Air India's Boeing 787 promotional video

by Devesh Agarwal

Through non-official channels a promotional video by Air India of their new Boeing 787. Now that the airline has a new toy to play with, all the 777s procured just a few years ago lie forgotten and rotting on the tarmac. Read my op-ed piece here. You can also see our cabin walk-though pictures and video here.

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Opinion: Approving AirAsia-Tata airline will derail goals of FDI in aviation policy

by Devesh Agarwal

The announcement that AirAsia is joining hands with the Tatas and Bhatias with the intention to start a new airline in India will put the a significant policy dilemma in front of the Government of India related to foreign direct investment (FDI) in civil aviation by foreign airlines, and might just land-up derailing the goals of the fledging policy.

While the policy is not explicit, so as to avoid any problems before the Competition Commission of India (CCI), the policy is framed to help the weak balance sheets of existing India airlines, and more importantly the banks, many of them government owned, who have already loaned vast sums of money to this sector.

When the cabinet approved the policy on September 14, 2012, the press statement said

"......there has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure"

Two weeks after the policy was announced, India's civil aviation minister, Ajit Singh, told the Business Standard

“We are not giving licences for greenfield airlines. As of now, FDI (foreign direct investment) in aviation can come only through existing airlines."

Indian civil aviation minister Ajit Singh.

The statements and policy are logical.

Thanks to years of regressive policies of the Indian government, and the ludicrous taxation structure, especially on aviation fuel, Indian carriers carriers' balance sheets are awash with red ink.

Air India has over $10 billion (over Rs. 55,000 Crore) in liabilities, while Kingfisher Airlines is in for over $3 billion ($16,000 Crore).

Even the country's more "financially stable" carriers like Jet Airways and SpiceJet has are stress situations with skewed financial ratios, and growth strongly hampered by a lack of capital.

With much of the money being siphoned in to Air India, and the financial implosion of Kingfisher, Indian financial institutions neither have the funds, nor the appetite, to lend any more to the airline sector. FDI is needed.

However, if foreign airlines are allowed to set-up new greenfield airlines, they need not risk investing in the existing airlines. They can start fresh, with no liabilities, benefit from not making or suffering past mistakes of operations or policy, bring in expertise and massive financial strength, and blow away the fledgling domestic sector.

We have already seen this happen in the international sector, where the government in its infinite "wisdom" required Indian carriers to operate for five years before they could fly international, while allowing even newly formed foreign carriers to operate to India, thus giving foreign carriers time to establish themselves with nil to minimum competition. Today, Indian carriers are restricted to the sidelines, while the unofficial national carrier of India is not Air India, but Emirates; with India contributing over 11% of the airline's total capacity. No small feat, considering Emirates is the world's third largest airline by seat capacity.

India's largest private carrier, Jet Airways, is negotiating with Abu Dhabi based Etihad to sell them a 24% stake for about $300 million (Rs.1,600 Crore), which is a premium considering Jet's total market capitalisation (mcap) is just Rs.4,575 Crore. Just as a comparison, AirAsia Berhad mcap is Rs. 12,842 Crore.

Jet leads Indian companies with a sky-high debt to equity ratio of 84 times, almost 1,000% of the next company in the list, or 4,300% of the 1.95 of AirAsia). Its total debt is in excess of Rs 11,030 crore. Thanks to losses over the years, the company's reserves have depleted almost 50%, thus declining equity, and leading to the increase in the company's debt to equity ratio. The airline needs to raise equity capital by inviting FDI from foreign airlines.

Earlier this week, the Chairman of Etihad, Sheikh Hamed bin Zayed al-Nahyan, delayed the deal citing concerns on policy flip-flops by the government. How will Etihad view an approval to an "India AirAsia"?

That will have to be gauged in the time to come, but, for certain, allowing foreign airlines to set up greenfield airlines will have a negative impact on the attractiveness of existing airlines, and by extension the health of their debts, and the health of the Indian financial sector.

