[Burning Issue] Air India Aircraft Deal and its Significance
Context
Tata Group-owned Air India (AI) placed two mega orders, adding up to a staggering 470 aircraft — for 250 planes with Europe’s Airbus consortium, and 220 with Boeing Co. of the United States.
This is the largest order placed by an airline in one go anywhere in the world, beating the 2011 order by American Airlines for a combined 460 aircraft. The biggest order by an Indian carrier before this was IndiGo’s 300-aircraft order in 2019.
In this context, this edition of the Burning Issue will elaborate on the deal and its impact on the Indian aviation sector. The topic will be relevant for the GS3 Mains Paper under the subheading Infrastructure development and Airports.
Details of the Air India order
The deal includes seventy of the 470 aircraft wide-body or twin-aisle planes for long-haul flights.
Airbus has got the bigger order, but the Boeing order includes an option for a 70-plane top-up, taking the possible order size to 540 aircraft.
The mega order cost for Airbus and Boeing aircraft is estimated between $70 billion and $80 billion.
Ever since Air India returned to the Tata Group, the new owners have been focussed on sprucing up the product offering, while also planning an extensive expansion for the airline.
A five-year roadmap–Vihaan.AI–was prepared with the objective of substantially growing the airline’s network and fleet in a bid to put it on a “path to sustained growth, profitability, and market leadership”.
About Indian Aviation Industry
One of the fastest-growing: The Indian aviation industry is one of the fastest-growing aviation markets in the world.
Undergone a significant transformation: Over the last decade, it has undergone a significant transformation, with the rise of low-cost carriers, increased competition, and modernization of airport infrastructure.
Growth: The Indian aviation industry has been growing at a rapid pace in recent years. According to the International Air Transport Association (IATA), India is expected to become the third-largest aviation market by 2025.
Domestic and International Market: The Indian aviation industry has a mix of domestic and international airlines. The domestic market is dominated by low-cost carriers such as IndiGo, SpiceJet, and GoAir, while the international market is dominated by full-service carriers such as Air India and Jet Airways.
Government Support: The Indian government has been supportive of the aviation industry’s growth and has introduced several initiatives to encourage investment and development in the sector. These include the Regional Connectivity Scheme (RCS) called UDAN, which aims to improve connectivity to remote and underserved regions in the country.
Infrastructure Development: In recent years, there has been significant investment in airport infrastructure in India. The country has over 100 operational airports, and several new airports are under construction or in the planning stages.
Skilled Workforce: The Indian aviation industry has a skilled and well-trained workforce, with several world-class aviation training institutions. Indian pilots and cabin crew are in high demand globally.
What is driving Indian Aviation Sector Growth?
Already third largest domestic market: India is the third largest domestic aviation market after China and the US. The annual domestic air traffic in pre-covid 2019 for India stood at 144 mn passengers.
Income growth and demographic dividend: Increasing income levels, an aspirational middle class, competition between low-cost carriers and enhanced connectivity and infrastructure.
Potential to become the 3rd largest international market: The government and the industry say India could become the third largest international — not just domestic — aviation market given the huge gap between potential and current air travel penetration.
How will Indian aviation shape up?
A major shift could happen in the market: So far, IndiGo’s been the largest player with strong promoter support but there are visible signs of competition from Air India and Akasa Air. Indian airlines will eye a greater share of outbound international traffic from the current level of around 45%.
While Air India is expected to cross foreign carriers in flights to US and Europe, IndiGo is eyeing Europe and East Asia by 2024. The government has asked airlines and airports to work towards multiple international hubs in India.
According to IBEF, India is poised to improve its position from the 7th largest in civil aviation to the third largest in the next 10 years. Given India’s demography and increasing purchasing power, domestic air traffic will certainly move higher.
Significance of the deal
Aspirational Air India: It has put Air India in the league of “aspiring” global airlines. The debt-ridden carrier, which was taken over by the Tata Group in early 2022, plans to turn into “a world-class proposition”. Experts say the bulk order indicates Air India’s intent to reclaim its “pole position” in the domestic aviation market, as well as expand its presence in international routes, BBC reported.
Reduce Dependence on Foreign Flyers: the large fleet that will be acquired by Air India will help in reducing the dependence of Indian flyers on foreign carriers such as Emirates, Qatar Airways, Etihad and other Middle Eastern airlines. These orders directly synergize Air India’s fleet with Lufthansa and Singapore Airlines – all part of Star Alliance, the world’s largest global airline alliance,
Help enter markets like the US: The purchase of wide-bodied aircraft like the A350s will allow Air India to enter markets like the US and Australia directly by offering non-stop flights from India to these places.
Cater to the need of Indian aviation: Air India’s new fleet will help in catering to the needs of India’s growing aviation market. Demand for air travel is again seeing a surge in India and other parts of Asia after the COVID-19 pandemic. As per ICRA, with 986 lakh flyers, domestic air traffic increased 63 per cent year-on-year between April and December 2022 in India.
May give a boost to Make in India and employment: The deal can also create jobs for Indians. The Tata group chairman has hinted that some of the aircraft parts could be manufactured in India, which will boost domestic manufacturing and create job opportunities.
Improves India’s global Standing: the deal is “important for the industry because, given the recent turbulence in the China market, the alternative growth market in India,”
Political signals: “India is also sending a strong political signal that it wants to remain attached to the West at a time when it has appeared ambiguous on Russian sanctions,”
Impacts on bilateral relations
India-France: At a virtual event attended by the Tata Sons chairman and French president Emmanuel Macron said that the Air India deal reflects deepening ties between India and France, as well as the successes and aspirations of India’s civil aviation sector. This achievement shows that Airbus and all its French partners are fully dedicated to developing new areas of dedication with India.
India-US: The Indian prime minister and US President Biden acknowledged the Air India and Boeing deal as a “shining example of mutually beneficial cooperation”. The two leaders also expressed a desire to bolster bilateral cooperation in space, semi-conductors, supply chains and defense co-production.
India-UK: British prime minister Rishi Sunak also said the Airbus-Air India deal would generate employment opportunities around the UK. This is one of the biggest export deals to India in decades and a huge win for the UK’s aerospace sector.
Challenges
Funding: When the Tatas took over the company, they had absorbed around ₹15,300 crores of the total debt of ₹61,562 crore belonging to the bleeding air carrier. Thus, it will be challenging for AI to raise a loan of US $50-60 billion to fund the deal.
Mere customer: if the Make-in-India clause is not added to the deal’s final agreement, India could end up being a ‘mere customer’ of goods with the least direct benefit to the Indian economy.
Operating costs are high: The Indian aviation industry has many difficulties, including high operating costs. This is caused by a multitude of things, including exorbitant fuel costs, airport fees, and taxes. If all these continued, the profit from these new aircraft will remain low.
Infrastructure Barriers: The Indian aviation industry is further hampered by outdated air traffic control systems, insufficient ground support services, and restricted airport capacity.
Regulatory Framework: The regulatory framework is a source of difficulties for the Indian aviation industry.
Conclusion
Overall, the Indian aviation industry has come a long way in recent years and is poised for further growth in the future. There will be a shakeout in India’s aviation sector, with the ‘Maharajah’ once more ascending the throne to reign supreme over India’s skies.
With a large jump in international air carriers from India, the deal promises to make India an international hub for air travel. The government’s support, investments in infrastructure, and skilled workforce will be critical to ensuring the industry’s success in the years ahead.
