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CAPA India Bilateral Policy Report: Emirates secures additional seats to India after 6 year wait

On 26-Feb-2014 India and Dubai agreed to liberalise their bilateral air services agreement, increasing the current 55,000 weekly seat entitlements for each side by approximately 20% on a staged basis over the next 13 months.

This is in line with the outcome CAPA had projected in its Outlook report in Apr-2013 and most recently in our Jan-2014 market analysis. We stated that we expected an opening up of the India-Dubai bilateral in the near-term to facilitate A380 operations by Emirates without the need to trade-off frequencies.

 

CAPA's India Bilateral Aviation Policy Report, to be released on 15-May-2014, is the most in-depth study ever conducted on the current and potential structure of India’s bilateral air service agreements and their alignment with traffic flows and the sometimes competing interests of foreign and Indian carriers, airports, consumers and tourism industries. Key stakeholder thinking will be combined with rigorous data analysis in this report which will provide invaluable support to business and strategic planning for airlines operating to India and international aviation authorities.

An early bird discount of 30% is available for orders and payments received by 21-Mar-2014. For more information contact Tarika Wadhwa on capaindia@centreforaviation.com

Weekly entitlements to be increased by 11,000 seats for each side

Emirates currently operates to 10 Indian cities while flyDubai operates to three, with Ahmedabad and Hyderabad common to both carriers’ networks. The additional 11,000 weekly seats would allow Emirates to introduce A380 equipment on the majority of its five daily services to Mumbai and four daily services to Delhi currently operated by A330/A340/777s aircraft. Some of the entitlements may also be allocated to flyDubai to open additional points of call in India.

The first tranche of 5,500 additional seats available from the upcoming Summer 2014 schedule would allow Emirates to upgauge up to four daily departures from Delhi and/or Mumbai. The A380s will probably be scheduled to support the morning departure bank from Dubai. Permission to operate the A380 on Indian routes is timely for Emirates which will face temporary slot constraints at Dubai Airport between May-2014 and Jul-2014 due to runway upgrades.    

Schedule for increase in seats entitlements between India and Dubai

 

Weekly Seat Entitlements

Current entitlements

55,284

Increase from Summer 2014 Schedule

+5,500

Increase from Winter 2014/15 Schedule

+3,300

Increase Summer 2015 Schedule

+2,200

Total entitlements by Summer 2015

66,284

Access for UAE carriers in India dwarfs all other markets

India is unique in having separate bilaterals with different emirates of the UAE; agreements are currently in place with Dubai, Abu Dhabi, Sharjah and Ras al Khaimah.

As a result of the expanded bilateral agreements that India has signed with Dubai and Abu Dhabi over the past twelve months, weekly entitlements for UAE carriers will increase to over 135,000 seats by 2015/16.

Including the points of call available to Indian carriers from which Jet Airways will be able to operate to Abu Dhabi, hubs in the UAE can be fed from 26 points in India.

This represents a massive increase from the 10,400 seats available to six cities in 2003/04. And it dwarfs the access offered to any single other country; it is almost as much as all European countries combined, which have just over 160,000 seats available to them.

In addition, the majority of the Indian bilateral entitlements to Abu Dhabi are expected to be utilised by Jet Airways operating a coordinated network and schedule with Etihad. As a result the number of weekly seats feeding hubs in the UAE is likely to be closer to 170,000-175,000.

Markets with Largest Weekly Seat Entitlements to India

The full CAPA India Bilateral Aviation Policy Report will include detailed analysis of existing bilateral agreements by key markets in terms of seats, frequencies, aircraft size and points of call, and their development over the last 10 years.

CAPA India research estimates that the additional near term seat requirements of foreign carriers is in excess of 170,000 per week

Despite the recent opening up of the market CAPA understands that UAE carriers are still seeking an additional 60,000+ weekly seats in the short to medium term in order to support increased frequencies to existing destinations; the deployment of A380s on metro routes other than Delhi and Mumbai; and the opening up of new points of call for flyDubai and Air Arabia

The business plans of UAE carriers entail massive expansion over the next decade and liberal access to the Indian market will be key to supporting this growth.

Emirates’ long term plans for India are expected to entail upgrading all services to Delhi and Mumbai to A380 equipment and increasing frequencies to these two primary gateways; introducing A380s to other metro airports, most likely commencing with Hyderabad and then Bangalore, and eventually to Chennai and Kolkata once they become Code F compliant - which should be achievable with some minor upgrades; and increasing wide body frequencies to other ports such as Ahmedabad, Cochin, Kozhikode and Trivandrum.

To complement this expansion, LCC flyDubai is expected over time seek to operate to more than 20 non-metros. The UAE would ideally like to see an Open Skies agreement with India, as would Qatar.    

Meanwhile demand from Qatar, Turkey, Singapore, Malaysia and others is estimated at close to 110,000, with almost half of this accounted for by Qatar.

