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Indian airlines need USD50 billion to finance fleet orders

Indian airlines will require an estimated USD50 billion of financing to support projected deliveries until 2027.

Around 100 aircraft are to be delivered to Indian airlines each year for the next five years. This is by far the greatest volume of aircraft induction in the history of Indian commercial aviation. Projected fleet expansion represents a major opportunity for aircraft investors looking to deploy capital in new generation assets.

However, despite the strength of underlying demand, operators in the Indian market face a number of challenges. On the cost front, Indian airlines pay some of the highest fuel taxation in the world and also incur taxes on aircraft leases, while on the supply side, infrastructure and skills shortages (particularly commanders) are potential constraints on growth. 

These features are covered in a new report from CAPA India, the CAPA India Aircraft Fleet and Finance Report 2018.

Summary

  • Indian airlines now have more than 1,000 firm aircraft orders, the third largest order book in the world, reflecting the positive outlook for growth. 
  • Narrowbodies account for more than 90% of the orders.
  • Sale-and-leaseback transactions have been the mainstay for financing India’s fleet.
  • With an average of close to 100 aircraft scheduled for delivery in each of the next five years, Indian carriers will need to attract a large pool of lessors to participate in the market. 
  • India's effective implementation of the Cape Town Convention will be crucial to reducing the country's risk profile. 

Positive market conditions have led Indian airlines to place bets on unprecedented expansion

India’s domestic market has grown at approximately 20% per annum for each of the past three years, and similar growth is expected in the current financial year. At the same time, international traffic has also grown steadily at 8-10% per annum in recent years.

With strong demand fundamentals and high liquidity in aircraft financing, airlines have taken advantage of the environment to place orders for more than 700 aircraft since 2014. The total order book has now crossed 1000 aircraft, making it the third largest in the world behind the United States and China. And CAPA expects that a further 100 widebodies could be ordered within the next 12 months.

For detailed insights and research about the state of the Indian aircraft fleet and finance market please contact CAPA India  

Firm aircraft orders placed by Indian airlines since 2014

Airline Narrowbodies Turboprops Widebodies Total
IndiGo 250 50 - 300
SpiceJet 100 25 - 125
Jet Airways 150 - - 150
GoAir 72 - - 72
Vistara 50 - 6 56
Air India 20 - - 20
TOTAL 642 75 6 723
  88.8% 10.4% 0.8%  

Total aircraft on order to Indian airlines

Airline Narrowbodies Turboprops Widebodies Total
IndiGo 389 40 - 429
SpiceJet 160 25 - 185
Jet Airways 225 - 15 240
GoAir 125 - - 125
Vistara 50 - 6 56
Air India 20 - - 20
TOTAL 969 65 21 1055
  91.8% 6.2% 2.0%  

Aside from the market's growth prospects, the large orders placed by Indian airlines also reflect the fact that most airlines face a strategic compulsion to keep pace with the market leader, IndiGo, in order to maintain competitive relevance.

With IndiGo holding a domestic market share of more than 40%, and no other airline having more than 15%, the market dynamics are increasingly a case of IndiGo versus the rest, with the LCCs significantly stronger than FSCs.

However, not all of these aircraft may be delivered. It is possible that some orders could be rationalised as the operating environment changes. Challenges have emerged in recent months as a result of the increase in oil prices, depreciation of the Indian Rupee and downward pressure on yields due to rapid capacity expansion. Market pressures are expected to result in the industry consolidating over the medium term to three large LCCs and two FSCs.

India’s fleet inductions are dominated by new aircraft

Indian airlines prefer new aircraft and have largely met their requirements by placing orders directly with manufacturers. Even most of the aircraft being taken on lease, e.g. by Air India, are brand new.

IndiGo has recently been taking some older aircraft on lease, however these are mostly short term inductions to provide replacement capacity for planned A320neo deliveries that have been delayed due to engine issues.

As a result of taking new equipment, airlines benefit from lower fuel burn and maintenance costs, higher dispatch reliability and an improved customer proposition. The placement of large orders directly with OEMs also results in significant support from the manufacturer.

The fuel efficiency and reliability of new aircraft are particularly important factors in a market with a harsh operating environment, high fuel costs and less well developed technical maintenance facilities. Achieving dispatch reliability in Indian conditions with older aircraft requires a considerable technical resource base, which is difficult and expensive to assemble in India.

India’s rapid fleet expansion: narrowbody equipment available and most suitable for the market

The scale of these orders has been made possible by the availability of sale-and-leaseback financing for narrowbodies, which are prime investible assets in the global aircraft financing market. More than 90% of Indian aircraft orders are for narrowbodies.

Had the market structure been such that regional or widebody aircraft would have served demand better, fleet growth would likely have been much slower, given the different dynamics in financing such equipment.

Regional airlines – particularly start-ups with limited experience – face significant challenges. Even if they are able to lease equipment, the terms and conditions are often tough. Deposits and advance payments can be equivalent to as much as 12 months' lease rentals, which can create cash flow challenges for small operators.

Although widebodies represent just 2% of current orders, an additional 100 of the type are expected to be ordered over the next 12 months.

Sale-and-leaseback has been the primary source of aircraft financing, however margins may soften

Due to relatively high interest rates in India, and the limitations of the Indian banking system, airlines are largely dependent on foreign capital for financing deliveries of ordered aircraft. Sale-and-leaseback transactions have been the mainstay for financing India’s fleet.

Large orders have enabled airlines to secure greater support from the manufacturer and a more competitive price, increasing the margin earned on such transactions, and in turn providing critical capital for Indian airlines.

These margins are expected to soften but could still generate USD4-5 billion at an industry level over the next decade.

IndiGo has recently begun to reduce its share of aircraft on operating leases. Some aircraft are being brought onto their books – mostly ATRs being financed from cash reserves. IndiGo similarly plans to acquire 6-7 A320neos.

Although there are only limited widebody transactions, these have mostly been finance leases, although Air India has entered into some operating leases for 787s.

Indian airlines not expected to face challenges with financing near term deliveries

The low interest, high liquidity environment and strong capital markets should ensure that availability of financing for aircraft deliveries to Indian airlines remains buoyant in the near term. New investors continue to be attracted to aircraft investment platforms and vehicles by high returns, and it is possible that more private equity and hedge funds will enter the market.

Since Indian aircraft inductions are primarily narrowbodies, with low cost configurations, these are liquid assets which continue to attract financing in the near term, although there are potential headwinds in the medium term.

The sheer scale of deliveries may require the participation of 25+ lessors each year

Indian airlines are scheduled to take delivery of close to 100 aircraft per annum for each of the next five years. Assuming that lessors are, on average, willing to add 3-4 aircraft each in the market, more than 25 lessors may need to take exposure to India each year.

Despite the availability of aircraft financing, Indian airlines may be chasing lessors more than lessors chasing airlines.

India will need to take steps to reduce the country risk profile

Although India is a signatory to the Cape Town Convention, the treaty has not been fully implemented.

As a result, lessors may seek to contain their exposure to any single Indian airline. The government recognises that this impacts the country’s risk rating and increases lease costs for operators. It has therefore taken steps to replicate some of the Cape Town provisions within the Civil Aviation Regulations – e.g. the ability to repossess an aircraft within five days of deregistration.

However, since these regulations were introduced, they have not been well tested with commercial airline repossessions. In the case of some general aviation operators, the time taken has been significantly higher than five days. Such issues will become more relevant as, and when, the global market becomes tighter.

To request a complimentary copy of Part 1 of the full report visit: CAPA India Aircraft Fleet & Finance Report 2018

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