The Incredible Rise Of Jet
The Indian aviation sector is on an overdrive with over 1,100 new aircraft being ordered by domestic carriers, a quarter of which belong to SpiceJet
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In terms of the aircraft-on-order to aircraft-in-service ratio, India is ranked number one, says a report by Sydney-based aviation think-tank Centre for Asia Pacific Aviation (CAPA). The country is also the third largest aviation market in terms of domestic passenger traffic (over 100 million passengers) behind USA and China, which are seven and four times, respectively, the size of the Indian market.
As more people take to the sky, domestic airlines have no choice but to order more aircraft to meet the growing demand. But large orders for aircraft are no longer a novelty. After all IndiGo, India’s largest airline by passenger numbers, is one of the biggest customers of the Airbus A320 family, with an order size of 530 aircraft in total. These include 430 A320Neo from orders placed in 2015 (250 A320Neo) and 2011 (180 A320Neo). In 2005, Indigo placed orders for 100 A320, which have all been delivered. Meanwhile, Jet Airways is expected to place an order for 100 narrow body aircraft, while Vistara is likely to go with 50 narrow bodies and 50 wide, says CAPA’s research.
Late last year, Mumbai-based GoAir firmed up an order for acquiring another 72 Airbus A320Neo at a list price of around $8 billion. The airline is said to have received a hefty discount due to the large scale of the order. In a recent statement, Airbus said the agreement was reached on 30 December last year and that it doubles GoAir’s order bookings for the aircraft type to 144. The first of the 72 aircraft will be delivered in 2020, it said.
The Turn of Fate
But for low-cost carrier (LCC) SpiceJet an order size of 205 Boeing airplanes (valued at around $22 billion) followed by an additional order for 20 737 MAX 10 planes (worth $4.7 billion) and 20 conversions from the previous order placed in June 2017, is indeed a head turner. Why? In late 2014, just about 27-months before it placed one of the largest orders with Boeing, SpiceJet was crippled with a shortage of cash. It could not pay off its debt and dues and was virtually shutting down. In fact, in December 2014, SpiceJet was grounded after oil companies refused to refuel its aircraft due to non-payments. The airline posted consecutive losses. For 2011-12, it posted a loss of Rs 604 crore. The next fiscal, losses stood at Rs 192 crore, and in 2013-14, losses zoomed to over Rs 1,000 crore. Next year, it posted a loss of Rs 747 crore. But in early 2015, when the management changed hands and its original promoter Ajay Singh tookover, SpiceJet reported a fantastic turnaround by posting Rs 450 crore profit for 2015-16. Last fiscal too, it reported profits at Rs 431 crore. SpiceJet is in fact doing so well, in January 2017, Singh announced the biggest order of 205 Boeing aircraft, an order worth over Rs 1.5 lakh crore. That is not all. Recently, the airline placed an order to buy up to 50 Q400 turboprop planes with Bombardier to consolidate its footprint in the regional markets. What a turnaround!
“From being on the brink of a near shutdown to being lauded for creating thousands of jobs in the world’s largest economy within a span of mere ten quarters, exemplifies SpiceJet’s amazing turnaround,” says Singh, the chairman and managing Director (CMD) of SpiceJet. Speaking to BW Businessworld in January (issue dated 23 Jan, 2017, All Set for Smooth Sailing), Singh had categorically stated: “For me, profitability is more important than market share. In aviation, it is not difficult to get market share. One way is to dilute fares to increase the market share. But that won’t be a sticky market share.”
In the light of the new orders and latest finance situation, we decide to meet Singh once again to know more about the latest developments and the funding for the proposed aircraft orders. Sitting in his corner office at Udyog Vihar Phase 5 in Gurugram, squeezing us in a slot between a slew of meetings, he tells us that “All the funding is done for the aircraft that are to be delivered in the first two years. This is happening through the ‘sale and lease back’ model. We have got very favourable terms for that. We are in a benign interest rate environment”. As part of the arrangement with Boeing, SpiceJet will get delivery of nine aircraft between August 2018 and December 2018, says Singh. Another 9 to 10 Boeing aircraft will come in 2019 followed by 20 more in 2020. By the end of 2020, SpiceJet would have added around 40 new Boeing aircraft, more than double of its existing Boeing fleet. “There is no debt (for the new aircraft). We have not raised any fresh equity either. It is completely funded from internal resources,” says Singh.
