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Muhammed Yılmaz

Will India Replace China as the Aviation Industry’s Growth Engine?

Issue 15 - 2023
Will India Replace China as the Aviation Industry’s Growth Engine?

Following months of negotiations, Air India, which is restructuring under the umbrella of the Tata Group, announced that it has signed deal to purchase 470 new aircraft, worth more than $100 billion at list prices. Unsurprisingly, the orders were split between two giant manufacturers, Airbus and Boeing.

Air India will buy 250 aircraft from Airbus and 220 from Boeing. The orders placed with Airbus include 210 single-aisle A320neo family and 40 wide-body A350s. The order package for Boeing comprises 190 737 MAXs, 20 787 Dreamliners and 10 777Xs.

This historic order, which comes at a time when international air travel is seeing a significant uptick following COVID-19, seeks to make Air India one of the biggest carriers in the world.

The global civil aviation industry owes its growth in the 2010s to China. China became a critical market for the two giant manufacturers Airbus and Boeing and acted as a catalyst for the industry's growth. Now, considering the recent developments in India, the question on the minds of almost the entire industry is the same: "Will India take over China's role in the 2010s for the growth of the aviation industry in the 2020s?"

A Noteworthy Detail in the Order Package: Pratt & Whitney

Given the Tata Group's plans to revive Air India, such a record order package has long been anticipated. When we look at the details of the package, the 34 orders for the A350-1000, whose sales figures have not been very good thus far, are quite remarkable. However, the choice of engines for the 400 narrow-body aircraft that were purchased was the most notable detail.

Compared to 800 Leap engines, Air India ordered zero Pratt & Whitney Geared Turbofan (GTF) engines.

The industry's confidence in GTF's performance is evident in this decision from India, especially in light of all the recent concerns that have been raised.

India is a Sleeping Giant!

India is a huge country of diverse lifestyles, but it is also a sleeping giant. The country is projected to grow at an average annual rate of over 10% over the next 10 years. The growth trend is particularly seen among the middle class. This might have an impact comparable to what China had ten to fifteen years ago. When the 2008 financial crisis plunged giant aircraft manufacturers into deep turbulence, China almost all alone kept them alive. The most significant component of this positive impact of China on the industry is its population. China's demand has increased to the point where it now consumes a quarter of all passenger aircraft built worldwide each year.

For the aviation industry, India is a huge market. There is an established market with a large number of low-cost airlines. However, it is difficult to claim that Indians have been able to enjoy the benefits of their aviation industry investments thus far.

How will Boeing-Airbus Approach India?

Air India's orders have not yet been finalized and entered the order books of the manufacturers. Only letters of intent have been signed as of yet. Consequently, the status of the orders is unclear. A portion of the aircraft in the package will come from leasing companies. It is possible that the A350-900s will come from those previously manufactured for Aeroflot, and likewise, some of the 737 MAXs will come from aircraft that the Chinese haven’t yet received.

It is highly uncertain whether Airbus and Boeing, which have been experiencing supply chain issues for a long time due to the pandemic and the subsequent sanctions imposed against Russia, will be able to satisfy Indian demand when it becomes official.

Air India's orders seem to be spread over enough time to avoid additional pressure on Airbus’ and Boeing's supply chain. Putting aside the A350-900s for Aeroflot, A350-1000s will start arriving towards the end of the 2020s. The same applies to the A320neo and A321neo. These will start to join the fleet in small quantities in 2027 at the earliest. Deliveries will increase gradually. Therefore, it would be wrong to claim that Air India's orders will make the current supply chain issues worse.

The good news for Airbus from this order package is that there may be a long-term demand boom for high-capacity narrow body aircraft. Another positive development for the overall industry is that the demand for wide-body aircraft is on the rise again. We have seen this most recently with the order for 100 787 Dreamliners placed by the U.S. United Airlines. We may soon see a significant increase in A350 order from Riyadh International Airlines (RIA), which is getting ready to launch in Saudi Arabia.

The orders from Air India have led to new decisions within both Boeing and Airbus. Following Air India's order, American manufacturer Boeing has decided to expand its investments in India. To increase support for airlines and improve logistics, Boeing has invested $24 million to establish a support center for airlines. The center, which is anticipated to hire nearly a hundred people, will offer technical workshops to improve aircraft performance.

Boeing estimates that the fleet sizes of Indian carriers will nearly quadruple between 2019 and 2041. Boeing recognizes the need for a more robust service network in the world's fastest growing aviation market.

Airbus, on the other hand, has taken action to increase the monthly production of its wide-body aircraft. The company's move is reportedly to be part of its strategy to profit from the rising demand for long-haul travel around the world as well as Air India orders.

During the pandemic, Airbus was forced to reduce the production of its wide-body aircraft due to the severe impact of travel restrictions and border closures, and airlines attempted to cancel or postpone previously placed aircraft orders.

Airbus is expected to increase the monthly production of the A350 from five to six, and the A330neo from two to three. These figures, however, are significantly lower than pre-pandemic production levels. Ten A350s and four A330neos were produced each month prior to the pandemic.

