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IndiGo order: The best laid planes

IndiGo order: The best laid planes

IndiGo made history in the world of commercial aviation with the largest single firm order for big jets ever placed, but says it has not decided how it will finance the deal. If the investment of $16 billion over six years indeed heralds an exponential growth in air traffic in India, is our aviation infrastructure gearing up to meet the challenge? Payal Khurana writes.

The Government is working on the upgradation and modernisation of 35 non-metro airports. The earlier deadline for their completion was March 2010, but due to recession and financial issues, this project was delayed. With the government opting for a PPP mode for these airports now, they are expected to be completed by 2012. We should soon see an upsurge from the tier-2 and tier-3 cities—although many private players will argue that this is a simplistic graph to draw, given the huge uncertainties in smaller-city demand and hence viability. The first indication of a perception of a surge ahead has come from India's biggest low-cost airline, IndiGo, which signed an MoU in January for 180 eco-efficient Airbus A320 aircraft. Of these, 150 will be the neo option and 30 will be regular A320s. The A320 neos, a new upgraded design, will debut in 2016 and IndiGo will be their first customer. These new jets, priced at $87.8 million each, will feature large wing tip devices called Sharklets, delivering significant fuel savings of up to 15 per cent, which represents savings of over 400,000 gallons of fuel and up to up to 3,600 tonnes of CO2 annually per aircraft. Airbus also states that the A320 neo will provide a double-digit reduction in NOx emissions and reduced engine noise. The planes are expected to be delivered between 2016 and 2025. The A320 neo also has a greater range capability, with up to another 900 km, a feature that is suitable in the Asian LCC market, where average flight lengths are typically much longer than in North America and Europe. Airbus stated that the deal, if confirmed as a firm order, would have a value at list prices of $15.6 billion. Aditya Ghosh, President, IndiGo, described the new order as a “drop in the ocean of India's requirement”.

Ghosh said that IndiGo has not yet decided how to finance the order. He said, “The order will still take five to six years to kick in and the company has time to decide on funding options.” The carrier's strong track record has previously facilitated financing and the carrier could also launch an Initial Public Offering (IPO) to finance the order. Responding to the market speculation about the airline planning to raise $5 million through its IPO, Ghosh said, “You can't run a business without considering various financing options with this (IPO) being one of them, but it's too early for me to comment.”

What were the top honchos at InterGlobe Enterprises, IndiGo's parent company, planning when they placed
this stupendous order? Rahul Bhatia, Group Managing Director of InterGlobe Enterprises, explaind: “This order for industry leading fuel efficient aircraft will allow IndiGo to continue to offer low fares. Ordering more A320s was the natural choice to meet India's growing flying needs. The opportunity to reduce costs and to further improve our environmental performance through the A320 neo was key to our decision.”

Another factor which plays a big role in this fleet expansion plan of IndiGo is that they have been granted international traffic rights by the Government of India to operate services from cities in India to Singapore, Bangkok, Dubai and Muscat during the forthcoming summer schedule.

Calculated risk

While the industry has risen from the ashes of the 2008 recession, memories of the hard times still loom large. Companies like Jet, Kingfisher, IndiGo and SpiceJet had accumulated losses of Rs 2,444 crore in 2007-08. Jet Airways' Founder Chairman Naresh Goyal's statement at that time, “We are bleeding. Everybody is bleeding,” poignantly expressed the plight of the industry just two years ago. An exorbitant rise in the price of air turbine fuel had added to the woes. But while the industry has bounced back, the business cycle risk remains.

The aviation industry scenario today is positive. IndiGo's Ghosh said, “There is a fundamental demand for air travel and more so for low-fare air travel. If we take a longer term view, we definitely see passenger traffic and demand increasing.” Airbus and Boeing India echo the sentiment: “There is strength and resilience in the Indian commercial aviation sector over the long term,” said Airbus COO John Leahy. “The potential for future growth of air travel, both domestically and internationally, is among the greatest in the world.” President of Boeing India and VP of Boeing International Trading Dinesh Keskar, commented: “India is one of the key growth markets of the world for aviation, and we are betting on the winners in India.”

IndiGo is not the only LCC in India to be planning rapid fleet growth over the next few years. SpiceJet has a fleet of 50 aircraft on firm order through 2016, GoAir has 10 aircraft scheduled for delivery by 2013, and JetLite has nine aircraft scheduled for delivery through 2013.

Growth projections

Centre for Asia Pacific Aviation (CAPA) has released its analysis on the traffic growth in the Indian domestic aviation market, stating that it has gone up by 62 per cent from 2008 levels. The industry which had entered into the red earlier than other Asian nations and the rest of the world, has also been one of the quickest to recover, with domestic traffic now 62 per cent above Nov-2008 levels, 27 per cent above Nov 2007 levels and around 66 per cent above Nov 2006 levels. Despite a steep increase in airfares in the month of November, the seven domestic airlines reported the highest carriage of passengers during a single month of the current calendar year.

According to the figures released by the Ministry of Civil Aviation, overall domestic passenger numbers in India increased 25 per cent year-on-year, to 4.9 million in Nov 2010 to reach the highest monthly level so far in the 2010 calendar year. While passenger numbers did not exceed four million in any month of 2009, every carrier in the domestic market reported growth in Nov 2010.

The strong economic growth is leading to great optimism from aircraft manufacturers. Boeing forecasts that the Indian aviation market will require 1,150 commercial jets valued at approximately $130 billion over the next 20 years, which will translate to four per cent of their total commercial planes worldwide. Airbus estimated the passenger aircraft demand from India to be at 1,093 planes, making it the world's 5th largest aviation market. Airbus added that the Indian freight will grow almost four-fold over the next 20 years, with 164 cargo planes operating within and from India by 2028. The current fleet is limited to only 12 aircraft.

Airbus also anticipates that India domestic travel will be the fastest growing market for air travel over the next two decades, with domestic traffic increasing by an average 12.2 per cent annually, to be seven times the 2008 traffic level. Overall traffic growth will be among the world's highest, averaging 7.3 per cent over the next 20 years compared with the current global average of 4.7 per cent, according to Airbus, which added that “long term, the potential for growth in India's aviation sector remains exceptional”.

The expansion in India's aviation industry is certainly putting tremendous pressure on the infrastructure. The airports are being pushed way past their design capacity, causing congestion in terminals, on runways and in the air. “The infrastructure needed to keep pace with the growth is certainly lagging,” said Capt VK Kukar, Vice President, Indian Federation of Pilots. Very few airfields are equipped with modern devices like Instrument Landing Systems (ILS) and some airfields do not have radars. With India being seen as the world's fastest growing air travel industry for the next decade, this problem will aggravate.

With only Delhi airport having zero-visibility landing facility, pilots are dependent solely on their competence and experience to land in poor weather, he added. While the infrastructure at the newly privatised airports in Delhi, Mumbai, Bangalore and Hyderabad is modern, the other airports have a long way to go. The fast-paced expansion of airlines has also led to compromises in hiring pilots and engineers.

The Airports Authority of India will have to come up with solutions fast. Mumbai is getting a second airport in Navi Mumbai which is under construction, and CAPA predicts a new one in Chennai soon. Infrastructure revamping to accommodate this boom in aviation will have to be top priority for the AAI now.

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