 

CAPA Estimates for

Additional Seat Entitlement Requirements

Qatar

50,000

Dubai

40,000+

Sharjah

20,000

Turkey

15,000-20,000

Singapore

15,000-20,000

Malaysia

10,000

Hong Kong, Thailand & others

10,000

The full CAPA India Bilateral Aviation Policy Report will include projections for seat entitlements that will be required by global region over the next 10 years to meet expected demand for international travel to/from India.

SpiceJet’s request for more than 40,000 seats to the Gulf

Indian carriers are currently utilising approximately 43,000 of the 55,000 weekly seat entitlements available to them under the India-Dubai bilateral. Prior to the most recent negotiations Indian carriers were asked to submit their estimated requirements over the next 2-3 years.

Air India, Jet and IndiGo combined are unlikely to have required more than 10,000-12,000 weekly seats. Air India and Air India Express do not have the narrow body capacity to support the expansion of regional international services; Jet Airways is now focused on Abu Dhabi and not Dubai; and IndiGo has modest plans for Dubai.

Indian LCCs are currently averaging load factors in the range of 70-75% on routes to Dubai and are not faced with an urgent need to further expand capacity. And indeed the viability of services from Delhi and Mumbai may come under further pressure as a result of competition from Emirates A380s on these routes.

The growth plans of most Indian carriers could therefore have largely been accommodated under the current bilateral without revision.  

However, SpiceJet reportedly submitted a plan seeking an additional 12,000 weekly seats to Dubai, 10,000 seats to Abu Dhabi and 22,000-24,000 seats to Doha - although it has yet not fully utilised the seats to Dubai allocated to it previously. The proposed growth in operations to these three points alone is almost three times the size of SpiceJet’s total international seat capacity at present.

It would require an estimated 17-18 additional aircraft to be dedicated to supporting this expansion to the UAE and Qatar, slightly more than the total number of narrow bodies that the carrier has scheduled for delivery through to 2016, of which up to ten may be required for replacement of existing equipment over the next two years. As part of its planned restructuring programme SpiceJet may even temporarily downsize its narrow body fleet. CAPA research estimates that the current fleet of 41 737s could be reduced by up to 20%.

And SpiceJet is actually rationalising its international network, having recently announced the termination of several routes such as: Delhi – Guangzhou; PuneBangkok; Bangalore – Bangkok; and Varanasi – Sharjah.

In this context the request for 44,000-46,000 seats to the UAE and Qatar appears aggressive, but this stated requirement by an Indian carrier may have been one of the reasons for the grant of additional bilaterals.

Change of gauge in Dubai opens up opportunities for an Indian carrier, but no takers likely for now

Under the new bilateral agreement Indian carriers will be permitted a change of gauge in Dubai, allowing Indian carriers to establish hub operations in Dubai subject to traffic rights. This is similar to the provision that was introduced in the India-Abu Dhabi agreement last year and which facilitated greater cooperation between Jet Airways and Etihad.

India had originally sought a change of gauge provision during bilateral negotiations in 2008 on the basis that the 5th freedom rights available to Indian carriers beyond Dubai could only be commercially leveraged if they could establish hub operations in the emirate. At the time the Dubai authorities had agreed in-principle but stated that due to infrastructure constraints at Dubai Airport such rights would only be available from the Al Maktoum International Airport (AMIA) as and when it opened for passenger operations. With regard to the change of gauge right agreed in the most recent negotiations it is not yet clear whether the offer is for Dubai Airport or AMIA.

Despite the potential attractions of a Dubai hub, this right is unlikely to have any takers for now. Jet Airways is committed to Abu Dhabi and the only other Indian carrier with widebody aircraft that could take advantage of the provision is Air India. It would be almost unthinkable for the national flag carrier to establish an offshore hub in the Gulf.

And establishing a hub at Dubai Airport may also be operationally challenging. The recent experience of Indian carriers is that slot constraints at Dubai have generally made it difficult to secure preferred timings, thus impacting the convenience of the schedule operated and resulting in increased time on the ground.

The change of gauge provision could be leveraged if a Dubai carrier were to invest in or establish a close alliance with an Indian carrier, but Emirates does not appear to have any current interest in pursuing such an approach. Although in a fast changing world as Emirates President, Tim Clark recently commented on the issue of investing in India, "never say never".

The full CAPA India Bilateral Aviation Policy Report will analyse the impact of global alliances, foreign airline investment and cross-border joint ventures on bilateral policy

As foreign airline route access is expanded, pressure increases on the Indian government to develop a new ownership structure for Air India

India's lack of a coherent policy to wean Air India away from government ownership over the past decades has left India in a constant dilemma between improving air access in the national interest - and providing a financial platform for its flag carrier to become sustainable. In the event the course of least resistance has been to accommodate the first goal, but to fail to take any meaningful action to improve Air India's position. This has left the government in the invidious position of pumping around a billion dollars a year into propping up the carrier.

