The Hindu Business Line : Aircraft acquisition — Indian Airlines' long wait is over

INDIAN AIRLINES' long wait for new aircraft is finally over. After a long struggle, when the airline's market share dipped from almost 66 per cent in 1997-98 to close to 38 per cent at the end of 2004, finally on September 7, at a joint press conference, with the visiting British Premier, Mr Tony Blair, the Prime Minister, Dr Manmohan Singh, announced that the Government had cleared the airline's proposal for acquiring 43 Airbus aircraft in a deal valued at more than $2 billion.

The airline board had cleared the proposal for acquiring 19-Airbus A-319 aircraft, four A-320s and 20 A-321s at an estimated cost of Rs 10,089 crore in April 2002. In November 2004, the Public Investment Board (PIB) cleared the project at a cost of Rs 9,475 crore.

The price of acquisition came tumbling down by Rs 614 crore with the dollar falling from Rs 49 when the Indian Airlines board approved the proposal to around Rs 46 last November thus helping in bringing down the cost of the project.

However, some Parliamentarians raised questions about the cost of the acquisition as a low- cost airline in the Far East had acquired a similar mix of aircraft at a lower price. The matter was then referred to an empowered Group of Ministers (e-GoM) headed by the Finance Minister, Mr P. Chidambaram, to have one final round of talks with Airbus Industrie and engine manufacturer CFM to get a better deal. These talks were held in New Delhi on September 6 and the deal was announced by the Prime Minister the following day.

Post-negotiations with the e-GoM, the deal will now cost Rs 9,890 crore, down from the earlier estimate of Rs 10,237 crore. Besides, Airbus and CFM have agreed to increase the counter trade commitment to 40 per cent from the earlier 30 per cent and the European aircraft manufacturer has also agreed to set up a maintenance, repair and overhaul facility and a pilot training centre.

Indian Airlines will, however, have to wait till for a formal communication from the Government before it can start final talks with Airbus for the deliveries to begin. It is only after the formal Government Order is received will the airline invite Airbus for signing a Memorandum of Understanding (MoU) after which a Purchase Agreement will be signed that will set out delivery details and specifications for the aircraft. At least two of the aircraft — the Airbus A-319 and A-321 — that the airline will be acquiring will be brand new to the fleet.

Now, Indian Airlines has a fleet that includes Airbus A-300s that at the beginning of July had an average age of 22.8 years, while the Boeing 737 aircraft have an average age of 23.9 years. In comparison the Airbus A-320s are much younger, at 13.9 years.

The arrival of all 43 aircraft could be another first for the airline as never before in its long history has it operated a single aircraft type fleet. Now, the airline has a mixed fleet of Airbus, Boeing and Dornier aircraft. However, whether the arrival of the new aircraft alone will help the airline win back market share is under some debate.

There is a feeling in some sections that the airline personnel will also have to undergo some re-training to keep pace with the market dynamics. The airline is unlikely to face a problem in finding cockpit crew to operate the new aircraft as several co-pilots will be ready to take over as commanders and several trainees as co-pilots.

It is possible that of the three types of aircraft that Indian Airlines plans to induct, the Airbus A-319, which will replace the Boeing 737 aircraft in the Alliance Airways fleet, will arrive first. However, senior airline officials say that IA has the flexibility to decide which aircraft it should get first.

The new fleet will also give airline the flexibility of deciding what aircraft to fly on which routes depending on passenger load. At the time the airline board cleared the project, senior Airbus officials had emphasised the beneficial impact of the `cockpit crew commonality' that allows a pilot who has operated one variety of aircraft to operate another just as well.

But before that happens, Indian Airlines will also have to start work on a host of issues including deciding on what type of seats and interiors each aircraft should have. The airline will also have to decide whether it wants to go in for in-flight entertainment systems as that provided by some private domestic airlines.

For example, Kingfisher Airlines, which also operates the A-320 aircraft, offers each passenger a personalised screen and headphones broadcasting five video and 10 audio channels. Similarly, Air Deccan offers drop down television screens; it also operates the Airbus A-320.

As for financing, it is proposed that 90 per cent of the foreign exchange component of the project cost, excluding the cost of training, will be funded by External Commercial Borrowings (ECB). Besides, the rupee component, the cost of training and 10 per cent of the foreign exchange component of the project cost are to be financed through internal resources.

The financing mix would be decided in consultation with the Ministry of Finance. Considering the excellent track record of discharging the debt liability, Indian Airlines is unlikely to face any difficulty in arranging aircraft financing and commercial loans at the most competitive rates and terms.

In addition, the airline board has also approved a proposal for raising resources through an Initial Public Offer (IPO). The airline has also received bids from merchant bankers for taking the process forward and could enter the market either by the end of this year or early next. What is likely to help the airline is not only the proposed IPO, but also the Government's commitment to providing the airline with Rs 325 crore as additional equity infusion.

Linked to the acquisition of aircraft, this will be released after final approvals are obtained. However, provisions for this have been made in the Budget Estimates for 2005-06. Besides, the Government's decision to provide a sovereign guarantee for the project will also help the airline.

While things are falling into place for Indian Airlines, the first aircraft to join its fleet is still some time away. Once the state-owned airline signs the purchase agreement with Airbus it will take 12-15 months for the aircraft to be ready.

Once the first aircraft is ready a team of engineers and operational staff will inspect the plane before taking delivery. And it is only then that the aircraft with Indian Airlines colours will roll out of the assembly line in Toulouse in France, and wing its way to India.

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