Even as an unabashed believer in capitalism, in my humble opinion, while an "India AirAsia" will lead to lower fares and more competition, ultimately it will be we tax-payers who will be left holding the proverbial bag as the government will be forced to bailout the banks.

Allow foreign carriers to set-up greenfield airlines, but after a period of time, may be three years, for now, get them to invest in Jet, IndiGo, SpiceJet, GoAir, and if the government ever comes to a logical sensibility, Air India.

I am advocating the same approach as of Mr. Ratan Tata, a leading member of the "Bombay Club" which over 20 years ago, proposed a similar go slow approach on liberalisation.

As usual, your thoughts, comments, feedback and counter-views are welcome.

The video below is a panel discussion on FDI in civil aviation, soon after the policy announcement, from NDTV. If you cannot see it on mobile or on the RSS feed, please visit the main Bangalore Aviation website.

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OPINION: Aviation at a Crossroads

The past couple of years have not been kind to the global aviation industry. Whether it’s the European union implementing a misguided carbon taxation scheme, the Indian government crushing its nascent airline industry under the weight of oppressive regulations and heavy fuel taxation, increased “NIMBY” (not-in-my-backyard : a term used to describe local residents who oppose aviation development near their residences)” activity in the west holding back growth in the airline sector, or a global airline industry plagued by rising fixed costs and softened demand in the face of the Global financial crisis, there is little doubt that the headwinds faced by the global airline industry are amongst the worst in its history.

Yet despite the apparent irrelevance of the airline industry to our daily lives, its potential decline has profound implications for my entire generation. To start with, it is important to define the essential role that aviation plays in local communities and in the economy as a whole. According to the Federal Aviation Administration (FAA), in 2011 civil aviation alone contributed to and supported more than $1.3 trillion in economic activity as well as 10 million jobs. These estimates ignore the thousands of jobs and billions of dollars in economic activity created and supported by military aviation; both directly in the air force, as well as in the thousands of companies involved in the supply chains of building and maintaining military aircraft for use both at home and with our allies abroad. In several communities, airlines, airports, and aircraft manufacturers are an important source of jobs- especially because positions in the former two sectors can’t realistically be outsourced.

On a more visceral level, the airline industry has contributed heavily to global and US economic growth. The most important aspect is that it makes sharing ideas, knowledge, and skills much easier. In the past, if you wanted to collaborate on a project with a group of engineers from Tokyo, it would take them days, even weeks to cross the Pacific by boat. But thanks to the miracle of modern aviation, you can now have them by your side in less than 24 hours, and at a reasonable fare to boot. This enhanced dissemination of knowledge and know-how has helped drive economic growth around the world, increasing the standard of life for everyone. On a more basic level, air cargo allows precious, time-sensitive, and/or valuable goods to be shipped around the world almost instantly – carving out new markets for exotic fruits and goods, as well as American exports. In today’s America, when unemployment amongst my peers is close to 15%, we can ill afford to lose the jobs provided by directly by aviation, let alone the many more indirectly made possible by air travel and air freight.

On a societal level, we all benefit when different cultures and viewpoints are brought together at common locations to discuss, integrate, and assimilate. Some of the best things about life in America (“Gangnam Style,” basketball, even apple pie) are foreign inventions brought here by immigrants. It is absolutely critical that we continue to make the world more interconnected, so that we can maximize the quality of life of all of the world’s citizens. It is no accident that as the aviation world has developed over the last few years; the degree of global integration has grown exponentially alongside. And in an increasingly uncertain environment which has led many economists to question whether the economy will even grow at all moving forward (or if we have settled into a “Great Stagnation”), cutting off a source and facilitator of economic activity makes little sense.

On a personal level, it kills me to see an industry that I love so much slowly be slowly squeezed to death (though there are bright spots like the United Arab Emirates and Singapore) by incompetent governance and an oblivious populace.

