WebSify
Follow us on
Mail
Print

The Dreamliner has landed. Now, will it save Air India?

Source : BUSINESS_STANDARD
Last Updated: Mon, Sep 17, 2012 19:24 hrs
Air India's first Dreamliner arrives Delhi

On 12th September, Boeing's much-delayed 787 Dreamliner touched down at Delhi airport amid a water cannon salute to join Air India's ailing fleet. An elated Civil Aviation Minister Ajit Singh, who has been upbeat that the 27 Dreamliners, all of which are expected to be delivered by 2014, would be game changers, said, "We hope that the Dreamliner will take Air India back to its good old Maharaja days."

For Boeing, Air India (AI) is just one among the 57 customers which have ordered the hi-tech aircraft. For AI, however, it represents its one shot at flying clear of the financial mess that it has found itself mired in over the years.

A much-delayed boon
Because of the nearly four-year delay in its scheduled delivery, Boeing has agreed to pay a compensation to Air India which could be the equivalent of getting four of these aircraft almost free (the order cost AI $110 million). While that's something that cash-starved AI will not be complaining about, the Dreamliner represents more than just a temporary cash influx.

The 256-seater aircraft - six more of which will be delivered by the end of this year - becomes the national carrier's most potent weapon. With less than 20 per cent market share, AI has been losing ground to international carriers like Emirates, and, even Jet Airways - which, for instance, is bigger than AI on lucrative routes like London. AI bleeds money on virtually every international route it flies.

So, how exactly can the Dreamliner become AI's magic weapon? The aircraft claims 15 per cent more fuel efficiency than competing similar aircraft and cheaper maintenance costs. With the induction of these planes, AI will have an edge over its more aggressive rivals, like Jet Airways, which will be saddled with older aircraft and get deliveries of their own Dreamliners only in 2014. It's a competitive edge which AI can easily leverage.

Alleviating mismatches
However, there's a more serious problem with AI that the Dreamliner alleviates The national carrier, as a result of the delay from Boeing, has been stuck with a serious problem - a mismatch between the kind of the aircraft it has and the places that it flies them to. Its major problem today is that it flies aircraft meant for long distances on middle-haul destinations and aircraft meant for short-haul on middle-haul destinations.

For instance, AI flies the Boeing 777-200 LR, which is a long-range aircraft optimised to fly non-stop for over 15 hours, to middle-haul destinations which take under 10 hours to reach, like Frankfurt, Paris, Hong Kong and Shanghai. A top AI executive says that to break even on these routes on a 777-200 would require a passenger load factor of 90 per cent, which is impossible. That is because they are fuel guzzlers, weighing 112 tonnes more than a Dreamliner.

However, the Dreamliner, which is optimised to fly for around 10 to 13 hours, could replace the 777 on these routes and start making much needed cash. AI officials say that it would cost the company 25 per cent less per revenue passenger kilometre if the 777 is replaced by the Dreamliner on these routes. "The Dreamliner, with its appropriate seat configuration and fuel efficiency, will be a potent weapon to give AI the competitive edge in international skies," says Kapil Kaul, who heads the operations of Centre for Asia Pacific Aviation in India.

Similarly, AI flies the A320 family of aircraft on routes like Singapore and West Asia. On its Singapore route, for instance, AI flies the A319 with only 100 seats because it carries more fuel. Obviously, it cannot make any money here

Instead, now the Dreamliner can be deployed on high-traffic routes, such as those in West Asia. Apart from offering more seats (compared to the 122 to 170 seats in A320 family including A319 and 321), it will be far more fuel efficient. An AI director involved in the route planning of Dreamliner had said last year: "AI has over 60 A320 family aircraft out of which about 30 per cent are deployed in middle-haul routes. The plan has been to replace at least 25 per cent of the fleet from A320 by Dreamliners."

