If you turn the pages of the visitor’s register at Air India’s temporary headquarters in PVR Star Mall in Gurugram near Delhi, you will find scores of entries made by 20-somethings who are either appearing for job interviews or are coming for their induction after having been selected. It is an indicator of the rise in interest in the airline after it was sold by the Indian government to the $128-billion Tata group in January 2022.

“We have witnessed approximately 30 per cent increase in Air India’s bookings post-privatisation. We are optimistic that this surge will drive demand and create a positive sentiment for the airline,” says Sabina Chopra, Co-founder & COO, Corporate Travel & Head of Industry Relations at online travel agency (OTA) Yatra Online. And after February 14, when Air India announced two mega orders totalling a world-record 470 aircraft (Airbus and Boeing combined) as part of its ambitious expansion plans, it is likely to see much more action—both as an employer and a provider of aviation services—not only in India but also globally.

So big was the order that it even saw the heads of state of France and the US voicing their approval. French President Emmanuel Macron highlighted the deal’s significance for his country in Prime Minister Narendra Modi’s presence. And US President Joe Biden, in a statement, said that the deal would result in supporting over “one million American jobs across 44 states, and many will not require a four-year college degree”. “Geopolitics also played a role in the order as the European and American governments realised India was fast emerging as the new growth centre to rival China,” said a person privy to behind-the-scenes deliberations. In the run-up to the announcement, aggressive bargaining over pricing and back-room diplomacy involving Paris and Washington were witnessed across multiple locations, others in the know told Business Today.

The fact that more competition is coming and the market may be maturing, is good. India’s aviation market is big; it’s growing fast and offers space for multiple airlines

Pieter Elbers
CEO
IndiGo

Reportedly, Air India has the option to acquire another 370 aircraft under the same terms from the world’s leading plane makers. If it exercises that option, the size of the deal would expand considerably to a whopping 840 aircraft. To understand how big that is, consider that the total number of commercial aircraft flying today in India is 717.

Another interesting aspect of the deal is regarding the engines that will power these aircraft. While the wide-body A350 planes will come fitted with engines from the UK’s Rolls-Royce and the B777/787s will utilise engines from the US-based GE Aerospace, all narrow-body aircraft will be equipped with CFM engines, a 50:50 partnership between France-based Safran Aircraft Engines and GE Aviation. The carrier is expected to start receiving the planes from mid-2025, making it battle-ready to take on the competition in India as well as globally. As part of Vihaan.AI—a transformation programmme to reclaim Air India’s position as a world-class airline—the carrier has defined a target of 30 per cent share of the domestic market over the next five years.

Welcoming the deal, Jitender Bhargava, former executive director of Air India, says, “It will be an Indian carrier harnessing the potential of growth within India. Hitherto, it was the Gulf and the Southeast Asian carriers who were funnelling traffic from different points in India to their hubs and then flying them over to Europe and the US.” The deal also serves to assert the Tata group’s role where they have the “right capacity, deep pockets and, most importantly, the right vision”, he declares. According to Sriram Gopalswamy, Vice President of Site Reliability Engineering & Managing Director of Sabre Global Capability Centre, the deal will have a far-reaching impact on the Indian airline and travel industry whose ripple effects will be felt for a while.

“Other airlines are likely to follow suit, as they, too, recognise the value of investing in new and efficient aircraft to boost their competitiveness and provide enhanced travel experiences for their customers,” says Gopalswamy. Indeed. There is already considerable buzz around the country’s newest scheduled airline Akasa Air placing a second aircraft order with Boeing later this year (Akasa currently has 15 aircraft and 57 due to be delivered), while no-frills carrier and market leader IndiGo is currently working on a significant deal to acquire wide-body planes to match Air India. With Indian aviation expected to grow at a fast clip over the next few years, one can expect more headline-grabbing orders in the medium term.

One word that describes Air India CEO Campbell Wilson, as one speaks with him, is ‘affable’. As he slowly lets his guard down, he also disarms you with his strategic clarity. Since the 52-year-old took charge at the airline last June, it has registered a 27 per cent increase in the number of operating aircraft, added new destinations to its network, achieved a dramatic reduction in call centre handling time, processed a significant number of outstanding refunds, undertaken large-scale recruitments, and inked lease agreements for 36 new aircraft to fulfil its immediate requirements.

The deal [Air India’s aircraft order] also serves to assert the Tata group’s role where they have the right capacity, deep pockets and, most importantly, the right vision

Jitender Bhargava
Former Executive Director
Air India

Explaining the carrier’s pre- and post-deal strategy, Wilson says, “The first is short-term, which will happen this year and the first half of next year—it is about largely bringing in leased aircraft. We have [taken] 36 aircraft on lease, 16 of which are going to be wide bodies. And they give us an immediate capacity boost.” From mid-2024-25, the carrier is expected to spend nearly $400 million in refitting its entire wide-body fleet of Airbus and Boeing aircraft. That will include new seats and in-flight entertainment. Thereafter, a substantial part of deliveries of the new orders would start in 2025. “By mid-2025, every aircraft in the Air India fleet will either be retrofitted to modern standards or will be delivered with modern standard products,” he says.