 And the threats to global aviation are numerous and diverse in nature. Part of the trouble is the incessant obsession with carbon dioxide emissions, and the general effect of environmentalism. According to the International Energy Agency (IEA), global aviation accounts for just under 3% of global greenhouse gas emissions (GHG). Yet the European Union proposed an invasive and expensive carbon tax, guaranteed to reduce airline activity and harm not only its own aviation industry, but those around the world. Environmentalists, because of their insistence on protecting each and every animal regardless of the cost, have effectively prevented the expansion of John F. Kennedy International Airport in New York, because the only viable option is to expand onto protected wetlands on Jamaica Bay. This lack of suitable airport expansion in the NYC area has in turn held back aviation development, as the number of flights at each New York City airport has been capped.

But because the runway capacity in the area is insufficient, there is now a huge backup of flights (planes lining up to land on runways) and an extraordinary amount of delays in the NYC airspace. The greatest irony of the situation is that now, tons upon tons of extra carbon dioxide emissions are being spewed into the air because the flights are forced to wait in line with their engines on at the airport or in the air. Many climate scientists would argue that this actually has a greater environmental cost than the loss of a few square miles worth of wetlands which could alleviate, if not solve outright, the problem. But the threats to aviation extend beyond inconsistent and incoherent environmental opposition. In recent years, the political power of so called NIMBYs has expanded. Around the world, especially in the great European cities like Frankfurt (where local residents passed a poorly thought out curfew for flights that decimated Frankfurt’s air cargo industry – likely creating more jobs for the superhubs in the Middle East) and London (where a combination of environmental, governmental, and local opposition to building a third runway at already slot restricted London Heathrow Airport threatens the place of London as a hub in the future aviation hegemony), but also in places like Philadelphia (where local residents are desperately trying to expand the constricted Philadelphia International Airport’s capacity). Admittedly, these residents are affected by airports in the region, but I have problems with using this as an argument to halt development.

The first is that in most, if not all cases, the local residents moved to the region after the airport was built there – they should have been aware of the risk that airports can expand and grow in importance. But more importantly, the needs of the few (local residents around airports opposing development typically number less than 1% of the population of the metro area that it serves) should not outweigh the needs of many. In times of crisis, like our economy today, it makes little sense to sacrifice new jobs and economic activity that would benefit the general region for such limited benefit.

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Opinion: India's government should allow A380 operations into India

Late last week, a report published in the Business Standard suggested that India’s erstwhile Ministry of Civil Aviation may finally loosen its rules governing Air Service Agreements (ASAs – or bilateral) by removing the aircraft type clauses from such agreements and restricting only seats,  frequencies, and route pairs allowed. What this means in effect, is that there would no longer be a ban on carriers such as Lufthansa and Emirates operating the Airbus A380 superjumbo into India.

Lufthansa applied last year to operate its 526 seat A380s between its largest hub in Frankfurt and India’s busiest international airport in Delhi. However, its application was denied by the Indian Ministry of Civil Aviation, on grounds that no carrier be allowed to operate an aircraft larger than Air India’s current fleet of 747s (in effect allowing no change to the current language of the Germany-India ASA, which allows Lufthansa to operate 747s of any type including the 747-8 to India).   Emirates is currently the largest non-Indian international carrier, and given its stated desire to increase its seat offering to India by 52% in the next few years. Other operators of the A380 including British Airways and Singapore Airlines might be interested in operating the type into India.

This editorial can be read as an open letter to the Indian Ministry of Civil Aviation and even to Dr. Manmohan Singh.  Mr. Singh, the positive reforms that you helped design in the 1990s helped usher in the current era of Indian prosperity. Now is not the time to seize up; continue to increase economic freedom and make the changes that will allow Indian economic growth to continue. There are those who think that allowing Emirates in particular to operate the A380 into India will have a detrimental effect on the Indian airline industry, pushing a group of airlines currently in a tenuous state of profitability back into the red, and turning beleaguered national carrier Air India into an even bigger money pit.