For now, Airbus has no plans to establish a final assembly line in India. Airbus currently manufactures aircraft at its Mobile plant in Alabama, the U.S., and in Canada, France, Germany, and China. No new plants are expected to be established.

This decision could make it more difficult for Airbus to realize its goal of getting a bigger share of the pie in the Indian market. For the time being, the European manufacturer intends to stave off this process by expanding its supplier network in India and increasing the volume of business it offers to them. It's uncertain whether this strategy will be viable in the long run.

India Should Solve the Visa Problem!

The weakness of Air India, a kind of state-owned company that was quite inefficient and very poorly managed, was very well exploited in the last couple of decades, which was one of the factors in the growth of the Gulf airlines. Therefore, Air India must compete with the Gulf carriers if it wants to revive and succeed. And this is a very challenging goal for them. This can only be accomplished with a solid strategy over a long period of time. And perseverance is a must in following this strategy. At this point, the Indian bureaucracy needs to get rid of its idle state. The long clearance procedures required even for the smallest issues, the difficulty in getting slots at Indian airports, and numerous other issues create a significant waste of time and reluctance.

In the past, India had one of the most stringent regulations governing aviation services as part of its strategy to defend Air India. But now, Air India will need improved bilateral relations as a country if it truly wants to grow and become one of the top carriers in the world. This also entails India's opening up to the outside world, which will consequently create more competition.

The criteria for obtaining a visa and the complete visa procedure are further examples of how complicated the Indian bureaucracy is. If India wants to create a bridge between home and abroad, it must solve the visa issue. Obtaining an Indian visa is quite complicated. It is not one of those countries where you can board an aircraft whenever you want and obtain a visa at the airport. Therefore, it appears that Air India will face significant issues due to this protracted bureaucratic process, even if the business becomes much more effective and lucrative following the aircraft orders.

If we look at recent history, there are many negative instances, such as Jet Airways, SpiceJet, Kingfisher, and the list goes on. One of the reasons why Boeing produced many MAXs and was unable to deliver them was that some of the aircraft were built for Indian airlines that went bankrupt. In other words, a challenging process awaits Air India in every sense.

Come, Make in India!

Focusing on domestic production has been a new trend and topic of discussion in India. Realizing that they are a huge market not only for the defense industry but also for commercial aircraft, Indians are developing various strategies to replace Airbus and Boeing aircraft with ones they design and manufacture themselves.

Over the last decade, the slogan in the country has been clear: "Make in India!" This slogan exudes a strong sense of self-confidence. India is a market that Western defense companies have long been interested in. However, the lack of sufficient infrastructure makes doing business in this country challenging.

India recently increased its military expenditures from $64 billion to $72 billion, a rise of 12.5%. This budget is substantial. India currently has the third-largest military budget in the globe.

The procurement allocation in this is $20 billion. However, the majority of this $20 billion is reserved for the domestic industry. If you are a domestic supplier or have a successful joint venture in India, it is simple, otherwise it is challenging. Because a maximum of $5 billion out of $20 billion is accessible by foreign suppliers.

In conclusion, finding a domestic partner is essential if you want to suceed in India.

India is a quite complex country. It is China's rival and Russia's ally. Unlike China, U.S. defense companies can sell to India. Boeing and Lockheed Martin have developed significant bilateral relations in India over the last two decades. Both have major joint ventures with Tata, a giant Indian corporation, and have projects in the pipeline. Boeing is building the P8 for India, the Apache fuselage is produced in India and exported to the world. The equipment for the Chinook helicopter is manufactured there. Lockheed Martin produces the tail part of the C-130 in India. Likewise, Airbus has quite large operations in India. Even though these are all critical parts and components of aircraft, they do not make up the entire aircraft.

Recently, there has been some strain on India's budgets as well. Especially the currency has been depreciating a lot. In the previous year, the Indian Rupee's worth against the US Dollar decreased by about 10%.

This is one of the reasons why domestic initiatives are prioritized. Because countries with tight budgets invest their resources in producing goods. That's what countries like Malaysia, Spain, Italy is also doing. When budgets get tight, instead of buying or borrowing from foreign competitors, the defense budget is used as a domestic investment, which boosts the economy. Jobs are created, technology and skills are developed. Since taking office, Modi's focus has been on funding domestic initiatives.

No one wishes to ignore the enormous promise of the Indian market. It is challenging for India to get what it needs in such a short amount of time, especially if issues arise with China or Pakistan. Countries like India are sometimes considered to have a “slippery slope.” Wheels can fall off if there is a minor shift in the government or in the policies.

Although India has had issues with its infrastructure for a long time, it is evident that both the infrastructure and the expertise of Indian businesses have significantly improved over the past 20 years. So perhaps things are changing.

Let’s conclude by answering the question we posed at the outset. It is uncertain whether India will replace China in the 2010s and take the burden of the aviation industry on its own. However, it is certain that we will be discussing much more about Indian aviation industry in the following 20 years than we ever thought 

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