Within hours of the deal being announced, analyst estimates on its list price wildly varied from $70-$110 billion. Wilson recently clarified the ticket size of the deal was more than $70 billion. Except for confirming that they had negotiated hard with OEMs, Campbell declines to divulge any further details, with a smile and a twinkle in his eyes. Meanwhile, industry sources say that his team haggled hard to obtain the best bargain. If an estimated discount of 55 per cent is deducted from the amount given by Wilson, its actual size comes to $38.52 billion. Till the Air India order, the country’s largest carrier by market share as well as fleet size, IndiGo, had crafted the world’s sweetest deal with aircraft maker Airbus in 2005, when it had ordered 100 aircraft even before launching operations. “In terms of absolute price, it can’t be an apples-to-apples comparison as aircraft prices go up with inflation. But in terms of the amount of discount, they may have done better than IndiGo because OEMs like Airbus and Boeing like to see a mix of narrow and wide bodies rather than an order for a single type of aircraft,” says an industry insider requesting anonymity.

On how Air India would finance the humongous order, Wilson says they are examining all options as the aircraft assets acquired will have an operational lifecycle of 15-25 years. “We have a long time available to return the capital on investment. Secondly, this opportunity for financing goes beyond equity. Aircraft acquisition, for example, is a very liquid market.” Aviation experts say the order may be financed through a combination of mechanisms such as sale-and-leaseback (SLB), finance leasing and outright purchase, as the order pans out over 10 years till 2035, with accelerated aircraft induction expected in the initial years. “This will entail pre-delivery and the final acquisition financing. We estimate that a majority of the narrow-body fleet will be financed via the SLB mechanism, while the wide-body fleet will involve finance leases or an outright purchase,” says Satyendra Pandey, Managing Partner at aviation advisory AT-TV. “These can involve a combination of bank financing, support from western export credit agencies such as EXIM Bank and ECGD, and bond issuances.”

Ajay Kumar, Managing Partner at Gurugram-headquartered KLA Legal, explains that in an SLB model, the lessee will sell the equipment to a lessor and lease it back immediately for commercial use. “This helps the airline generate some liquidity and at the same time get the opportunity to use the equipment. Other Indian airlines such as IndiGo have adopted this route successfully,” he says.

Ajay Kumar
Managing Partner
KLA Legal

In addition, Singapore Airlines has agreed to invest $250 million as part of the transaction to merge Vistara, its joint venture with Tata Sons, into Air India. Plus, Tata Sons’ backing is expected to help with a strong credit rating to obtain a competitive rate on financing.

Meanwhile, a big move towards internal integration is afoot at Air India. “We have got two concurrent integrations,” says Wilson. “One between the two low-cost airlines, Air India Express and AirAsia India, and the other between the two full-service airlines, Air India and Vistara. We will end up with one full-service and one low-cost airline group.” At the same time, Wilson rules out the possibility that any of the existing 11,000-plus staff would be retrenched because of the integrations. “We have been very clear throughout this process that Air India has very ambitious growth plans both for its full-service and low-cost businesses. There will be opportunities in the new group for anyone that wants them,” he remarks emphatically. “Everyone should be excited about the opportunities that it brings for the nation, for the airline and also for their individual careers.”

Wilson says the carrier has so far been adding 100 pilots and 500 cabin crew per month. In addition, another 1,500 people have joined the company in non-flying positions such as in ground services. “We have taken a little bit of a pause at the moment because whilst we go through this process of merging AirAsia and Air India Express, and are planning for the merger of Vistara and Air India, we want to ensure that everyone in the group has a position and a future,” says Wilson.

This will also ensure that the existing staff is retained even as the company absorbs new talent, making Air India a big job creator. As per the standard formula followed in civil aviation, while a narrow-body aircraft creates 100 direct jobs, a wide-body one creates 120. Thus, factoring in Air India’s order for 400 narrow-body aircraft and 70 wide bodies, a total of 48,400 direct jobs are expected to result from the deal. And as far as the number of direct-to-indirect jobs is concerned, factoring in the ratio of 1:2 calculated by the Ministry of Civil Aviation for India, another 96,800 opportunities will be created in areas such as aircraft engineering and travel & tourism. “This deal will directly impact the Indian talent industry by creating tremendous employment opportunities across various domains. We expect at least 10,000 new jobs in both tech and non-tech roles to be created in the aviation sector in the next two years in the country,” predicts Sachin Alug, CEO of staffing solutions firm NLB Services.