Admittedly, there will be an adverse financial effect on India's airlines, especially at the beginning, when they are ill prepared to deal with the incredibly low unit costs of the A380.  Jet Airways and SpiceJet in particular may see their profitable international operations flip into the red, while Air India's poorly designed international operations will be further decimated. This will cause some temporary pain. Wages and employment will be cut, domestic route networks might be pared with no international operations to cross-subsidize them, and the once robust fleet growth in India would likely die down.

But in the long run, this will result in a better Indian airline industry. Perhaps Jet Airways will be unable to compete with the lower costs from Emirates  (though Lufthansa'a A380s will likely help Jet given the ever growing ties between the two airlines). At the same time, maybe Jet Airways makes the necessary changes (reconfiguring aircraft into a more dense configuration, removing first class from long haul aircraft, improving onboard service, streamlining operations, et.al) to become competitive with Emirates. Most people are familiar with Dawin's theories of evolution (i.e. survival of the fittest); opening up India's airline market to the full brunt of international competition will result in a stronger airline market in the long run. In a scenario where India's airlines must compete or go bankrupt, only the most financially viable airlines will survive, resulting in a financially solvent industry.

Moreover, it is important to keep in mind that the ultimate goal of air travel should not only be to create a strong Indian airline industry, but rather to ensure that Indian travelers have the most options for air travel at the cheapest price.  In the end, if Indian's get cheaper fares for their travel to the US, Europe, Africa, and Latin America, it will be beneficial to economic growth and to the quality of life for Indians. International air travel is ultimately an ends to a mean; it exists so people can easily travel to and from their foreign business ventures (or to bring foreigners into India for business), or to allow people to travel abroad for leisure or to visit their families.  When these people pay cheaper fares to travel abroad (and vice versa when foreigners pay cheaper fares to come to India), it grows the economy. The more cost efficient it is to move people to and from India, the more likely foreign businesses are to grow their presence in India. As international air travel becomes cheaper, trade also increases. Lowering international fares will attract more tourists, and will allow the tourists that already come to India to spend more money on buying goods and services in India.

So allowing the A380,  with its lower unit costs and lower fares, will be beneficial to the economy. And as Indian economic growth has slid beneath 6% for several quarters, the government must act in the interests of the broader economy and the 1.3 billion Indians, not in the interests of a few thousand airline employees. Do the right thing; allow the A380 for international flights to India. 

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Your opinion: Topic of the week: Will the 787 Dreamliner revive Air India's fortunes?

After much delay Air India has finally taken delivery of its first Boeing 787-8 Dreamliner aircraft.

The airline has taken out full page advertisements in most major newspapers across the nation, extolling the virtues of the aircraft.

There are many short-comings at the airline that need correcting. The most important being political and bureaucratic meddling and micro-management of airline operation. This meddling is showing up in the form of an idle Boeing 777-200LR fleet, which has a very poor seat configuration resulting in imbalanced operating economics. The procurement of these aircraft were forced on the airline by political bosses. The employees of Air India are not blameless with poor and indifferent attitude and militancy in high gear.

Can the Dreamliner salvage the fortunes of Air India? Share your thoughts. Post a comment.

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Opinion Poll: The on-going pilot's strike at Air India; share your views

The topic of the week is the on-going pilot's strike at national carrier Air India by members of the Indian Pilots Guild (IPG) which began last month on the 7th making this strike almost a month old.

The strike has caused estimated losses exceeding Rs.350 Crore ($64 million) to airline. This at a time when the airline is on life support, receiving a desperately needed equity infusion of Rs. 1,200 Crore ($219 million) just to pay long pending salaries and critical vendor dues (oil companies, airports, etc.)

In a bold move the airline has sacked over 100 striking pilots and even the courts have ruled the strike illegal. The civil aviation minister Ajit Singh has held out an olive branch saying pilots concerns will be addressed. Now the IPG is continuing the strike demanding that all sacked pilots be re-instated by the airline before they stop striking. To read the view of the IPG, please see this article by Aeroblogger Rohit Rao.

