FLUG REVUE August 2005: Air travel boom in India

August 2005

AIR TRANSPORT BOOMS IN INDIA

By Andreas Spaeth

A sudden wave of goldrush fever has come over the aviation industry, and the cause of this is a country in which flying barely took off for many decades. In recent weeks and months, success messages have been arriving from India at such a pace that even industry insiders are having trouble keeping abreast of the latest developments.

Boeing 737

This became particularly apparent this June at the Paris Air Show, where Indian airlines in some cases were announcing multiple billion dollar orders on the same day, the lion's share going to Airbus, but Embraer also enjoying some rich pickings. The total value of these orders came to around thirteen billion dollars (at catalogue prices). One of the most striking orders came from an airline that has only been flying since May 2005, Kingfisher Airlines, which has committed itself to five A330's, five A350's and the same number again of even the A380.

Another low-fares start-up, IndiGo which is headed by Rakesh Gangwal, former CEO of US Airways, took the industry by surprise with a firm order for over 100 Airbus A320's. A firm order for ten A330's from the biggest private airline, Jet Airways, was closer to the order of magnitude that was expected. Already in previous months the Indian air transport industry, suddenly possessed of a new lease of life, had been generating a series of headlines. A selection follows. Airbus and ATR are each selling up to 30 aircraft to India's first low-cost carrier, Air Deccan. Airbus is supplying two dozen aircraft to the newly founded Kingfisher Airlines, while low-cost carrier SpiceJet is starting up with Boeing 737-800's. Jet Airways is purchasing 17 new Boeing jets and leasing six long-range Airbuses; Air India placed an order worth nearly seven billion dollars for 23 Boeing 777-200LR's and 777-300ER's plus 27 Boeing 787 long-range jets and is also founding a no-frills subsidiary called Air India Express. Indian Airlines is ordering 43 new Airbus jets. India has concluded “open skies” agreements with the USA and China and is liberalising air traffic to the United Kingdom. Airlines which have up to now concentrated on the domestic market are expected to commence intercontinental services to Europe and the USA within a few months of the announcement to this effect.

Jet Airways has recently been flying with A340-300's hurriedly leased from SAA between Mumbai and London and between Mumbai and New York via Brussels. The stock market flotation of Jet Airways was oversubscribed 16 times over within a few hours, having raised $2.2 billion for India's largest private airline. “The market is exploding,” says John Moore, Senior Vice President Commercial at ATR. “There is no other market in the world that is so under-supplied,” is the comment of SpiceJet manager, Jason Bitter. “India is taking off and is becoming more and more aware of its strength. It is a giant that is slowly awakening,” says Peter Luethi, of Swiss origin, who is the COO of Jet Airways.

Dinesh Keskar, Boeing's regional sales director, shares these views. “The growth in Indian air traffic is remarkable. Passenger traffic will grow by a minimum of 20 percent a year.” Boeing and Airbus have both recently revised upwards their sales and growth forecasts for India. In the first six months of the last financial year alone, domestic Indian air traffic notched up passenger growth of at least 26 percent, and in the year as a whole 15 million passengers took to the air. The industry is now expecting annual growth of 25 to 30 percent, which is expected to result in 50 million passengers by 2010. When one considers that some 15 million Indians use the railways every day and the purchasing power of the new middle-class that boasts 200 to 300 million people, this is still quite a modest figure. Up to now the average number of flights flown per year by each inhabitant of the Indian subcontinent has been only 0.014, compared with 2.02 in the USA. Even tiny Malaysia, with a population of only 22 million, has a domestic market of 13 million passengers per year. Although the total population of India is over one billion people and the country is the fourth biggest economic power in the world, up to now it has had a paltry 125 aircraft, fewer than Ryanair and easyJet combined. By contrast, China, with 1.3 billion inhabitants, already has 750 aircraft, 75 million Chinese currently embark on air travel per year, and it is expected that 1,900 aircraft will be in service in China by 2020.

In India on the other hand there are over 400 small and medium-sized airports which have no connection worth mentioning to the air route network. These include major cities like Kanpur, which has a population of 4 million. “Large strata of the population do not fly because there are no connections and the prices are too high,” says airline pilot Gorur Ramasamy Gopinath. “If only one-half of the middle class were able to fly, that on its own would mean 150 million passengers,” he calculates.

Gopinath knows what he is talking about as he is the CEO of the first low-cost airline in India, Air Deccan, which commenced operations in August 2003 and today offers over 76 daily flights to 23 destinations in India. And this is at prices starting at 700 rupees (about 12 Euros) – cheaper than travelling by first class on the train. It is no wonder that Air Deccan is able to welcome on board up to 300,000 customers who have never flown before every month. “India is no longer the country of a billion hungry people who are dependent on food parcels and charity, but a country with a billion hungry consumers,” is how Captain Gopinath describes the new market.

The main reason for the surprising transformation that has occurred in India after decades of paralysis and overbureaucratisation of the aviation industry is the liberal aviation policy that was inaugurated in 1994, but which has only really made itself felt in the last few months following a change of government. Eleven years ago private airlines were allowed for the first time, and a dozen of them started up, but only Jet Airways, which today enjoys a 43 percent share of the domestic market, and Air Sahara, with a 14 percent market share, have survived. These developments were primarily at the expense of the state airline, Indian Airlines, which has a 34 percent market share and is expected to be privatised before long. It was not until December 2003 that a committee reporting to the Aviation Ministry published a report recommending the further development of Indian air transport. After intensive consultation with the airlines, it made a lot of recommendations aimed at breathing new life into an industry that was virtually suffocating beneath state regulation. “There is no reason why the Indian civil aviation system could not be one of the best in Asia,” the report stated. “The infrastructure is actually a limiting factor, and the lack of capacity from and to India is another major obstacle.”