Jagannarayan Padmanabhan
Practice Leader & Director-Transport & Logistics
CRISIL Infrastructure Advisory

After the two integration processes are completed, the group will operate with two airline brands—Air India and Air India Express. The step is essential for ensuring highly synergised operations of the full-service and low-cost entities. A significant part of the domestic market will be served by the low-cost Air India Express, which will provide onward connectivity on domestic routes to international passengers arriving by the full-service Air India. Similarly, Air India Express passengers taking an overseas flight will be offered connections on Air India’s routes. “Ultimately, we want the group to operate as one network, distribution and sales platform, so that we can provide the best in terms of the cost structure and the product for the relevant markets,” says Wilson.

India, though, has had a chequered history of airline mergers. The 2007 integration of Air India and Indian Airlines, and between the now-defunct Kingfisher Airlines and Deccan Air threw up enormous challenges. However, Wilson is confident that the interconnectedness of the four group carriers would help in ensuring a smooth integration. “Air India Express and AirAsia India are very complementary. The former has an international footprint and the latter has a domestic footprint. Bringing the two together brings scale and network opportunities. And given the more modern platform of AirAsia India, it allows us to support the future LCC’s growth.” The same also holds in the case of Air India and Vistara, he avers. “Air India was on relatively old IT systems. They have been progressively modernised to be similar to what Vistara has. Again, there is integration, where their domestic strength and domestic product can uplift Air India and vice versa.”

With each passing month, air travel sentiment continues to gain strength. Domestic air traffic is now running at pre-Covid-19 levels, while international air traffic has recovered to 90 per cent. Domestic airlines carried 12.54 million passengers in January 2023 as against 6.41 million during the corresponding period of 2022, according to data from the aviation regulator, Directorate General of Civil Aviation (DGCA). “Besides short-haul destinations in the Middle-East and Southeast Asia, long-haul destinations like the US, Canada, and Australia, too, are showing healthy demand and growth in numbers. These numbers should get even more robust with increased capacity and flight options,” says Saujanya Shrivastava, COO of Flights and Gulf Cooperation Council at India’s largest OTA MakeMyTrip.

Satyendra Pandey
Managing Partner
AT-TV

Air India is banking on this growth in the long haul. While its narrow-body aircraft will operate domestically as well as to destinations in the Gulf and Southeast Asia, its wide-body fleet will be operating long-haul flights to particularly Europe and the US to further consolidate its presence on those routes, where IndiGo barely has a presence. “Strategy is more about prioritising what not to do. Where is the competition weakest? In the international long haul! So, the first order of things is to consolidate and raise entry barriers there,” says the industry insider.

However, IndiGo currently enjoys a robust presence on regional routes within India, and it won’t be easy to displace it from that position anytime soon. “Regional short haul may come only when the task of achieving profitability on current services has been completed. Also, the essence of competition is to do things better than your competition, not necessarily doing what they do,” says the insider. Jagannarayan Padmanabhan, Practice Leader & Director of Transport & Logistics at CRISIL Infrastructure Advisory, also feels that Air India’s immediate focus will be on the international long-haul markets. “At the regional level, while on an absolute basis, the volumes could be significant, the coverage is quite dispersed. We can expect IndiGo to maintain market leadership in this space for the medium term. It will also be prudent for Air India to compete in this space at a later date and not vie for any elbow room currently.”

At a time when most observers await an anticipated dogfight between Air India and IndiGo with bated breath, Pieter Elbers, CEO of IndiGo, sums up the emerging market dynamics aptly. Responding to a BT query on the inevitable competition from Air India a few months earlier, he had remarked, “The fact that there is more competition coming in and the market may be maturing, is a good thing. India’s aviation market is big enough; it’s growing fast and offers space for multiple airlines to operate.” He had said that IndiGo would continue to build on its network to face the competition. “Competition keeps you alert and focussed.” In response to Air India’s order, IndiGo is looking at leveraging its orders of 500 aircraft placed with Airbus during different periods in 2011, 2015 and 2019 for future expansion while finalising the contours of its wide-body order. Furthermore, fresh orders from airlines in the world’s fastest-growing aviation market are helping global aircraft makers tide over slowing sales induced by the Covid-19 pandemic and geopolitical turbulence following the Russian military action in Ukraine.

Echoing his competitor, Wilson is equally bullish about India’s untapped prospects: “India, in total, has less than 50 wide-body aircraft and Air India has almost all of them. A country like Singapore has 150! If you look at the population that we have, the economic growth, the geography and the diaspora, the opportunity to support a much larger fleet of aircraft is absolutely obvious.” It is this underlying environment and opportunity that has led Air India to make a huge investment in a new fleet.

In the process, it has not only given a lease of hope to a struggling global aircraft manufacturing industry, but also helped India buttress its geopolitical relations with key partners like the US and France.

Collateral benefit, we say.