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By Vinay Bhaskara and Devesh Agarwal
Last week, media reported that the board of Air India’s board had recommended the ailing national carrier cut its order for Boeing 787 Dreamliners from the original ordered 27 aircraft down to 12
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| Air India aircraft at Mumbai CSI airport |
Last month, the Comptroller and Auditor General (CAG) published a scathing financial audit of Air India that questioned the merits of Air India’s 2005 order for Boeing wide-body aircraft. Of that order, Boeing still has to deliver 27 787s and 3 777-300ERs.
Ever since the CAG report, the entire management, bureaucratic and political leadership, especially in the Ministry of Civil Aviaiton is walking on egg-shells.
In September, civil aviation minister Vayalar Ravi, claimed that Air India was incapable of buying all the 27 aircraft worth nearly Rs. 18,000 crore (US$ 3.6 billion).
From a narrow view point, the minister may be right, but when we look at the broader context, cancelling even a part of the order is a big mistake.
While we outline the reasons for our opinion below, it is clear that Air India needs the new aircraft, if for no other reason, to correct many wrongs in the fleet procurement commenced under this very same order, initiated by the previous minister Mr. Praful Patel.
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| Air India Boeing 777-300ER VT-ALN at London. |
From this current order of 68 aircraft, Air India has eight Boeing 777-200LR (Long Range) in a 8 first, 35 business and 195 economy class config (8/35/195), 12 Boeing 777-300ER (Extended Range) in a 4/35/303 configuration, two Airbus A330-200s, and four Boeing 747-400s in a 12/26/385. Three 777-300ERs are still pending for delivery. The Boeing 777’s feature full lie-flat first and business class seats. Lie-flat seats may be common in first class, but very few airlines offer this comfort in business.
Perhaps the most obvious argument in favor of purchasing the 787s is that Air India’s route network is practically crying out for a mid-sized twin-aisle aircraft in the 200~250 seat capacity.
The 777-2000LRs, while of this size, have been designed for ultra-long haul (ULH) flights of 16 hours and greater. The 777-200LRs were profitable only when oil prices were in the sub $50 per barrel range. With today’s sky-rocketing oil prices, even global powerhouse airlines from the oil rich middle-east find it difficult to justify ULH flights, that too with about 50% of the aircraft devoted to premium classes. Purchased to offer non-stop flights to North America, a fantasy Mr. Patel sold to his cabinet colleagues, the LRs are the biggest money drain on the airline and have never made money. On shorter distances the LRs are just too heavy, not carrying enough passengers to make money for the carrier. i.e. Air India HAS to use the LRs for long distance flights only.
Regional destinations such as Hong Kong, Singapore, Tokyo, Shanghai, the Gulf, and even longer-haul destinations such as Paris and Melbourne would be served far more efficiently with the Dreamliner than the current fleet of 777s and A330s.
The 787 is at least 10%~20% more fuel efficient than any aircraft in Air India’s current fleet. Even with recent concerns over fuel burn due to the first batch of 787s being overweight, the 787 still promises 5-10% advantages in seat-kilometer fuel costs; not an insignificant figure for Air India, whose fuel bill can represent up to 50% of operating costs.
Earlier this year, against an Indian expectation of $1 billion, Boeing had offered about US $500 million in compensation to Air India for its 787 delays. While Air India declined that compensation, claiming, almost ludicrously, that its losses due to the 787 delay were close to Rs. 6,000 crore (US $1.5 billion), it can still receive a substantial compensation from Boeing if it takes delivery of the entire order. Any tinkering with this order will open an escape gate for Boeing to slip away from the compensation.
For a cash strapped Air India, compensation from Boeing for the 787 deliveries, which should be demanded and settled up front, is equivalent to an equity infusion, an action the government is still currently pondering.
As with any sale, freebies, incentives and off-sets, were provided during the heat of negotiation. Any seller will look to recover the cost of these freebies, by immediate income on the sale, long term income by way of maintenance and other on-going services, etc. A reduction in the order reduces these benefits the seller gains.