Continued liberalisation should thus precipitate a serious review of the government’s ownership of Air India. The national carrier is likely to be one of the hardest hit by the increased access granted to foreign carriers; 80% of its international ASKs are deployed on routes to the Middle East, Europe and North America where it competes directly with Gulf airlines.

Increased losses by the national carrier will in turn have to be funded by the government, which has already committed to infusing a further USD3.9 billion in Air India over the next eight years, in addition to billions already spent.

As the internal and external operating environments have become even more challenging since the turnaround plan was developed, these estimates are now likely to be conservative. As a result, a practical and dispassionate approach requires that all options be on the table, including privatisation, including relaxing foreign ownership provisions.

The full CAPA India Bilateral Aviation Policy Report will present a roadmap for the future of Air India to address one of the key dysfunctionalities in bilateral policy

India-North America routes will be the new battleground for Gulf carriers

With Gulf carriers set to increase weekly frequencies to the US by over 30% in 2014 they are likely to look to India to help feed this additional capacity. This is expected to increase pressure on European and Indian carriers. More than 50% of the traffic on Air France, British Airways and Lufthansa services to India is connecting to/from North America, while Air India generates approximately 30% of its international revenue from the US.

Air India in particular will find it very challenging to compete across the board on price, product, network and frequency. The carrier has only just started to become cash flow positive on its US routes in the last few months with the transition from 777-200LRs to 777-300ERs which are better suited to the mission. And despite some initial operational issues the 787 has also contributed positively to Air India’s financial performance.

Recent traffic growth on long haul routes from India to the UK, Europe and North America has underperformed the overall international market from India. In 2013 traffic between India and UK/Europe actually declined, while to North America it was up approximately 5%. This is in contrast to the 8-12% growth on routes to the Middle East and Asia, much of which was stimulated by LCCs.

As part of the competitive interplay, unless there is strong underlying growth in westbound markets from India, the rapid expansion of Gulf carriers is likely to result in the near term displacement of traffic away from European and Indian carriers; at the same time, better connections and pricing can be expected to stimulate travel.

Competition is also extending to product on the ground. Etihad and Jet Airways have been promoting the recent opening of the US Pre-Clearance facility in Abu Dhabi as a value-add for passengers travelling from India to the US enabling them to avoid lengthy customs and immigration queues on arrival at their final destination. Dubai Airport and Doha Airport are also understood to be in discussions with the US Department of Homeland Security regarding the possibility of opening such facilities, although Emirates does not appear to be in favour - arguing that it could prove to be a logistical challenge which impacts the ability to achieve smooth and efficient connections in Dubai.   

India - now more than ever - requires a clear and defined bilateral policy linked to its national interests and economic goals

Increased market access for Dubai carriers in and of itself is likely to be beneficial for India's economy and its tourism industry. Its carriers offer a high quality, competitive product with extensive networks served on a high frequency basis providing convenient connectivity between India and the world.

India's interests may in fact best be served by opening up even more to foreign carriers, not less, reducing the strategic risk of dependence on any single market. But there does not appear to be any thought leadership on this issue amongst key decision-makers. The challenge for India's aviation industry and for foreign carriers is that there is no clear bilateral policy with defined objectives stated in terms of India's connectivity, trade and tourism requirements as well as its geo-political interests.

In order to frame an appropriate policy India needs to develop a long term vision for its own aviation industry. This should be suitably ambitious as befits an emerging economic power while at the same time being honest about the realistic hub potential of India's airlines and airports, given that policy makers ceded any competitive headstart that India could have had for more than 20 years.

It should also define the role that foreign carriers will clearly have to play in supporting the global connectivity requirements of what will likely be the third largest economy in the world within the next two decades.

In the absence of such a vision there can be no roadmap outlining the timeline and criteria for the allocation of increased bilaterals. As a result there is neither transparency nor predictability for key stakeholders.

Since 2004 India has oscillated without warning between rapid liberalisation and protectionism with ad hoc decisions taken without appropriate consultation. Such an approach makes strategic planning for airports and airlines next to impossible - a huge challenge in such a capital intensive industry - and benefits neither Indian nor foreign operators, while endangering future foreign investment prospects.

CAPA India "Bilateral Aviation Policy Report 2014"

This short analysis highlights some of the themes from the CAPA India Bilateral Aviation Policy Report 2014.

The full report presents a comprehensive guide to the establishment of a transparent bilateral policy for India, highlighting the research and analysis required to support appropriate policy formulation; the consultation protocols that should be adopted; and setting out a practical roadmap for the implementation of a new framework from the starting position of the current bilateral agreements.

CAPA India is the leading aviation advisory, research and knowledge practice in South Asia with the largest dedicated team of aviation analysts in the region and a portfolio of more than 100 consulting and research projects. To order the full 150+ page CAPA India Bilateral Aviation Policy Report to be released on 15-May-2014, contact Tarika Wadhwa on +91 11 4692 1036 or email capaindia@centreforaviation.com.

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