Airlines in India and the Risks of Large Aircraft Orders

The aviation segment is abuzz with speculation of a large aircraft order of 250 to 300 aircraft by Air India. This would not only signal a commitment by the Tata Group to staying the course with its airline ambitions, but also addressing a key challenge with its current portfolio, namely: fleet economics.

The overall strategy will only be clear once the details are known. Specifically, how many orders are firm versus options, timing of induction, and minimum delivery commitments, to name a few. However, despite the group’s good credit quality, aircraft orders also carry associated risks and these risks require planning. Indeed, some airlines have placed large orders only to find that they are unable to absorb the orders – a result that is a double-edged sword.

Why airlines place large orders

Large orders allow for volume discounts and ensure a steady flow of aircraft while ensuring the right aircraft are available for deployment. But ordering aircraft also requires a thorough understanding of the market, including an assessment of technology transition, mission requirements, and market-specific risks.

In India this strategy was first exploited by Indigo who placed an order for a whopping 100 Airbus aircraft in 2005. This was followed by additional orders in the following years and as of now Indigo is on a order flow for approximately 550 aircraft. Additional orders cannot be excluded.

These orders were and are largely financed by the sale-and-leaseback method which has become the cornerstone of Indigo’s overall strategy. While other airlines have attempted to replicate this strategy, many take a myopic view. That is, the order must be considered in the context of the overall business and on other parameters they are considered insufficient. Order volume is only part of the overall equation and order risk should be assessed against several elements, including airline balance sheet strength, network, management capacity, flexibility orders and engagement with suppliers.

While Indigo’s ordering strategy has been successful and has been copied in part by competitors, there are also counterexamples where ordering risk has led to large capital calls and rapid balance sheet deterioration. . There are examples like Air India, AirAsia Berhad and Etihad.

Orders have inherent risks

Aircraft represent the highest capital cost for any airline and aircraft orders, by their very nature, require a long-term planning horizon. Planning includes aircraft type, aircraft combination, aircraft specification and liquidity on aircraft type. Risk mitigation is all about looking at the time horizon, staying true to the mission, and not giving in to “over-specification” of the aircraft. Competitive maintenance contracts, unit economics, and TCO assessment are also essential. These are just a few items in a complete list where no item can be overlooked. Because over time they add up to give exponential results, whether positive or negative.

Aircraft orders also require the ability to finance the orders. There are several methods for this, each with its advantages and disadvantages. Collectively, Indian airlines have used a combination of financing mechanisms ranging from export credit to sale-leasebacks to outright purchases. Over the past decade, Indian airlines have opted for sale-leaseback method due to its cash accretive nature. Yet sale-leaseback is also an expensive form of financing and, in an environment of tight liquidity and rising interest rates, it poses new challenges. New methods of financing must take into account macro-economic trends and specific market challenges, including the fluctuation of the rupee, contract enforcement costs and rising inflation.

The inability to fund orders impacts the market as suppliers adjust the market risk premium, driving up costs for everyone. And there are examples such as Jet Airways, Kingfisher and Air Costa which had large orders in the pipeline at the time of the shutdown which led to such results.

Indian airlines are sitting on surplus planes

As Indian airlines position themselves for a post-pandemic reality, aircraft orders will continue. An additional order, in addition to that of Air India, cannot be ruled out. But orders also carry the risk of absorption and the inability to find financing on favorable terms has a significant impact on the entire sector. Although this is not a result one would expect and certainly not with a group like the Tatas, it still needs to be planned for.

Orders coupled with a cash crunch also lead to an outcome where some airlines engage in sale and leaseback transactions to make profits on the aircraft in the short term, but end up with levels of reduced asset utilization or the inability to deploy those assets profitably. The consequential impacts on the market are even more detrimental. Deployment is also limited by the fact that our airports have not been able to position themselves as hubs and aviation policy has ceded key bilateral rights to a point where foreign carriers can deploy capacity and reduce demand that otherwise would have traveled on Indian airlines. . As such, the possibilities for international deployment remain muted at best. A solution requires the alignment of multiple stakeholders, but by all indications this will not happen in the short to medium term.

As of this writing, Indian airlines are collectively sitting on aircraft orders of over 950 aircraft. With an additional order from Air India, the market will have over 1,200 aircraft on order, which translates to a ratio of approximately 1.7 aircraft on order for every aircraft in flight. And many planes are larger variants, which means extra capacity. Even assuming double-digit market growth, the absorption of these orders, particularly by airlines with weak balance sheets and poor credit quality, remains uncertain.

Satyendra Pandey is the managing partner of aviation consultancy AT-TV. The opinions expressed are personal.

First post: STI

cnbctv18-forexlive-benzinga -Sp

Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.
Back to top button