Sanjeev Ahluwalia | Will a sparkling Maharajah be ‘home away from home’?

The Asian Age.  | Sanjeev Ahluwalia

Opinion, Columnists

Prime Minister Narendra Modi hailed the two agreements for deepening mutually beneficial cooperation with both the United States and France

Aircraft and services matching the quality of Lufthansa and Singapore Airlines can enable commercially fruitful dovetailing within the Star Alliance group. (Photo: PTI)

The normally low-profile Tata Group high-rolled their way into London earlier this week, signing letters of intent to purchase 470 commercial aircraft from Boeing and Airbus. Both manufacturers together booked only 1,622 orders for commercial aircraft last year. The Air India order is 29 per cent of last year’s booking -- an outsize investment given India’s share in the global air travel market is less than four per cent, but possibly necessary since Indian aviation companies operate at passenger load factors of between 85 to 94 per cent.

Air India is ahead of the curve in declaring the end of the three-year-long aviation “winter”. Its fleet is ageing, which justifies locking into new capacity while prices might be attractive and be ready to catch the tide at the flood, once demand revives, and to walk the talk on fuel-efficient and low carbon emissions equipment.

Prime Minister Narendra Modi hailed the two agreements for deepening mutually beneficial cooperation with both the United States and France. Air India will buy 220 aircraft from Boeing, of which 190 will be single-aisle for short-haul flights and 40 wide-bodies for long-haul routes. This is one of Boeing’s largest orders, which moved President Joe Biden to remark: “I look forward to deepening our partnership even further as we continue to confront shared global challenges -- creating a more secure and prosperous future for all of our citizens.” He added: “This sale will support over one million American jobs across 44 states, and many will not require a four-year college degree.”

The bonhomie was as much in evidence across the Atlantic in Europe, as Airbus secured an even larger order for 250 aircraft from Air India -- including 210 single-aisle and 40 wide-bodied. The month-long negotiations at a Tata-owned luxury hotel – London’s St. James Court --concluded with a banquet featuring seafood and coastal culinary delights from Kerala and Goa. With Boeing and Airbus, luxuriating in success,

were engine manufacturers General Electric, which picked up the lion’s share of the lucrative engine deals, whilst Rolls-Royce also ran. President Emmanuel Macron put it succinctly: “Today is one of the milestones of the in-depth strategic and friendly partnership we have between India and France.”

Clearly, it is only when trade fertilises diplomacy that sovereign bonding strengthens.

Such large orders are negotiated well below the listed prices so only insiders know the actual deal size. But the total commitment is reported to be up to $80 billion. A relief for domestic taxpayers is that, unlike previously, only the Tata bottom line is at stake here. Delivery times are long and possibly staggered over the next five to eight years. Hopefully, eventual loan servicing or lease rentals for the equipment hired during the interim period will be timed to coincide with supportive growth in the air traffic market at home and, more important, globally.

Nevertheless, the size of the commitment from Air India -- previously a loss-making publicly-owned company sold to the Tata group in 2021 and formally transferred only recently in 2022 -- reflects the upbeat mood around India’s economic prospects over the medium term. Such optimism is not without supporting fundamentals. GDP growth rates remain double of global rates. Inflation is trending down with wholesale inflation moderating much faster to 4.5 per cent (January 2023) though retail inflation fluctuates around the 6.5 per cent range versus the maximum target of four per cent. The overall government (Union plus state governments) debt at 89.3 per cent (2021-22) remains high, but the fiscal deficit is trending down from 6.4 per cent last fiscal to 5.9 per cent this fiscal, with expectations of reaching 4.5 per cent by FY2025-26.

India has bet big on public investments to halve the cost of logistics, approach international levels of efficiency and enhance the quality of life for citizens. The government is doing the heavy lifting in the Railways and inter-state highways, which move the bulk of passenger and freight traffic. Indian Railways carried over eight billion passengers in 2019 -- the last normal year. Passenger numbers dipped to 1.3 billion in 2021, at the peak of the Covid-19 pandemic, but recovered to 3.5 billion in 2022 (GOI Economic Survey). In comparison, only 167 million passengers travelled by air in 2019, which dipped to 69 million in 2020 at the height of the pandemic (World Bank). The focus of public investment on the Railways and urban metro lines is wise, leaving aviation to be funded by the private sector, though roads and rail services also provide feeder passenger and freight traffic services to air operators.

Privately-owned aviation companies and telecom services are the outcomes of the 1992 liberalisation reforms in India. Air India has only a 10 per cent share in domestic travel, though it has a larger share of the international air travel -- an outcome of long-held landing rights and parking slots overseas. After the privatisation of Air India, the supply side of the market is less fragmented. Indigo has the lion’s share, servicing slightly more than one half of the market. The three Tata Group airlines -- Air India, Air Asia and Vistara (in partnership with Singapore Airlines) service one-fourth of the market, while SpiceJet, Go Air and the others crowd into the residual share.

Air India aims to more than double its domestic share to 30 per cent, which explains some of the buying spree. Aircraft and services matching the quality of Lufthansa and Singapore Airlines can enable commercially fruitful dovetailing within the Star Alliance group. Competing with the entrenched Gulf carriers remains a worry, given their institutionalised ability to beat the competition on prices without compromising service quality.

In 2019 CAPA (an aviation industry association) issued a 15-point guide on how to survive the downturn. Gems include -- total value capture -- charging more for extra bags or in-flight services to capture more of the passengers’ wallet rather than simply increasing the price of a ticket. Reducing the frequency of service is better for enhancing profits than enduring lower passenger load factor.

Reallocation of assets and staff across group companies or eliminating overheads or running a contactless, virtual airline can optimise cost, as can deferring purchase of equipment till demand returns.

Air India is sure to have internalised these valuable tips, though it appears to have overlooked one which advises that old, depreciated assets are a value proposition not to be ignored when revenues are depressed. Meanwhile, erstwhile frequent flyers wonder whether the sparkling new Air India will remain the home away from home that it once was.