively. Many of
them are rushing to the stock market for initial
public offers (IPOs), driving up the already
buoyant bourses.
With about 7% annual gross
domestic product growth, Indians are
taking
to the air in fast-growing numbers. By 2010, the
country will have 65 million middle-class
households, consisting of 351 million people, or
more than the current populations of the United
States and Canada combined.
More than 3
million tourists arrived in India last year, and
though this is far lower than competitors such as
Thailand, which is targeting 12 million, the
passenger rush to India is only going to grow.
Last year, the government signed expansive
bilateral air-services agreements with more than
15 countries, including the US and Britain.
It's enough to make aircraft manufacturers
drool, especially Boeing and Airbus, both of which
have already secured lucrative contracts with
India carriers.
So far so good. But hold
on to your seatbelts.
According to a
recent government report, the state of the
country's international airports is "an
embarrassment", and the entire civil-aviation
industry is "in crisis".
Delays, safety,
customer satisfaction and operational headaches
worry the industry. The business needs more
airports, pilots and flight crew and less-stressed
air-traffic controllers.
Both Delhi's and
Mumbai's airports - the key facilities for the
country's capital and financial center,
respectively - handle twice as many takeoffs and
landings as they were originally designed for,
resulting in long queues at immigration counters.
The two airports, built many decades ago, account
for nearly half of India's air traffic.
There is negligible duty-free
shopping and passengers may not park their cars
overnight outside, resulting in chaotic conditions
and bewilderingly large crowds outside the
terminals. Maintenance is poor. A few years ago, a girl died and several
other passengers were injured when a faulty
escalator at Delhi airport's arrival hall
yawned open and entangled the riders
in heavy machinery.
And so crowded have
the skies above the two cities become that the
Airports Authority of India (AAI) has asked the US
Federal Aviation Administration to assist in
managing air-traffic density. The US regulator
will help redesign air routes leading into the
cities and help train traffic controllers in
high-density traffic management.
After
some dithering, the government approved a $3
billion plan to modernize and restructure the two
airports, with the help of private partners.
Similar schemes will be implemented for other
international airports at Kolkata, Chennai and
Bangalore if the first operation is successful.
Unfortunately, these airports might have
to wait a while.
Turbulence ahead Just as dense winter fog in Delhi keeps
airline schedules disrupted, the Civil Aviation
Ministry has been accused of opaqueness and
manipulation of the bidding process for the
modernization of Delhi and Mumbai airports in
favor of two international consortia - GMR-Fraport
of Frankfurt and Reliance-ASA of Mexico.
Aeropuertos y Servicios Auxiliares (ASA),
the operator of the largest international airport
in Latin America at Mexico City, belongs to a
consortium of firms led by Reliance Airport
Developers, which in turn is part of one of
India's largest privately controlled corporate
conglomerates.
After private consultants,
appointed by the ministry, recommended the two
consortia (and their Indian partners) be awarded
60-year contracts, there was an uproar that the
bidding was not competitive.
While
representatives of the consortia concerned denied
any manipulation, several government officials
involved in the complicated bidding mechanism have
alleged that the process has not been fair.
Gajendra Haldea, adviser to the Planning
Commission, has stated: "Unfortunately, the
bidding process has failed to attract or
pre-qualify any of [the] operators of the best
airports in the world, such as Hong Kong,
Singapore, Seoul, Kansai, Dubai and Kuala Lumpur."
Haldea added that it was doubtful if the
partners chosen by the shortlisted Indian bidders
would enable the Mumbai and Delhi airports "to
achieve world/Asian standards through airport
operators who seem to be performing inadequately".
Although the question of modernizing
airports has been on the anvil for many years, it
was only a year ago that the government decided to
opt for a public-private partnership scheme for
the award of the long-term concessions to run the
Delhi and Mumbai airports.
The first flaw
in the bidding process was an attempt to hand over
large tracts of expensive urban land and real
estate to the bidders. This anomaly was quickly
rectified after a public outcry.
