Air India inks Landmark Aviation Deal

In News

• Air India of Tata Group orders the largest ever Airbus and Boeing planes deal to overhaul its flight capacity.

About

• Air India has recently signed letters of intent with Airbus and Boeing for a total of 470 new aircraft, including 70 wide-body planes for long-haul flights.
• The orders involve 40 Airbus A350, 20 Boeing 787 and 10 Boeing 777-9 wide-body aircraft, along with 210 Airbus A320 and A321neo and 190 Boeing 737 MAX single-aisle planes.
• This deal has the potential to rank among the biggest by a single airline in terms of volume, easily topping $100 billion at list prices, including options.
• The first new planes will enter service in late 2023, with the bulk arriving starting mid-2025.
• The deal was announced by Indian Prime Minister Narendra Modi, US President Joe Biden, and French President Emmanuel Macron as a symbol of deeper partnership between the countries.
• Previously, Tata Group and Singapore Airlines had inked the Vistara deal to merge Air India and Vistara is targeted for completion by March 2024.
• India is the world’s fastest-growing airline market, and this deal would contribute to the government’s goal of making India a $5 trillion economy.

Important features of Aviation Deals

• This is the largest-ever pipeline of new aircraft ordered by an Indian airline.
• The deal comes at a time when India has been facing diplomatic pressure from the West over its imports of Russian oil and there is a push to boost domestic manufacturing as part of a broader supply chain realignment after the Covid pandemic.
• The Air India and Airbus deal is a “landmark agreement” and an “important achievement” for the India-France strategic partnership.
• The Air India-Boeing agreement for “over 200 American-made aircraft is expected to support over one million American jobs across 44 states and reflects the strength of the US-India economic partnership.

Aviation Industry of India

• The Indian aviation industry is still attracting investments from the government and private sectors, despite being loss-making.
• At present, Indian Airlines market is dominated by w IndiGo with a share of 58.8% followed by Vistara (10.4%), and Air India (8.4%)
• India is the world’s third-largest air passenger market after China and the United States.
• In FY22 alone, India’s passenger traffic accounted for nearly 189 million, with domestic passenger traffic accounting for over 166 million and international passenger traffic accounting for 22 million.
• The Indian aviation sector is expected to touch 400 million passengers annually in 7-10 years while the government expects the number of air travellers to grow to 40 crores by 2027.
• Despite the pandemic, domestic airlines have continued to add new aircraft to their fleets, and the overall fleet size is expected to almost double to 1,200 in 5 years.

Major challenges

• High operating costs: Aviation Turbine Fuel (ATF) prices account for almost 45% of the operational cost of an Indian airline while the fuel costs for Indian airlines are also significantly higher compared to their global peers.
• Currency fluctuations: Almost 35-50% of Indian airlines’ operating expenses are dominated by US dollars and added to it, the depreciation in the rupee adversely impacts an airline’s bottom-line growth.
• Competition: The Indian aviation industry is highly competitive, with several established players and new entrants vying for market share.
• Price war: The government has removed the cap and floor on airfares for airlines, which may ignite a price war among the air titans.
• Infrastructure constraints: The number of operational airports in India is limited, and the existing infrastructure is under strain due to the rapid growth in air traffic.
• Debt and losses: Due to the pandemic and rising operating costs, Indian airlines have recorded significant losses in recent years with elevated debt levels and losses to several aviation companies in India.
• Regulatory challenges: The Indian aviation sector is subject to several regulations and policies, which often impacts the growth and profitability of airlines.

Importance of Aviation sector

• Economic growth: The aviation sector supports several other industries like tourism, hospitality, and trade, and contributes significantly to the country’s GDP creating job opportunities and stimulates economic development.
• Connectivity: It plays a vital role in connecting the vast geographical expanse of India enabling people and goods to move quickly and efficiently across the country, which is crucial for the development of remote and rural areas.
• Globalization: With the increasing globalization of the world, the aviation sector has become a critical enabler of international trade, investment, and cultural exchange. 
• National security: The aviation sector facilitates the movement of military personnel and equipment, helps in disaster relief operations, and provides a platform for surveillance and intelligence gathering.

Way Ahead

• The Indian aviation sector is essential for the country’s economic growth, social development, and national security. 
• The deal will play a critical role in connecting India with the rest of the world, facilitating trade and cultural exchange.

Source: IE