Now under the calm aftermath, these incentives are at risk of being frittered away with a potential change in the order. As an example, Boeing had agreed to supply a 787 training simulator worth almost $100 million free of charge. Now, Boeing has indicated it will not supply the simulator free if the order is reduced.
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| The first Boeing 787-8 Dreamliner operated by All Nippn Airways |
With some of its faults, the Boeing 787 Dreamliner is probably the most desired passenger jetliner today. In an era of high fuel prices, the 787’s tangible fuel efficiency gains mean that numerous airlines around the globe are willing to pay premium prices for early 787s.
Air India should leverage this demand.
Without a shadow of doubt, Air India must commit to all ordered 27 Dreamliners.
The airline may choose to use only 12 of them for its own use. Air India can sell the balance aircraft or effectively sell the delivery slots to other operators who are keen to operate the 787. Air India obtained competitive pricing as an early customer of the 787 and airlines are willing to pay a premium to get a Dreamliner. Air India stands to make a handsome profit along the way.
In January 2010, during the economic slowdown, Jet Airways sold its brand new Boeing 777-300ER VT-JEL MSN36563 since the airline was over-capacity. After the aircraft made its first flight in July 2009 (see videos here), it was promptly parked in the desert in October. Jet never took delivery of the aircraft, the ownership and registration reverted back to Boeing as N834BA and was sold to Abu Dhabi Amiri, a VIP flight operator, and registered as A6-SIL.
Selling the surplus aircraft will produce multiple and immediate financial benefits for Air India. At the same time, by keeping the original order of 27 aircraft intact, in so far as Boeing is concerned, all of Air India’s benefits like the simulator and delayed delivery compensation claims will remain intact, producing between $500 million to $1 billion for the airline.
A more risky alternative, is to use the 787s to replace the 777-300ERs on a one-to-one basis. After a certain period of implementation, the 787s can be used to replace the 777-300ERs on regional and medium-haul routes. 777-300ERs are a very desirable aircraft in the leasing world right now. Jet Airways is estimated to be earning at least $1 million to $1.25 million per month leasing its Boeing 777-300ERs to Turkish Airlines and Thai Airways. If leasing is not an option for Air India, it can sell the aircraft off to help finance 787 deliveries. However, given the tendency to sloth and corruption with Air India and government this is not a desirable strategy.
Without a doubt, the current Boeing fleet is a weight around Air India’s neck. Along with the surplus 787s, Air India would be well advised to get rid of the 777-200LR aircraft even if this means conducting a fire sale and incurring losses. The carrier can off-set the losses with the profits made on sale of the 787s.
With virtually no premium class passengers, Air India needs to change the cabins of its Boeing 777-300ERs. Remove the first class completely. In a few aircraft provide for one row (six seats) of business class, and increase the rest of the aircraft in to economy class.
Make a few aircraft an all economy class high density configuration i.e. 30 inch seat pitch which will increase the seating to 400+ seats. Operate these aircraft on the gulf sectors in a low fare model, and pack the aircraft to capacity. Instead of killing the Indian market, take on the gulf carriers — Emirates, Etihad, Qatar, and all the others head-on with the low fares.
We still have some doubts on the marketing capability of Air India, and whether it will be able to fill these high density aircraft, but if the airline can achieve this, it will have a multiplier effect on the airline’s fortunes.
The proposed sale and lease-back of the proposed 12 Dreamliners is being met with scepticism in the industry. Many an observer fears the black hand of corruption ensuring sale of the aircraft at very low prices and leases-back at highly inflated prices. One does not have to spell out what happens with the difference.
Do you feel our proposals are achieveable? They do require some bold thinking and an unwavering commitment to Air India — in Air India management, the mandarins in the various government departments, and the Ministers. Do you feel the commitment and thinking is there?
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