CAPA will shortly release its keenly anticipated annual India Aviation Outlook Report for 2013/14. In this first of a four-part series of extracts from the full 200+ page report, we look at the changing dynamics of the airline sector on both domestic and international routes.
Part 2 examines the policy vacuum that exists in India and the impact this has on the viability and development of the sector. Part 3 will address key issues in airport and airspace infrastructure while Part 4 will consider the outlook for traffic, capacity, yields and airline profitability.
This article reviews some of the key points from the Outlook Report.
Jet Airways’ Indian summer in Paris
CAPA understands that Jet Airways has placed an order for 50 Boeing 737 MAX aircraft, together with 8-10 777-300ERs, to be announced at the Paris Air Show in Jun-2013.
CAPA expects a further order for over 50 A320 neos which will utilised by its low cost subsidiary, JetKonnect. Jet Airways was earlier in negotiations for over a year to acquire 100 A320 neos; however it now looks likely that the order will be split across manufacturers. Jet is therefore expected to announce a total order for over 100 aircraft in Paris. The longer term order could be as high as 200, however we expect that it will be announced in phases.
The orders represent the emergence of a new Jet Airways in the aftermath of the investment from Etihad and signal a major change in Indian aviation. Until recently the carrier was unable to order aircraft because export credit agencies were concerned about its leverage, as a result of which it was only able to lease A330s to expand capacity. We also expect to see Jet place a strong emphasis going forward on turning JetKonnect into a competitive LCC.
The current order for ten 787-8s will switch to 787-9s – to provide a common fleet with Etihad and airberlin - while the order for 36 737-800s will be converted to -900 series aircraft. CAPA expects that Jet Airways could be the first Indian carrier to operate the A380, leased from Etihad (which has 10 of the type on order).
Jet Airways aircraft in service and on order prior to latest expected order
SpiceJet’s fleet plans and forward strategy dependent upon new investor
CAPA expects that SpiceJet will secure a new investor, possibly a foreign airline, within the next 3-6 months. This will lead to a complete change in the carrier’s strategic plans. Confirmation of an order for 30-40 737 MAX aircraft has been held up pending the new investor coming on board, however continued delays may lead the carrier to miss out on timely delivery slots.
CAPA expects the outstanding options for 15 Q400 regional aircraft will also be exercised after the strategic investor is confirmed.
GoAir also likely to attract a strategic investor in FY14
GoAir, India’s smallest scheduled airline is expected to launch international operations in FY14. Although it has been operating for six years now its fleet size is below the current minimum threshold of 20 aircraft for operating overseas. However, this regulation is expected to be relaxed shortly reducing the minimum fleet size to 10 aircraft. CAPA expects that GoAir could also induct a financial or strategic investor in FY14 and may even consider an IPO.
Kingfisher’s revival ruled out with banks now focusing on recovering loans
Despite continued efforts and statements by the promoter, Kingfisher’s revival now appears to be all but ruled out. A number of resumption plans submitted to the Ministry have been rejected as not being feasible as there was insufficient commitment to capital. The banks with outstanding loans to Kingfisher are now intent on recovery proceedings. So far they have succeeded in recovering INR10 billion (USD185 million) but a protracted legal battle can be expected for the remainder.
IndiGo remains well-placed in the market but the competitive framework is set to change
India’s most profitable airline, IndiGo, has remained consistently focused on its business plan and is the market leader across financial and operational metrics. However going forward it is likely to face a more challenging competitive landscape in FY14 with Jet placing much greater attention on its low cost subsidiary JetKonnect; SpiceJet and GoAir set to be strengthened by new investors; Air India introducing its low cost subsidiary on domestic routes; and the launch of AirAsia and possibly other greenfield carriers, all of which will create a new market dynamic.
Indian Domestic Market Share by Airline, Mar-13
With the changing market structure the carrier might review its funding plan over the next 12-18 months and could explore also options from strategic and financial investors to an IPO.
A decision on Air India’s privatisation is likely to be high on the agenda for the next administration in 2014 as a result of the changing market structure
Air India has delivered a significant improvement in its operational and financial performance in FY13, reducing losses by USD500 million. But despite these improvements deep structural issues remain, ranging from its massive debt burden of USD9 billion to sub-optimal aircraft utilisation, poor labour productivity, fleet limitations, and a fundamentally weak business model, all compounded by government intervention and a rapidly changing external environment, with the Jet-Etihad deal being the latest challenge hurled at the airline.
Indian Carrier Debt Levels FY12/13
Yet, despite the best intentions of Air India’s management and recent improvements in performance, the carrier has an almost insurmountable challenge. In this scenario the government will be faced with having to drip feed billions of dollars over the next few years to finance deficits with no meaningful improvement in the carrier’s situation. Meanwhile Air India itself will be politically hamstrung with regard to taking the difficult restructuring decisions required to develop a competitive cost base.
As a result Air India has no future under continued government control - which should bring privatisation back onto the agenda, with a possible decision on the divestment schedule in 2014 triggered by the impact of foreign airline investment transactions. In the meantime the carrier requires a new turnaround plan and financial restructuring programme that takes into account the changes in the market since the last plan was prepared two years ago. A viable and long-term solution for Air India is imperative not only for the airline itself but for the industry at large because as long as it struggles under government ownership it will continue to drive distortions in policy.
The 5 Year/20 Aircraft threshold for start-ups operating overseas is likely to be abolished, changing market dynamics
Indian regulations require that a start-up airline must complete five years of domestic operations and reach a fleet size of 20 aircraft before it will be permitted to operate international services. The rationale provided was that for the protection of passengers carriers need to demonstrate their credentials in the domestic market before being considered capable of handling the additional complexity of international operations.
