SEPTEMBER 7, 2006

Asia
By Nandini Lakshman

Airbus and Boeing Vie for India's Skies
With Indian carriers in expansion mode, the Western giants face each other to fill the growing demand for new airplanes

Few corporate rivalries are as heated as the one between Boeing (BA ) and Airbus. The manufacturers are engaged in a mad mating dance with India's flagship and discount airlines alike to lock up orders in one of the fastest-growing aviation markets on the planet.

In late August, the companies committed a combined $2.8 billion in investments over the next 15 years to set up technology centers, maintenance and repair facilities, and pilot training schools in India. This isn't altruism: Indian passenger traffic is clocking about 25% growth rates and is expected to stay that way during the next five years. And some $70 billion in aircraft orders will be up for grabs over the next 20 years, Boeing and Airbus project, as the industry builds out its air fleet.

So it's no surprise bigwigs from European Aeronautic Defence & Space (EADS), the majority owner of Airbus, and Boeing have been winging into India in recent weeks to announce high-profile investments. EADS is interested in both defense contracts (it has already sold anti-missile systems and air-to-air missiles to the Indian military) and airplane orders.

On Aug. 29, it announced plans to spend $2.5 billion in India over the next 15 years, which will include opening an aviation engineering and design unit called the Airbus Engineering Center in the first half of 2007.

FUTURE OPTIONS.  Tom Enders, EADS CEO, made a late-August trip to New Delhi and Bangalore to underscore the company's commitment to India. And Airbus, which has endured a recent management shakeup and troubles with its critical A380 megaplane program, is gaining some serious momentum (see BusinessWeek.com, 9/5/06, "Airbus Shakeup: A Sign of Things to Come?").

"We hold 73% of all future orders and options in India, valued at $22 billion," says Kiran Rao, an executive vice-president with Airbus. The company has nailed recent orders with smaller airlines such as Kingfisher, GoAir and Air Deccan. Airbus has more than 100 aircraft currently in operation in India.

Boeing is also throwing some money around, though not as much. The U.S. airplane manufacturer plans to spend $275 million to build a regional maintenance and repair facility at Nagpur in the Indian state of Maharashtra and holds a grant for a flying school. This is a follow-through move associated with a 68-airplane order placed by Air India in December, 2005, for Boeing 777s, 787s, and 737s that the carrier will use to expand its fleet.

SPICY MARKET.  In fact, just about every Indian carrier is in serious expansion mode at the moment. "The trigger for the investments is the [expected] 25% compound annual growth rate in the aviation sector for the next 10 years, where we will need 1,000 aircraft," says India's civil aviation minister Praful Patel.

Dinesh Keskar, vice-president of sales, Boeing Commercial Airplanes, predicts the U.S. manufacturer will double the current 125-aircraft fleet operating in India by 2011, which would mean about $18 billion in new business. Aside from the Air India deal, Boeing has secured a $700 million order from Air Sahara for ten 737-800 jets and 20 each from Jet Air and Spice Jet, all a mix of 737s and 787s.

Though the U.S. and Chinese aviation markets are far bigger—India has only 256 aircraft in operation—few doubt India has huge potential. About 91 aircraft were acquired in the last 18 months, according to the Center for Asia Pacific Aviation.

Thanks to India's income levels and a young demographic profile, more Indians are traveling domestically and abroad than ever before. Annual passenger traffic was 14.5 million two years ago, but hit 25 million in the year ended in March, 2005. The first quarter of this financial year has seen a 48% surge in traffic, and total passenger traffic is expected to reach 60 million annually by 2010.

UNEXPECTED DEMAND.  This growth wave is also lifting the better-run carriers. "The market has grown rapidly because full-service carriers like us are able to make the most of the increased traveling population," says Saroj Datta, executive director of Jet Airways. And the scale of Indian carriers is growing rapidly. Bangalore-based budget carrier Air Deccan started out with just one ATR Turboprop plane supplied by EADS in 2003. It now wants to take its current 37-aircraft tally, comprising 15 Airbus-320s and 22 ATRS, to 45 by the end of this year.

The carrier expects to double its passenger traffic to 7.5 million over 2005 levels. Already it has managed to grab a 21.8% market share, which is slightly higher than established carrier Indian Airlines. "We have done in three years what took Indian Airlines 53 years," says Capt. G R Gopinath, Air Deccan managing director.

To meet all the expected demand, India not only needs more planes but a huge upgrading of its aviation infrastructure. Unlike China's network of major city and regional airports, India has only 90 commercial airports, of which only half see any serious passenger traffic. Only 10 operate profitably.

LOSSES AHEAD.  At the same time, the number of daily flights nationwide has doubled to 1,200 over the last two years. All this has resulted in major air congestion problems and flight departure and arrival delays. That, in turn, has hurt carrier efficiency at a time when jet fuel prices have soared. Among other industry challenges is a dearth of trained pilots and aviation engineers at home, and ferocious price wars.

Indian officials insist they are on the case. "We will upgrade 50 airports in the next five years," says aviation minister Patel. Even so, Indian aviation as an industry is expected to lose about $350 million this fiscal year, according to the Center for Asia Pacific Aviation.

Indian commercial aviation certainly has challenges ahead, but it is hard to dismiss the long-term growth prospects. The country needs more planes in a hurry, which is ultimately all that matters to Boeing and Airbus. The scramble is definitely on to grab what looks like low-hanging fruit in India for years to come.

Business Week

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