February 19, 2023

Air India revealed its global ambitions February 14 by announcing the purchase of 220 airplanes from Boeing – with an option for 70 more - and an additional 250 airplanes from Airbus.

The order is an important step in Air India’s transformation to offering “a world class proposition” serving global travelers, said Chairman Natarajan Chandrasekaran in a statement. He made the airplane purchase announcement in a video presentation joined by Indian Prime Minister Narendra Modi and President Emmanuel Macron of France.

While the value of the two orders was not disclosed, they are reportedly worth a total $68 billion. They are hence major orders for Boeing and its engine supplier GE, both based in the United States, as well as for Airbus, based in France, and its engine supplier Rolls Royce, which is based in the United Kingdom.

The airplane purchases were prominently covered by the business media in the U.S. and Western Europe. Their coverage of the fraud allegations against Adani Group, India’s biggest business group, has faded at least for the moment. 

On the same day as the Air India airplane order, Indian Income Tax Officials searched the New Delhi and Mumbai offices of the BBC. The search came weeks after BBC “aired a documentary in the UK critical of Indian Prime Minister Narendra Modi,” BBC reported.

There was no criticism of the BBC search by Macron, U.S. President Joe Biden, and U.K. Prime Minister Rishi Sunak or by their officials. On the contrary, they issued statements thanking Modi for the Air India order.

As a report in The Independent, U.K. noted, that, while the British government has “maintained a stoic silence on the (BBC) matter” Sunak was quick to hail the aircraft purchase announcement as one of his country’s “biggest export deals to India in decades”

Aside from the not-so-subtle political backdrop, the question is whether management can transform Air India into a profitable global airline. 

In 2022, the Tata Group bought back Air India from the Government of India for $2.4 billion - $2 billion in assumed debt and $400 million in cash. This was after the government assumed the airlines’ remaining accumulated losses of $7.4 billion. The airline, which was founded in 1932 by JRD Tata, was taken over by the government in 1953.

Founded by Jamsetji Tata in 1868, the India-based Tata group comprises of 30 companies including Tata Consultancy Services (TCS), Tata Motors, Tata Steel and Tata Consumer Products. Together their annual revenues exceed $100 billion, have a market value of more than $300 billion and employ over 800,000 in 100 countries. TCS, an information technology business, accounts for roughtly half of the market value of the Tata Group.

Two thirds of the equity of Tata Sons, the holding company, is held by philanthropic trusts, which support education, health, livelihood generation and art and culture. 

By next year, other Tata owned airlines are expected to merge into Air India. Together they have a fleet of 218 aircraft, making it India’s largest international carrier and second largest domestic carrier. Air India will also control 4,400 domestic and 1,800 international landing and parking slots at domestic airports, as well as 900 slots at airports outside India.

India is seeing sharply rising demand for air travel. The number of airline passengers, both domestic and international, rose from 17 million in 2000 to 168 million in 2019, before the pandemic lockdown, according to The World Bank..Demand is expected to continue rising by about 20% a year for the next couple of decades.

While Air India will get the first deliveries of the new Boeing and Airbus airplanes later this year, the bulk of them will join its fleet after 2025. This will increase its capacity and that too with more fuel-efficient aircraft, with modern safety equipment and passenger amenities.

On the operation side Air India will benefit from the expertise of its partner Singapore Airlines (SIA). Following the combination, SIA will own 25% and invest $250 million in Air India. “Tata Sons is one of the most established and respected names in India,” Goh Choon Phong, Chief Executive Officer, Singapore Airlines, said in a statement when the merger of the various Tata airlines was announced last year. “With this merger, we have an opportunity to…unlock (Air India’s) significant potential, and restore it to its position as a leading airline on the global stage.”

But, as the huge cost of Air India’s purchase order shows, the airline business is highly capital intensive. Also, Air India faces intense competition. In the domestic market, IndiGo, based near Delhi, India, has more than half the market share, double that of Air India. Like Air India, IndiGo is also expanding its fleet.

The annual number of international passengers traveling from India is about 22 million. Typically, such passengers are more lucrative for the airlines. But the destination for the bulk of Indian travelers is Doha, Sharjah, Dubai, Abu Dhabi, and other cities in the Middle East, where there are about eight million Indians working as temporary migrant labor.

In 2022, roughly thirty percent of India’s international travelers flew on Qatar Airways, Air Arabia, Emirates and Fly Dubai, which are all owned by Kingdoms in the Middle East. About a quarter flew on Air India and its discount airline Air India Express while IndiGo carried 15% of the flyers.

So, to fill its new planes Air India will have to compete aggressively in the domestic market with IndiGo and other smaller Indian operators like SpiceJet, and in the international market with the Middle Eastern airlines as well as IndiGo. This means Air India will have to offer competitive, if not cheaper, ticket prices as well as improve its service.  

On the cost side, Emirates and the other Middle Eastern airlines are backed by Kingdoms with a large financial surplus from their oil and gas exports. Hence, they likely buy their airplanes at a big discount by paying cash or by using low-interest debt. Air India will have to use debt to buy the new airplanes and that too likely high-interest debt, given that it has no history of operating on a large, global scale.

In addition, the Middle East airlines have a major operating cost advantage. Based in major oil exporting countries, their fuel costs are far lower than that of Air India. India imports 80% of its crude oil.

On the labor side, the bulk of the staff of the Middle East airlines are from South Asia. To be able to hire the best Indian talent, Air India will have to match the salaries, especially that of Emirates which is rated among the top five airlines in the world for service.  

For decades, most private airlines lost money including on international routes, mainly because much of the capacity was owned by airlines run by various governments. The government-run airlines were viewed as providing a key infrastructure service to a nation’s economy and hence not expected to make profits.

Around 2010, the situation changed, at least for the U.S. airlines, because they began charging a wide range of extra fees: for better seats, checked luggage, food, headphones, drinks, and other items. But Air India may be unable to follow this strategy given the competition, especially from its well-funded Middle Eastern rivals.   

Warren Buffett, Chairman of Berkshire Hathaway, has amassed a net worth of $107 billion, largely through his investing skills. In his 2007 letter to shareholders, Buffett wrote, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers (who built and flew the first aircraft in 1903).”

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