Till 2020, SpiceJet has a firm schedule to induct at least 40 Boeing 737s and 18 Bombardier Q400s out of the ordered 275 aircraft — 225 Boeing 737s and 50 Bombardier Q400s.
Singh also talks about the ‘sale and leaseback’ model that several airlines use. So how does this work? Under this arrangement, an airline sells an aircraft at the time of delivery to a lessor at a premium on the ordered price and then inducts it on lease. It is the most feasible option for airlines, experts say. For new aircraft to be delivered after 2020, SpiceJet is exploring the option of financing new orders via the Export-Import (EXIM) Bank of the United States. The EXIM Bank is looking to provide loans to India for procuring American equipment and technology, particularly in the civil aviation sector. “The EXIM bank is still not functional so far. We are told that it will be operational soon. Let’s see if that materialises,” says Singh.
New aircraft fulfil two very clear objectives. One: they are fuel efficient and require lower maintenance, which help airlines in saving money. Two: they let airlines add newer destinations and new routes profitably. At the time of taking delivery of the first Airbus A320Neo, Aditya Ghosh, president of IndiGo had said: “The A320Neo aircraft will enable us to continue to offer affordable air transportation and a new flying experience for our customers. The fuel-efficient aircraft will be part of a new phase of our growth and will enable us to offer more regional and international destinations at the best price.” Two-months ago while talking to analysts, Ghosh expressed the airline’s keenness to also explore ‘low-cost, long-haul’ option. “We believe there is a significant opportunity that exists to traffic from high cost non-stop operators with the right kind of low-cost non-stop services out of India. We are uniquely positioned to take advantage of this, primarily because of our significant domestic network,” said Ghosh.
Singh of SpiceJet is also evaluating starting ‘low-cost, long-haul’ flights. Simply put, it means applying the ‘no frill’ concept on international routes. So at a fare of say Rs 25,000, SpiceJet is looking at offering international destinations. “This is a very interesting idea, we would want to explore. We have a very large number of Indians who would potentially want to travel overseas. And many more will travel overseas, if the fares are low. So if one can create a business model that actually reduces the cost of those overseas flights in a way that you can charge a lower fare and yet retain a margin, then this is something that is worth exploring,” says Singh. But at this time, the price of the aircraft itself is a little high, adds Singh. “Once the cost base comes down, we can do low-cost, long-haul flights for sure,” he adds. In terms of destinations, Singh says, SpiceJet will look to connect “pretty much all the places that have a strong Indian diaspora — both on the eastern and the western side”. According to aviation expert Amber Dubey, Indian carriers have just 30 per cent of the global traffic to and from India. “With the Indian government demanding prime slots at certain international hubs for Indian carriers in return for higher bilateral quotas, low-cost, long-haul flights to the EU, the US, Australia and Far East are a great opportunity,” he says. Even rival and market leader IndiGo has expressed its intention to explore the low-cost, long-haul international routes.
How will the new aircraft help SpiceJet? Singh says as the new planes start arriving, the fuel-cost will reduce drastically. “These aircraft are 15-20 per cent more fuel efficient. The engineering cost will also reduce a lot because of the negotiations that we have with them now. And the acquisition cost is lower already. There will be a significant drop in the cost base of SpiceJet, therefore we are hoping that the profitability of SpiceJet will increase dramatically,” he says.
In terms of new routes, Singh says the objective is to fly profitably. “We will keep looking at routes that give maximum profit margins,” he adds. According to Ray Conner, vice-chairman of The Boeing Company, the economics of the 737 Max will allow SpiceJet to raise profitability, open new markets, expand connectivity within India and beyond, and offer a superior passenger experience. Boeing says the new planes will consume 20 per cent less fuel than the first next-generation B737s, and will deliver the lowest operating cost in its class — 8 per cent per seat less than its nearest competitor.