New horizons
The new aircraft will also open up new routes which AI was previously not able to service. It is already planning to fly non-stop to Sydney and Melbourne, as it is a virgin market and no other airline does so. Says a senior executive in the route planning department of a leading airport: "As many as 550 passengers fly from Delhi to either Sydney or Melbourne from Delhi alone every day. They take indirect flights which take 22 to 38 hours. A direct flight could be a game changer. AI could put in two aircraft and still go full."

Also, with business booming between China and Africa, there are potential markets which AI would, of course, tap. In China, while AI flies to Shanghai, it does not go to Guangzhou - the trading hub of the country. However, low-cost carrier SpiceJet has already received permission to fly directly to this city, spotting an opportunity in the large traffic flow that, for now, get there indirectly via Hong Kong or other southeast Asian destinations.

AI has also been a small player in the European market, limited to only three destinations - Frankfurt, Paris and London - having ceded ground to international players like Lufthansa group, British Airways and KLM which reign supreme. Even Jet Airways, with a hub in Brussels, and inter-line agreements with European carriers, has been able to increase its presence in this market. AI executives say that they are now looking for the Dreamliner to fly to new markets like Milan, Rome, Barcelona and Brussels, to name a few.

Miles to go…
However, the big question is, will the deployment of the Dreamliner be enough to turn the company around? For many, the answer is no. They argue that the economics of AI's much-touted flights to the US has serious problems. They continue to haemorrhage the maximum amount of money, making a loss of over Rs 1,500 crore in 2009-10. What's worse is that its direct flight, serviced by a new Boeing 777-200, lost over Rs 482 crore in the same year. The reason: AI expected that since it was the only direct flight that the airline offered, people would pay a premium on fares, but that did not happen.

Second, unlike other international airlines which make good money on their business and first class seats because they shore up overall yields, AI's performance has been a disaster - its passenger load factor ( PLF) in first class is an appalling 12 per cent, and in business class, 27 per cent, though it has fewer seats compared to other competing players. However, good international carriers have more than 50 per cent PLF on these classes.

Third, the failure to get into the Star Alliance, which would have given it seamless access to the world, could be a key deterrent, even after it deploys the Dreamliner. Especially, when all its international competitors, and now even Jet Airways, are likely to join the party.

Many aviation analysts also argue that AI's failure to be nimble-footed and prepare a contingency plan when it was clear that the Dreamliners would be delayed, has put its finances in jeopardy. They point that the airlines could have leased out more A330s - which have similar seating and fuel efficiencies to the 787 - in the interim period. But, it got only three, which was not enough to cover the various routes.

Says former AI director Jitendra Bhargava: "AI was hoping to get a premium on its non-stop flights. But, that never happened and they under-priced the product. And ask AI what it will do with the Boeing 777s which are only two to three years old if they replace them with the Dreamliners?" Bhargava adds that Qantas decided to postpone delivery of the Dreamliners because of its precarious financial position. Ironically, AI's finances are worse off but it has no problem inducting new planes.

AI's answer is to lease out five of the eight Boeing 777-200. But, despite trying advertising from January to find an airline willing to lease their aircraft, and an aborted attempt to get a deal finalised with Air Canada, according to industry, the carrier has failed to make headway. Says S Venkat, director of AI: "We have re-tendered. There are some problems with the economics of the aircraft". Another option which is being looked at is to go for an outright sale.

Yet, airline experts say that the problem with the 777 is in its seat configuration - it has 238 seats, while most other carriers who use these aircraft have many more. According to data on the Emirates websites, which also flies the same aircraft type, its 777 has both 290 as well as 346 seats, which is a two-class configuration. Even Delta has 274 seats.

Many airline experts say that that the Dreamliner cannot be the answer to AI's problems at all. "When has an aircraft changed the fortunes of a company? AI needs to aggressively market its products. Two years from now, the Dreamliner might meet the same fate as many of its other aircraft," says Bhargava.

Will the Maharaja prove all of them wrong?

blog comments powered by Disqus
most popular on facebook
talking point on sify finance