India's airlines look to fly
high By Siddharth Srivastava
NEW DELHI - The potential for India's
airline sector to take off is sky-high as
investment and the demand for new pilots soars.
Last month, European aircraft maker
Airbus, said it intends to invest US$1 billion in
India over the next decade to meet high demand in
one of the fastest-growing air-travel markets in
the world.
The Airbus investment is part
of a $500 million assurance to the
Indian government, which
recently ordered 43 Airbus aircraft for Indian,
the state-owned domestic carrier, in a $2.25
billion deal.
Airbus has said it will
spend $300 million in setting up a pilot-training
school and $250 million on an engineering unit,
both likely to be in the Indian technology hub,
Bangalore.
"This is just the beginning -
there will be much more," said Kiran Rao,
president of Airbus India.
India's 2,300
pilots fly more than 230 aircraft, most of them
brand-new, with half a dozen added every month.
Almost a quarter of pilots in India are
expatriates, as the sector needs 400 pilots a year
but produces only about 100. New training schools
are being set up, but the interim will see more
expatriates being hired.
In another move,
the Tata Group, whose diverse interests range from
steel to retail and software, is making an
indirect entry into the domestic airline business
as a financial investor, by picking up a 7.5%
stake in the Delhi-based low-cost airline
SpiceJet. The investment, to be made through the
group's financial arm, Ewart Investments, is
reported to be worth about $17.2 million.
SpiceJet has moved to raise money because
of the need for network expansion in the face of
mounting losses. Among other investment proposals
SpiceJet has accepted are Texas Pacific Group's
$30 million, Istithmar PJSC's $25 million and
Goldman Sachs' $5 million, the company said in a
statement this week.
SpiceJet is acquiring
its 10th aircraft this month and plans to expand
its fleet to 18. It has a market share of more
than 7.5% and has registered the highest load
factor in the past 12 months.
The Tata
Group has been looking to re-enter the aviation
sector for more than a decade. The most publicized
attempt was through a proposed $700 million joint
venture with Singapore Airlines (SIA) to launch a
domestic airline in 1997, which the government did
not clear even after the group agreed to drop SIA.
Low-cost airlines seem much in demand this
season for large corporate groups looking for
financial investment. Soon after Tata-SpiceJet,
Anil Ambani's Reliance Vision, a mutual-fund
scheme under the Reliance Mutual Fund umbrella,
revealed that it has been slowly acquiring Deccan
Aviation shares in the past few months and has now
acquired a 3.5% stake in Air Deccan.
Airline stocks have been beaten low in the
past year because of poor financial performance.
However, the prospects are good because of a
growing economy and increasing travel. This month,
Airbus rival Boeing delivered 18 of the 68
jetliners ordered by Air India under an $11
billion contract, the biggest commercial-aircraft
deal in India's civil-aviation history.
In
one of the largest-ever transactions that have
followed, Air India has also secured a $6.2
billion loan from the Export-Import bank of the
United States for its fleet expansion.
India's biggest domestic airline, Jet
Airways, said this week that it had purchased 10
Boeing 787-8 aircraft to support its international
operations.
Industry observers see
corporate interest (Reliance, Tata) as a positive
development for the sector. "The fact that
institutional investors are beginning to see the
potential in the business is a healthy sign,''
said Vijay Mallya, chairman of Kingfisher
Airlines.
Air Deccan chief executive
officer G R Gopinath said: "Large-scale investment
by big groups, which we did not have earlier, is
beginning to come in now. Growth of aviation is
integral to the country's economic growth."
Indeed, India's aviation market is flying
high, at least in terms of traffic and volumes. It
is estimated that by 2010, there will be 70
million air passengers in India (up from the
current 25 million). In the next decade, India
needs $50 billion in investment in planes and
infrastructure.
Indian carriers are
expected to buy at least 280 new planes by 2010,
worth $15 billion, and spend another $15 billion
in the following decade. In the longer run, India
needs 1,100 new aircraft, of which 935 would be
passenger planes and the rest for freight,
according to Airbus's market predictions.
Boeing has said it expects India will need
856 new jet aircraft worth more than $72 billion
over the next 20 years.
India's domestic
aviation market, in which 12 airlines compete, is
expected to grow at 20% annually over the next
five years. A slew of new carriers including Air
Deccan, SpiceJet, Kingfisher, IndiGo and Go Air
have resulted in airfares hitting rock bottom,
challenging rail fares.
It has been a
while since the Indian aviation sector was opened
up to private players in 1991. Until then, Indian
(then known as Indian Airlines) and Air India
handled domestic and international air travel
respectively.
With doubts about government
intentions, only a few airlines began operations.
Among the early entrants, only Jet Airways, which
launched in May 1993, and Air Sahara, which
launched in December 1993, have survived. However,
sustained economic growth over the past few years
has seen the Indian aviation sector explode.
But right now, the Indian airline industry
is going through a difficult phase financially,
and domestic carriers are thought to have lost
about $300 million in 2006.
Air Deccan and
Kingfisher have yet to break even on their
operations. Jet Airways reported losses during the
quarter April-June 2006 amounting to Rs449.8
million ($9.6 million) compared with a net income
of Rs953 million in the previous year's
corresponding quarter.
According to
estimates, Indian private airlines lost $250
million in 2005, and are losing a whopping Rs2
billion ($45 million) in cash every month just to
stay afloat. Having committed huge funds to
acquire aircraft, most airlines are not in a
position to pull back.
Low-cost airlines
have emphasized that only about 2% of the Indian
population travel by air and there is huge
potential, once the air-ticket prices are brought
down at par with rail travel. However, losses have
kept away most retail investors from such
companies as Jet Airways, SpiceJet and Air Deccan.
''Most [Indian] players will continue to
show losses over the next 12-18 months, generating
profitless volume growth. Efficient and
well-funded operators will survive,'' said Kapil
Kaul of the Center for Asia Pacific Aviation.
But there is hope for the future. With the
stock markets booming, most airlines will be
looking to tap the equity markets. Ultimately,
most will bet on rising volumes for higher
revenues.
For this to happen,
infrastructure, including airports and
accommodation, have to be substantially ramped up
to make traveling for both the domestic and the
international customer a comfortable experience.
Keeping airline schedules from falling
behind because of winter fog can be achieved by
installing new technology in aircraft.
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%. Delhi and
Mumbai airports have been handed over to private
players for major revamping, while there are plans
in place for others.
According to recent
reports, the eligibility norms for airlines
seeking to fly abroad are likely to be reduced to
a minimum of three years of domestic operations
from five years at present. This will considerably
benefit Air Deccan, which is looking to launch
flights to the Middle East and Southeast Asia.
Siddharth Srivastava is a New
Delhi-based journalist.
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2007 Asia Times Online Ltd. All rights reserved.
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