The recent CAPA report points out that airport infrastructure challenges could constrain growth and lead to sub-optimal operations and network economics. It says that parking bays and runway slots will become increasingly scarce over the next few years, especially at metro airports.
Signs of congestion are already emerging at Mumbai, Chennai and Delhi airports. “The situation will become more acute unless airports are able to construct 400 parking bays and enhance airside capacity within five years. Otherwise airlines will face challenges in implementing their base and network plans,” the report says. Agrees Sanjiv Kapoor, chief strategy and commercial officer of Vistara. “Not only are there no new slots available today, what is even more worrying is that if you look at the 10-year capacity addition plans for Mumbai (including Navi Mumbai) and Delhi (including the proposed new Jewar airport), you will find that it still falls short of expected demand growth significantly. We need massive new airports on the scale of what is being built in Beijing and Istanbul, which is four to six times the size of the Delhi and Mumbai airport plans including Navi Mumbai and Jewar,” he says.
Kapoor adds that at present, it is difficult to think of an airport in India that can be a true hub for an airline with 200+ aircraft, leave alone for three to four airlines of that size. “It is probably the single biggest challenge facing Indian aviation today,” says Kapoor.
Agrees Singh of SpiceJet. “Whenever there is growth like the one in aviation sector, the corresponding infrastructure struggles to keep pace. It is true everywhere. Having said that, in tier-2 and -3 towns where growth is happening, there is still a lot of capacity. And we are hoping to use that capacity going forward,” he adds.
In Chennai, the site for a second airport has not yet been finalised. Pune is another airport that is already congested. The Delhi airport will soon begin an expansion drive as it is nearing its total capacity for passengers. With no sign of activity for the second airport at Jevar in Uttar Pradesh, the only hope is that the GMR Group is able to complete the capacity expansion of Delhi airport in a time-bound manner.
Going Regional is Important
By January 2019, IndiGo expects to have 20 turboprop aircraft. The planes will be deployed on the regional routes under Union civil aviation ministry’s flagship regional flying scheme Ude Desh Ka Aam Nagrik (UDAN). The airline is also looking to target the underserved areas. Three months ago the airline announced its plans to buy 50 ATR turboprop planes. The order size is estimated at $1.3 billion.
SpiceJet plans to add around six Boeing 737 Next Generation aircraft during Q3 and Q4 of the current fiscal, and expand its Bombardier fleet by adding two more Q400s. The airline has been awarded six proposals and 11 routes under the first phase of the UDAN Regional Connectivity Scheme (RCS). During the current quarter, SpiceJet will start operations in the remaining sectors under UDAN, namely Kanpur, Adampur and Jaisalmer, making flying possible for more passengers, says Singh. “As far as UDAN is concerned, we have started Mumbai to Porbandar and Mumbai to Kandla flights. Also, Hyderabad to Pondicherry, Delhi to Jaisalmer, to Kanpur, to Jalandhar and Aadampur are operational. We are operating these flights at 90 per cent passenger load factor,” he adds.
Meanwhile, there is some good news for passengers who frequently travel overseas. Vistara, the airline run by Tata SIA Airlines, has advanced its plane deliveries by three months so it can launch international flights after March 2018. This will mean another option for international travellers from India. Vistara currently has 16 planes and was scheduled to get four more by June 2018. But now it will have a fleet of 20 planes much before, so that it can fly abroad said Vistara’s outgoing CEO Phee Teik Yeoh recently: “International ambition has always been there from day one. If I can get a wide body, I can go a bit further, but otherwise theoretically, with my 21st and 22nd plane, I can deploy it regionally (West Asia, South East Asia).” According to an analyst report, Vistara could order 50 narrow body planes and 50 wide, and may also opt for wide body aircraft on short-term lease from Singapore Airlines till its ordered planes arrive.
It is clear that in order to maintain the high-growth momentum in the aviation market, there is a definite appetite for more aircraft, better airports, better and cost-effective solutions. The opportunity to create better aviation infrastructure, lower ATF costs and cheaper tickets is posing a challenge to all stakeholders. Are we up to it?