By the
middle of last September, eight consortia had been
pre-qualified for submitting technical bids but,
soon afterward, allegations of irregularities
began to surface.
Representatives of the
communist parties - on whose support the
Congress-led United Progressive Alliance coalition
government in New Delhi is dependent for its
survival - called for a cancellation of the
bidding process and the calling of fresh tenders,
but the government refused.
As charges of
irregularities flew, evaluation reports submitted
by the two private consultants were referred to by
no fewer than four separate official committees
comprising civil servants and politicians.
Whereas attorney general Milon Banerjee, a
political appointee of the government, has stated
that the bidding process was above board, there
have been dissenting voices from within the
bureaucracy.
It has been claimed that the
consultants were subjective in their evaluation of
the bidders. The consultants, in turn, argue that
the very nature of the bidding process was such
that an element of subjectivity in judging the
capability of the bidders could not be avoided
altogether.
Leftist parliamentarians have
alleged that the consultants have close business
links with the bidders. The consultants argue that
there was no "conflict of interest" since they
were appointed before the identities of the
bidders became known.
An "empowered group
of ministers" (or political heads of government
departments)headed by Defense Minister Pranab
Mukherjee decided to steer clear of the
controversy by referring the contentious issues to
a panel of top bureaucrats.
The group did
note, though, that while India has been attracting
"world-class investors" in various sectors of its
economy, in this instance, "we have chosen Mexico
through technical evaluation, and not by
competition".
A week before the
bureaucrats' report was due this week, AAI
chairman K Ramalingam and its finance secretary,
Prasad Rao, distanced themselves from the
evaluation and, in a note to the ministry, called
for "fresh technical and financial bids from the
eight pre-qualified bidders".
Few doubt
that India's attempts to upgrade its crowded and
inefficient airports through the privatization
route will be further delayed or even terminated.
Crowded skies The Indian
aviation sector was opened up to private players
in 1991, the year that India's economic
liberalization programs were also launched. Until
then, government-owned Indian Airlines (IA) and
Air India (AI) handled domestic and international
air travel respectively.
With doubts about
government intentions really to open up, only a
few new airlines began operations. Among these,
only Jet Airways, which launched in May 1993, and
Air Sahara (December 1993) have survived. Sahara,
a part of India's Sahara Group, has indicated that
it wants to sell a minority stake to raise money
to buy planes. Overseas buyout firms are reported
to be interested.
Sustained economic
growth over the past few years has resulted in an
explosion, with more than 20 airlines operating or
planning to operate. Jet Airways now has a fleet
of 40 Boeing, three Airbus and eight turboprop
aircraft and has ordered 30 new aircraft to cater
to its domestic market share of 42.9%.
At
the Paris air show last year, Jet Airways
purchased 20 planes from Boeing and 10 Airbus
A330s, with options for 10 more, at a total cost
of $4.3 billion. Sahara has 17 Boeings and seven
Canadair Regional Jets (CRJs). Five new Boeings
and four new CRJs were purchased in 2005. Last
February, the Mumbai-based Jet Airways raised $436
million in its IPO.
New carriers have
joined the fray. In November, Kingfisher Airline
(launched in 2005) placed orders for 50 aircraft,
including 30 Airbus A320s and 20 ATR72-500s, at
the Dubai Air Show 2005. Last June, Kingfisher
signed contracts for 15 Airbus, including five
super jumbo A380s, the first Indian airline to do
so, in a $3 billion deal. Deliveries have started
and will continue until 2012. Kingfisher's
founder, Vijay Mallya, is the chairman of UB
Group, and a liquor baron whose company dominates
the beer market.
SpiceJet, a budget
airline that launched last May, has five Boeings
in its fold and has placed orders for 10 more.
SpiceJet's shares more than doubled last year.
According to a Bloomberg report, Citigroup Inc and
Goldman Sachs Group Inc and ABN Amro Holding NV
are among the SpiceJet investors who bought $91
million of the airline's stock and bonds in 2005.
