Dino D'Amore
By Dino D'Amore January 14, 2011 10:03


The IndiGo order this week is thought to have carried a discount of around $800 million on list prices putting the value of the order at just under $15bn. IndiGo, meanwhile, is expected to continue to invest which begs the question: Will it go public and offer shares later this year? Watch this space.

IndiGo this week showed that Indian aviation, for all its setbacks over recent years, remains the focus of a huge growing market. Boeing expects the country’s airlines to add about 40 aircraft each year over the next two decades to meet an expected 15% year on year surge in traffic over the next five years and about 8.5% on average over the next 20 years. Last year though passenger numbers surged by some 25%.

Just like China, parts of India remain deeply impoverished, its economic boom is elevating millions into the middle classes, and they are taking to the air in droves and no wonder, long-distance travel used to mean hours on cramped and noisy trains, or on the roof of the same, but rising wages and the liberalisation of the airline market that began in the mid 1990s has given many a choice. But we would be blinkered to think that everything is well and good with Indian aviation.

India’s aviation sector has already stalled, when an over-ambitious expansion a decade ago exposed major airlines to the recent global downturn leaving Kingfisher, Jet and others begging unsuccessfully for a government bailout after suffering huge losses caused by high fuel prices and over-capacity.

What is to stop Indian aviation suffering the same scenario of high fuel prices and over capacity both in the latter half of 2011 and beyond?

Two years ago in India there were too many seats chasing too few passengers. Now, fares are at a level where airlines can make a profit but as aircraft are delivered off order or lease overcapacity will return with a vengeance unless some airlines fold.

Yet Indian aviation suffers the same problems now that it did a decade ago: The airport investment just is not there. You would think that with all the aircraft on order investing in Indian airport construction and upgrade would be a sure thing! New Delhi opened a 2.7-billion-dollar terminal in July last year, but Mumbai has been unable to relieve chronic congestion at its only airport, which is hemmed in by slums on three sides.

So the problem for Indian airport investment? Environmental concerns, difficulties in relocating local people, corruption, a slow legal system and woeful land acquisition legislation leave the system in total disarray. In Mumbai it has taken ten years for backers to finally get the right to build a new airport among mangrove trees on a plot southeast of the city, all at huge expense and cost in time.

It is clear that unless Indian infrastructure is sorted out through root and branch overhaul of government legislation and working practices many of the aircraft now on order will be going nowhere.

Boeing will start building its first MRO center in India next month to take care of the expanding fleet of its customers


The board of flag carrier Air India will next week (19 January) choose from among ICICI Bank, State Bank of India (SBI) and Standard Chartered to refinance a $1.15 billion (Rs5,187 crore) loan taken from a consortium led by IDBI Bank.

“The loan would be a rupee loan and would be backed with a sovereign guarantee,” said an official of the civil aviation ministry. “Air India is looking at raising a loan with an average maturity of 12 years. The carrier is looking at an interest rate of 9%.”

A sovereign guarantee of course gives banks an assurance that the government will repay a loan if the borrower is unable to do so.

The state-owned airline had borrowed the money to buy 21 Airbus aircraft, spare engines, simulators and workshop tools.

This news shows that Air India was not able to use aircraft as collateral which it had typically used for long-term loans. The move to offer a single security follows the government’s decision that the state-run carrier should provide only one kind of collateral. The government has directed Air India to offer a part of its sovereign guarantee to raise working capital loans at cheaper rates.

Air India has short-term loans of Rs19,000 crore and Rs22,000 in long-term loans. This month Air India posted an operating profit of Rs21.66 crore in November. It also said 108 of the 194 flights on the Air India network made a cash profit in November.

Air India and SBI Capital Markets, an arm of SBI, representing a consortium of banks, have approached the Reserve Bank of India with a debt restructuring proposal.

On 19 January, consulting firm Deloitte Consulting India is expected to present the final turnaround plan after vetting similar plans made by Air India, in association with SBI Capital Markets.

Air India is coming out of the woods! Maybe it is time to lobby the government there and invest in airports the rewards could be great.

Dino D'Amore
By Dino D'Amore January 14, 2011 10:03
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