Singapore Air Show

Established Indian carriers happy with policy status quo

 - February 11, 2008, 11:34 AM

India appears to have ruled out any early prospect of increased international competition among its airlines. The move will disappoint recent start-up operators looking for a relaxation of current policy that bars Indian carriers with less than five years’ experience from international routes.

Despite hopes that a new policy would allow carriers operating for at least three years to offer overseas service, civil aviation minister Praful Patel said last October that there will be no change. The decision came amid dynamic industry momentum as private Indian operators compete against the country’s two recently merged government-owned carriers–Air India and Indian Airlines–which in the future will operate as Air India.

For several years, India has been preparing a new air transport policy that private carriers hoped would allow them to offer international services. While observers believe overseas ownership of domestic operators will likely remain outlawed under India’s new policy, restrictions on international services by private carriers could have been relaxed through a reduction in the required domestic service experience.

Under current rules, five carriers are permitted to fly international routes: Air India, its low-cost carrier subsidiary Air India Express, Indian Airlines, privately held Jet Airways and Air Sahara (which Jet Airways has acquired). Fast-growing Kingfisher Airlines (together with budget airline Air Deccan, in which Kingfisher is building an increasing stake) has been lobbying hard to get the rules relaxed. Jet Airways (including subsidiary JetLite) and Air India are the only two airlines currently offering international service, and the Indian government has previously stated that this is insufficient.

Symptomatic of young airlines’ enthusiasm has been Kingfisher’s stated intention to contract with a U.S. operator to provide capacity if the new policy bars it from international skies. Kingfisher already is involved in code-share arrangements with Continental Airlines. Following orders announced at the past two Paris Air Shows for at least 50 twin-aisle jetliners, Kingfisher is eager to begin widebody flights.

In addition, low-cost carrier SpiceJet, which along with Kingfisher began flights in May 2005, wants to provide international flights and had led speculation that a three-year age entry threshold might be introduced in India’s new air transport policy. Further confirming a trend to rationalization among Indian carriers, Kingfisher has been seeking to increase its 25-percent share in prototype Indian low-cost carrier Air Deccan, which has been flying since August 2003.

Alongside the recent Air India/Indian Airlines (IA) merger, Air India Express and IA subsidiary Alliance Air have been brought together (under the former’s name) to operate as a domestic and international low-cost carrier. Jet is operating Air Sahara as JetLite and will discontinue its international flights and drop a code share between Air Sahara and American Airlines.

Under the aegis of the specially created National Aviation Company of India Ltd. (NACIL), the “new” Air India is seeking membership in the Star Alliance global airline partnership, preparing to order additional and replacement aircraft and reviewing long-haul plans, especially to the U.S. via a yet-to-be-designated European hub.

Completion of legal formalities last August allowed integration of the merged operations to proceed, following approval from India’s civil aviation ministry. Over the next two years, the respective Air India and Indian Airlines flight codes are to be unified, computerized reservations systems rationalized and the route network and fleet optimized.

In addition to more than 110 inherited aircraft, the merged operation also will receive a similar number previously ordered by the constituent companies for delivery in the next four years. These include 18 Boeing 737-800s, eight 777-200LRs, 15 777-300ERs, and 27 of the new 787 for Air India, and 43 Airbus A320s ordered by Indian Airlines. Beyond these outstanding orders, about 60 additional aircraft are required.

NACIL has agreed to a $1.23 billion financing package with the U.S. government’s Export-Import Bank to support the Air India acquisition of 17 Boeing 777-200LRs and -300ERs and four spare General Electric GE90 engines, as well as Boeing 737-800s and CFM International CFM56 powerplant spares for Air India Express. The deal covers 85 percent of the required capital. The bank also has made a preliminary commitment to supporting the remaining 51 Air India Boeings.

Air India route plans include consideration of points such as Amsterdam, Copenhagen, Munich and Vienna as a European stepping-stone to North America, in addition to nonstop Mumbai- and Delhi-New York services. The European hub is expected to link eight Indian provincial cities to transatlantic flights.

The merged operation, designed to produce a true network to compete against the growing private sector, inherits the old Air India medium- and long-haul international routes and Indian Airlines’ domestic and short-haul international routes.

Both constituent carriers have been modernizing and enlarging their fleets, and the merger should release significant synergies through, for example, removal of duplicated destinations and redeployment of capacity on new routes. This assumes employees do not launch a successful opposition. Late last year, 10 trade unions representing some 33,500 workers attempted a legal challenge on the grounds that the merger had no parliamentary approval (even though creation of NACIL was under a formal act). Aviation minister Patel reportedly said the merger has cabinet approval, and he has also indicated a desire to sell a 15-percent stake in the new group as a first step toward possible privatization.

The new company structure includes six discrete business units covering passenger transport, low-cost operations, cargo, ground handling, maintenance, repair and overhaul, and other services (such as IT and security), each of which will operate as an internal profit center. The Air India Express low-cost operation will be based in Delhi, away from the main airline and cargo headquarters in Mumbai. The maintenance business will be divided into MRO airframe activity in Mumbai and MRO engineering engines and components work in Delhi.

For the financial year that ends on March 31, the former Air India component is expected to generate revenue of some $4 billion. Together, the two elements reported about $3.5 billion in revenues in the preceding year, according Air India.