Large Indian fleet orders to drive network expansion

The order book for India’s airlines is likely to exceed 1,100 aircraft following expected orders for 100 aircraft each by Jet Airways and Vistara. This is the third largest order book in the world after the USA and China. And its projected ratio of 2.2:1 aircraft on order for every aircraft in service would be the highest of any major aviation market.

The order book will be dominated by narrowbodies which account for 86% of the total, so airline network plans remain focused on domestic and short haul international routes. Widebodies and regional aircraft account for just 6% and 8% of the total, and this is even after orders in recent weeks for 50 ATR-72s by IndiGo and 25 Bombardier Dash 8-Q400s by SpiceJet.

CHART – India has the third largest order book in the world , but highest ratio of on order versus in service aircraft of any major aviation marketSource: CAPA – Centre for Aviation and Airline Leader

But with the 40 largest airports in India likely to be saturated within the next decade, securing slots for key domestic routes will become more challenging. CAPA – Centre for Aviation estimates that most of the 40 largest airports in the country will have exceeded their design capacities within the next decade, and for several of the larger metro airports it could be much sooner.

Each of the metro cities will require a second airport by 2030, and Delhi and Mumbai may require a third. Mumbai and Chennai are already close to saturation and the prospect of these major airports being closed to additional air capacity has significant negative economic repercussions.

Air India and Jet Airways have started to deploy widebodies on some domestic routes from Mumbai in order to maximise the capacity of scarce runway slots. The airport has been actively discouraging operations by regional aircraft and has a curfew on general aviation movements during peak hours.

Although the PPP concession to develop a second airport in Mumbai at Navi Mumbai was finally awarded in Feb-2017 – after many years of delays – the official go-ahead is yet to be received by the successful bidder, Mumbai International Airport Limited. With significant earthworks to be performed at the site before construction can commence, it is highly unlikely that the second airport will commence operations until FY2023 at the earliest, by which time congestion at the existing airport will have become far more severe.

TABLE – CAPA – Centre for Aviation estimates that most of the 40 largest airports in India will have exceeded their design capacities within the next decadeSource: CAPA – Centre for Aviation and Airline Leader

 

The impact of congestion can be seen in the recent traffic growth rate at Mumbai, which is by far the lowest amongst the six metros, reflecting the shortage of available slots. The economic loss to the city and the region is massive as a result, causing the loss of thousands of jobs and fundamentally undermining Mumbai’s potential as a major regional aviation hub. These effects are little short of tragic – and completely avoidable.

The government will need to fast-track decisions on the construction of second airports in key cities, or at least notify land so that a suitable sites are available when required. In Chennai, the site for a second airport has not yet been finalised, which means that operations are still several years away. Similarly, Pune is another airport that is already congested, and where a solution in the form of new airports is yet to be determined.

In the case of Delhi, the decision to approve the development of the second airport serving the National Capital Region, at Jewar, is a welcome development. At projected growth rates the current airport could saturate by FY2023, and even sweating the asset to handle more passengers may only accommodate a couple of years additional growth.

International growth may be less constrained as India’s geographic location means that back-of-the-clock services are common, a time when there is greater availability of slots. There are currently five Indian airlines that operate international routes – Air India, Air India Express, IndiGo, Jet Airways and SpiceJet. Over the next 18 months they could be joined by three more, namely AirAsia India, GoAir and Vistara.

AirAsia India and Vistara have been keen to operate international routes since they launched, but must first comply with the regulatory requirement of operating 20 aircraft on domestic routes. GoAir already meets this threshold, and has expressed interest in overseas markets, but is yet to take that step.

TABLE – India’s airlines are continuing to expand connectivity across both domestic and international marketsSource: CAPA – Centre for Aviation, Airline Leader & OAG 

 

The five Indian airlines operating international routes serve a combined total of just 40 destinations on a nonstop basis. For an economy the size of India, this represents a relatively small footprint compared for example with the networks operated by the Gulf carriers. As a result, the majority of the close to 60 million annual international passengers to/from India travel on foreign carriers, with around 40% connecting via offshore hubs.

Destinations in the Gulf are well served, but Indian carriers have only limited routes to Central and Southeast Asia, with several major markets unconnected. For example, no Indian airlines operate to Malaysia, despite the fact that more than 630,000 Indian tourists visited the country in 2016.

In terms of long haul routes, only Air India and Jet Airways operate widebody equipment, and Air India is the only one operating to 15 of the 18 long haul destinations. Africa and Latin America remain white spots in the networks of Indian carriers. Half of the foreign destinations are served by multiple Indian carriers, with all five airlines operating to Dubai and Muscat. Half of the foreign destinations are served by multiple Indian carriers, with all five airlines operating to Dubai and Muscat.

Air India has been rapidly expanding its international footprint. Over the last couple of years it has launched or announced a number of new stations including Copenhagen, Madrid, San Francisco, Stockholm, Vienna and Washington DC, with cities such as Nairobi, Houston and Los Angeles on the radar.

Meanwhile, Jet Airways is focusing on increasing capacity to Amsterdam and Paris where it is working closely with partners Air France-KLM and Delta to provide connectivity across Europe and North America. Jet Airways has five A330s and 10 Boeing 787-900s on order, although it continues to defer deliveries. Nevertheless, a large widebody order will be necessary in the near term, both for replacement and expansion.

IndiGo, the leading player in the domestic market, has signalled its intention to diversify its network onto regional and long haul routes. IndiGo has the largest in service fleet in India at 135 aircraft, and the largest order book of any airline in the world at 458 aircraft. Its fleet could expand by more than aircraft during the current financial year, a net addition of almost one aircraft every eight to nine days.

IndiGo recently surprised the market by announcing plans to diverge from its single aircraft type model and launch a regional operating division. In May-2017 the carrier announced an order for 50 ATR-72s, which is likely to be expanded further in the near term.

CHART – Kolkata leads the way in terms of annual passenger growth from India’s metro citiesSource: CAPA – Centre for Aviation and Airline Leader

However, in terms of regional equipment orders in the market this simply replaces the 50 Embraer jets that were on order to Air Costa, until the airline suspended operations earlier this year due to financial difficulties. Air Costa’s operating certificate was revoked in Jun-2017.

IndiGo has stated that it sees great potential in launching long haul low cost services. Such operations could be developed organically, however the carrier has also expressed interest in bidding for Air India’s international operations, following the Government of India’s announcement that it plans to privatise the national carrier. Details about how the offer will be structured are not yet known, including whether the domestic and international operations will be available separately.

India’s underserved market demand, combined with the slew of new aircraft orders, means the industry should be set for rapid expansion and diversification. Yet it is equally clear that government prevarication over introducing new, much needed infrastructure has the potential to nip much of this growth in the bud.

This article was adapted from a feature that appears in the latest issue of Airline Leader – the strategy journal for airline CEOs. Visit Airline Leader to find out more.