But this restriction discriminated against Indian carriers since it did not apply to foreign airlines. So while Air Arabia, Etihad and Tiger Airways were granted permission to fly to India despite having been in operation for less than five years at the time of entry, Indian airlines such as Kingfisher, IndiGo and SpiceJet could not fly out.
The 5 year/20 aircraft rule imposed an unnecessary restriction which only benefited Jet Airways. And indirectly it may have been one of the contributory causes of Kingfisher’s demise. Its decision to acquire Air Deccan was driven in part by the fact that Deccan was approaching five years of operations and would allow Kingfisher to launch international services. The challenges of integrating Air Deccan ultimately proved to be very costly.
CAPA has long called for this regulation to be abolished and we expect changes to take place very soon. As a first step the restriction may be reduced to five years and 10 aircraft which is currently under consideration, however it may be removed entirely in the next 12-18 months. This would completely change market dynamics and would for example allow carriers such as AirAsia and other prospective start-ups to grow new markets which could include the development of a long haul LCC.
Despite the challenges AirAsia sees only opportunity and plans to make India a focus market
AirAsia India could launch operations by late October 2013 and CAPA believes that the airline is planning a much larger play in the market than has been indicated so far. Aside from domestic operations, if the 5 year/20 aircraft rule is abolished in the near term we could see the launch of regional international services sooner than expected. Similarly there is likely to be much greater integration with other carriers in the AirAsia group in Malaysia, Thailand and Indonesia and the re-launch of AirAsiaX services from Kuala Lumpur to Delhi and Mumbai.
Indeed international plans could include the launch of medium and long haul routes from India using A330s. India could be an ideal market for a long haul LCC and given its geographic location it could even support hub operations connecting Asia to Europe and the Middle East. It would be somewhat ironic if a foreign airline ends up being the first to recognise and leverage the Indian market’s hub potential.
Time to end the ban on the A380 in India
CAPA expected that the A380 would be operating in India before the end of 2012. That did not happen and we now expect the aircraft to make its debut in 2013. With the government exposing Indian carriers to significantly increased competition from foreign operators already it is difficult to continue to defend the argument that the incremental capacity of an A380 relative to a 747-800 is going to destabilise the market.
The most likely operators in the short term are Emirates, Lufthansa and Singapore Airlines, and in due course possibly Etihad or Jet Airways. If the Jet Airways-Etihad deal is good for the consumer then surely the A380 is too.
Foreign airline investment will be game-changing
As CAPA forecast in our India Aviation Outlook 2012/13, the Indian Cabinet finally approved foreign airline investment in Indian carriers in Sep-12, finally bringing to an end a regulatory anomaly that had existed for 16 years. India already permitted 49% foreign direct investment in the airline sector, but since 1996 the regulations - unique in the world – specifically excluded the one class of investor that has the greatest strategic interest and can add value to the sector, namely foreign airlines.
CAPA had predicted foreign investment would be a game-changing policy decision and it has rapidly proven to be exactly that. In Sep-12 we had anticipated that the deal flow would commence within 6-9 months with the most likely interest to come from the Gulf. Our report had also projected the possibility of AirAsia’s entry.
The results are showing. Etihad will acquire a 24% stake in Jet Airways, while AirAsia plans to hold 49% in a proposed start-up carrier. With the Jet Airways-Etihad deal now concluded we expect serious interest to follow from others. Qatar Airways’ preferred market strategy for the market is likely to consist of seeking an increase of 50,000 weekly seat entitlements and entering into a codeshare agreement with IndiGo, however we do not rule out the prospect of them investing.
Other potential suitors include All Nippon Airways, Lion Air, Tiger Airways and even Singapore Airlines. Leading international LCCs which have established JV operations in multiple markets are likely to favour greenfield investments, along the lines of AirAsia, to avoid legacy issues and ensure that they can establish low costs of operation. Emirates has remained conspicuously quiet, although bilateral discussions are underway between the governments of India and Dubai to increase weekly seats by 26,000 with immediate effect. The carrier does not look like a prospective investor at this stage as the model goes against its broader strategy.
As already noted, the Jet Airways-Etihad deal was reportedly linked to other foreign direct investment flows from Abu Dhabi. The timing of the reform was perfect for Jet Airways – a carrier which until 2012 had argued that there was no need to allow foreign airlines to invest in India. However, the simultaneous decision to open up the India-Abu Dhabi bilateral agreement almost four-fold was key to Jet Airways achieving the valuation that it did.
CAPA expects that foreign airlines could invest in both SpiceJet and GoAir in the next 3-6 months. With a precedent now set, future transactions are likely to be seen by Middle East carriers in particular as a means to leveraging market access. This should have a positive impact on valuations for Indian carriers. However, with such investment the role of Indian carriers is likely to consist of supporting the business plans of Middle East airlines and hubs.
CAPA welcomed foreign airline investment as a game-changing decision. However, we also cautioned that the policy and regulatory framework – and its ability to understand competition and consumer issues – was not sufficiently robust to absorb the potential impact of foreign airline transactions, alliances and codeshares on the industry structure. This horse has now bolted, but that does not remove the need for a transparent and coherent policy and regulatory regime.
CAPA India Aviation Outlook Report 2013/14
This analysis is an extract from the keenly anticipated 2013/14 edition of the annual CAPA India Aviation Outlook Report to be released in May 2013.
The coming year will be a defining period for the long-term prospects of the Indian aviation market. In this complex environment, having access to up-to-date research and insights into the direction of the market is critical for any business with exposure to Indian aviation.
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