Istithmar, the private-equity arm of the
government of Dubai, also participated.
Air Deccan, which took off in August 2003,
placed a massive 30-aircraft order with Airbus in
2004. It was the first private airline in India to
fly an Airbus. Both Spice and Deccan aim at
attracting a chunk of the first-class railway
travelers.
In May, Deccan Aviation Pvt,
which owns Air Deccan, raised $40 million by
selling an undisclosed stake to ICICI Ventures
Ltd, a unit of India's ICICI Bank Ltd, and Capital
International Inc, a part of US mutual-fund firm
Capital Group Cos. Deccan has hired JPMorgan Chase
& Co and four other banks to arrange an IPO
for this year.
Another recent entrant to
an increasingly competitive scenario is Paramount
Airways, a Tamil Nadu-based company that began
operations in October. Paramount has leased five
Embraer 170s and three Embraer 175s and placed
orders for five more. It is the only airline in
India to fly the Embraer. It has also ordered 10
Boeing 787s. Others such as Go Airlines, Air One
and Indus Air also have elaborate plans in place.
The significance of the purchases is
multifold. It shows that private airlines are in
for the long haul and the higher purchasing power
of India's relatively new corporate sector is
expected to remain. Not only are the new airlines
building up their fleets through quick
decision-making processes, more frequent flights
and new destinations and sectors are being
announced almost daily.
Budget airlines
have cut down on extraneous services, but made air
travel accessible to the middle class. The Jet
Airways IPO last year was a huge success. The
quick decision-making ability of the private
sector (Kingfisher is already planning an IPO this
year) has resulted in the government-run airlines
turning nimble, with IA and AI pulling up their
socks.
After negotiations lasting more
than a decade, delays and red tape, IA signed up
with Airbus Industrie, the French manufacturer,
for 43 planes in a $2.5 billion deal. The first of
these aircraft, sporting the new name Indian for
IA, rolled in last month.
AI has decided
to buy 50 Boeings (including the yet-to-fly
Dreamliner), worth $7 billion, though there are
still a few clearances left. Last month, the
Cabinet Committee on Economic Affairs (CCEA)
approved the purchase of 68 (18 for a subsidiary
airline) aircraft by AI. "In-principle approval
has been given subject to final price negotiations
by an empowered group of ministers," a CCEA
statement said.
AI is awaiting a report
from its adviser on its proposed IPO, which would
partly finance its acquisitions. DSP Merrill Lynch
will soon submit its report, after which the
proposal will be forwarded to the government for
approval. If given the green light, the IPO could
take place this year. Similarly, IA is in the
process of finalizing an IPO.
With so much
at stake, Airbus and Boeing have between them
agreed to outsource $3 billion worth of aerospace
systems works to India. Ministry sources have been
quoted saying that the government has introduced a
clause that ensures that the outsourcing business
is worth at least 30% of the value of any deal.
This will add to the country's current aviation
exports, estimated at a paltry $75 million.
Industry experts say that in the next few years,
aerospace exports from India could be worth over
$5 billion.
Some of the credit for the
developments in the aviation sector rests with the
government, though the forces of competition have
created a momentum that is difficult to plug.
Despite resistance by key coalition allies, the
left parties, the government has been able to push
through reforms in the aviation sector, though the
process of airport privatization, as seen above,
is mired in political brinkmanship.
As per
the government's open-sky policy, private domestic
carriers have been allowed to fly international
routes, while the ceiling for foreign
institutional investment in Indian airlines has
been hiked from 40% to 49%. And with New Delhi
signing bilateral agreements for regions spanning
the Middle East, Europe and the US, more
capacities on these routes has been made
available.
Now it's just a question of
getting those airports up to scratch.
Priyanka Bhardwaj is a New
Delhi-based writer.
(Additional
reporting by Paranjoy Guha Thakurta of Inter Press
Service.)
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taking
to the air in fast-growing numbers. By 2010, the
country will have 65 million middle-class
households, consisting of 351 million people, or
more than the current populations of the United
States and Canada combined. 