One of the most important recommendations was therefore to allow private domestic airlines to fly on international routes. As the national carrier, Air India, was not allowed to buy any new aircraft for over a decade, on its own it is not able to satisfy the sharp increase in international demand. But to avoid endangering the national carrier, the authorities clung for a long time to extremely restrictive, bilateral air transport agreements, which did not allow foreign airlines adequate access to the Indian market either – a vicious circle. To the detriment above all of India itself, so the industry experts say, the state airlines, Air India and Indian Airlines, only actually utilised around 30 percent of the traffic rights to which they were entitled. Other recommendations related to the lowering or abolition of excessive charges and taxes on air fares, the privatisation of air traffic control services and both the national airlines, and raising of the upper limits on the proportion of a native airline that could be owned by foreigners, from 40 percent to 49 percent. This provision hit Jet Airways, then 40 percent owned by Gulf Air und Kuwait Airways, only in 1997, the Middle Eastern airlines being forced to sell their shares to Jet Airways majority shareholder Naresh Goyal.

At the end of 2004 the government implemented some of the recommendations of the commission. Amongst other measures, they abolished landing charges for aircraft with fewer than 80 seats and cut the remaining levies by 15 percent. At the beginning of 2005, Jet Airways and Air Sahara received formal approval to commence international and intercontinental services from the spring. Just how overdue this was can be seen from the latest, record figures in international traffic: a total of 3.4 million international visitors came to India in 2004 (up by 30 percent on the previous year), while 5.5 million Indians travelled abroad by air. At the same time as the reforms, the government in Delhi announced an investment programme of almost nine billion US dollars to expand the airports. Completely new constructions, in some cases privately financed, are planned, for example, for the two IT metropolises of Bangalore and Hyderabad, to which the only non-stop flights offered by a Western airline are Lufthansa's services from Frankfurt.

Apart from the limited infrastructure, one critical obstacle to the unfettered growth of Indian air transport is an acute shortage of pilots. When the new no-frills airline, Kingfisher, commenced flying operations in May, its established rivals, Air Sahara and Jet, had to prune back their flight schedules due to lack of cockpit personnel. Air Sahara alone had lost ten pilots to Kingfisher and to another low-cost start-up, also founded in May, SpiceJet. “There is a real pilot bottleneck in India,” says Jet Airways Chief Operating Officer Peter Luethi, who is also having difficulty manning the new intercontinental services. “There has to be an Indian captain in the cockpit, and for the first year the second position will be occupied by a foreign pilot. By then we will have trained up enough 737 pilots.” Air Sahara, which up to now has had only twelve foreigners in its cockpits, will also not be able to manage the long-haul services it is launching in the autumn without hiring any expatriates. To counteract the shortage of pilots, the Indian authorities have already raised the age limit for pilots from 60 to 61 this spring.

The success of Air Deccan and the unbelievable pace at which other low-cost airlines are penetrating the market in India refute familiar, previous industry assessments. According to these, the classic cheap flights formula can only work if market liberalisation has reached an advanced stage and adequate infrastructure (e.g. secondary airports and wide Internet access) exists. But within a very short time it has become clear that even people on the subcontinent have discovered their basic right to cheap flights and are promoting low-fare access to this fast and modern means of transport. The Indian no-frills airlines have proved surprisingly resourceful in the matter of compensating for the low rate of Internet access, with alternative distribution channels – for example, by selling tickets in banks, post offices and supermarkets. So far ten percent of Air Deccan's customers have booked their tickets direct online.

Compared with the country's older airlines, the two newcomers, Kingfisher and SpiceJet, set great store on presenting themselves as lifestyle brands and on specifically targeting the Internet generation. Kingfisher owns the brewery of the same name, and advertises its beer under the slogan “King of Good Times”. It has models working as flight attendants onboard its A320 fleet, meals and drinks are served free of charge, seat pitch is a tolerable 30 inches (76.2 cm), every seat has its own screen with video programme – and it is no coincidence that the management team come from JetBlue in New York. Similarly, the SpiceJet management team also come from the West: Jason Bitter worked for the Belgian airline V-Bird before it became insolvent, and CEO Mark Winders was previously employed by the Canadian CanJet. SpiceJet (successor to the former ModiLuft), established an Asian record with 37,348 Internet ticket bookings on the first day of sales. Charging for snacks and dispensing with in-flight entertainment, it sees itself more as a genuine no-frills carrier: “We are aiming for the lower end of the middle-class, we want the masses to fly with us,” says Jason Bitter. Other newcomers are already lining up for takeoff: as well as IndiGo, which was mentioned above, there are now two airlines based in Mumbai, Visa Airways and Indus Airways, while Air One is based in Bangalore.

In fact, underlying conditions on the subcontinent are not actually propitious for low-cost airlines. “Two-thirds of the costs in India bear no relation to whether one is positioned in the market as a full-service carrier or as a low-cost airline,” says Jet's COO, Peter Luethi. There are no secondary airports, aircraft- and maintenance-related costs are the same for everyone, as are the fuel costs, which are very high thanks to a state monopoly. “Fuel normally accounts for 13 percent of operating costs, but in India the figure is 33 percent,” Luethi complains. On top of that, there is a 45 percent tax on all tickets. The scope for cutting costs is confined to only one-third of the costs, and one-half of the possible savings are achieved simply by a tighter seat pitch. As Luethi points out, “Whereas in the West, the low-cost model brings a potential 55 percent cost reduction compared with the traditional airlines, the effect in India is confined to 35 percent.”

From FLUG REVUE 8/2005

Last updated 15 July 2005

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