In addition to requesting your comments, this week we have an opinion poll, allowing you to share your views. Please vote in the survey. The other option is provided with a text box to explain your choice, if other than yes or no.

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Opinion: Bold admissions Mr. Singh. Now please free Air India

The newly travelling youngsters may not have the pathos, but the Maharaja of national carrier Air India is a brand cherished by most persons of my age, with ties to India. We remember, with pride, the fact that Air India was the first all jet airline in the world; one of the earliest adopters of the Boeing 747 jumbo jet and the Airbus A300. We cherish the warmth and grace of days gone by, and then we are dragged in to the present and land, with a thud, on the dismal state of affairs at the airline today.

Sloth rules the daily operations, political interference is the mantra, petty factionalism hollows the foundations like termites sucking the resources of the airline without a care for the consequences.

Every so often, one puts aside rational thinking and tries to feel some sympathy for Air India, hoping against hope, for some optimistic future for the beleaguered airline, and then Air India delivers, with amazing regularity, a dose of bad news; and it is almost always, self-inflicted.

Over the last few days the airline is being blackmailed by the striking Indian Pilots Guild (IPG) representing erstwhile Air India pilots, who want exclusive access to the Boeing 787 Dreamliner, blocking the re-training of their pilot "colleagues" from the pre-merger Indian Airlines, despite a Supreme court ruling to the contrary.

It borders on criminal, that such petty issues are being used to justify the cancellation of almost the entire international schedule of Air India, causing it daily losses already in the hundreds of crores, less than a month after the government has committed a whopping Rs. 30,000 Crore ($6 billion), taxpayer funded, bailout of the airline, an amount greater than the central government's outlay for the health department this year.

The IPG is a perfect example of the political and labour aristocracy nexus that plagues Air India. This pilot's union's is led by Jitendra Awadh, who is not a pilot, but a career politician from the same party of former civil aviation minister Mr. Praful Patel, during whose tenure, Air India went from profit, to annual losses topping $1.5 billion.

Unlike Mr. Patel who ducked last year's scathing indictment by the Comptroller and Auditor General (CAG) of his ministry's operations, the current minister Mr. Ajit Singh made some refreshingly candid admissions during his interview with Karan Thapar on CNN-IBN. (Watch the 22 minute video here.)

He accepted that government should not be in the service industry, especially a specialised one like an airline. He accepted that the days of a government owned national carrier are long gone. He accepted that the merger of Air India and Indian Airlines, forced through by Mr. Patel, and considered one of key reasons for the ills of Air India, is still only on paper, far from complete, and receiving only lip service at best.

Undeniably true statements Mr. Minister, but then, when you admit government's inability to run an airline, why keep perpetuating the folly by insisting on government control of Air India's operations? When you admit that government owned national carriers are extinct like dinosaurs, why pretend to try and revive Air India, that too, under government interference?

Sir, if you truly believe in your admissions, and I believe you do, you need to abandon all this pretence that is at the heart of Air India's problems. Stop throwing good money after bad. Stop this criminal waste of taxpayer money, which is on the surface ostensibly committed to revive the airline. Stop protecting "past managements".

Air India has still has some capable people, but they are drowned out by the hordes of political lackeys that have infected the airline over the years. Unlike your many predecessors, you have shown your resolve by not bowing to the blackmail of strikers, now you need to raise the sense of responsibility up a notch. You have to isolate and remove all the causes of failure, in all quarters, right from the ministry to the doorman at Air India's office.

Air India can be revived, but never while its operations are under government control. Yes, it will be a herculean effort to loosen the stranglehold of the vested interests, but it can be done. If not full privatisation, take a leaf out of Mumbai, Delhi, Bangalore, and Hyderabad airports and commence with PPP (Public Private Partnership).

Use the PPP route to transparently auction and place Air India's operations under private control. Give that private management the freedom to run the airline, and deliver the benchmarks, goals, and results you have already demanded from and agreed to with Air India.

It is time to free Air India Mr. Singh.

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