India8217;s air travel growth spurs jet orders

GoAir also placed what by any normal standards would have been an eye-catching order for 72 Airbus jets at 6.6 billion. It8217;s been a frenzy in Paris with orders from India proving that the industry is in pretty good shape8230;It8217;s all part of the continuing shift in economic power from west to east,said BGC Partners senior strategist Howard Wheeldon.

India8217;s airlines have orders worth 40 billion in the pipeline,but analysts say their ability to pull through to taking delivery could be tested by high fuel taxes,poor infrastructure,debt and frequently rising interest rates.

As of today it seems far fetched that they need so many aircraft because India does not have infrastructure to handle this,said Kishor Ostwal,chairman of Mumbai8217;s CNI Research. We have to see if we can have the infrastructure to support another 300 to 400 aircraft in coming years. Even today airlines in key metro routes do not get slots to land in time and this pushes up operating costs further,Ostwal added.

There have been improvements,such as the country8217;s longest elevated expressway linking the congested city of Hyderabad to its airport. But analysts say there is much work ahead.

Connectivity remains inadequate through much of India,and airport infrastructure is non-existent in many smaller cities.

Still,airlines are growing their fleets as demand booms in India,where an economy growing at nearly 9 percent is spurring business travel and a burgeoning middle class long accustomed to traveling by rail is now increasingly opting for air. And with a population of over a billion,India does need more planes.

At the beginning of 2000,there were 100 large passenger aircraft in India for 1 billion people; now there are 300 aircraft for 1.2 billion. The ratio is extremely small,said Kiran Rao,executive vice president for sales at Airbus. Over the same period the backlog of airplanes on order has exploded from just 12 in 2000 to well over 500 after the show.

By contrast,China,which is itself poised for dramatic growth,starts off with 1,400 large jets for 1.3 billion people.

India8217;s largest private carrier Jet Airways state-run Air India and low-cost carrier SpiceJet have over 12 billion worth of orders,with more in the pipeline.

OVERSEAS LOANS

Indian carriers,whose fares are usually comparable to U.S. prices,are cutting fares to compete with railways,which enjoy a far more comprehensive infrastructure network,covering much of India,and have offered a cheaper way of travel for decades.

Indians have the lowest propensity to travel by air of the BRIC countries,making less than 0.1 trips per capita in 2009,on a par with Belarus and Senegal,according to Airbus data.

With statistics like these,it is no surprise that India8217;s domestic network is expected to generate the world8217;s fastest air traffic growth over 20 years. Airbus expects domestic travel to grow on average 9.2 percent over the next two decades.

Boeing sees average annual traffic growth of 9.4 percent between 2010 and 2030 in South Asia.

To feed this demand,India is estimated to need about 1,100 commercial jets worth up to 130 billion over the next 20 years,representing about 4 percent of the worldwide forecast for commercial airplanes,according to Deloitte aerospace analysts.

Plane manufacturers like Airbus are making a strong push to tap that market. Indeed the Indian market is one of the key drivers behind its decision to upgrade its A320 jet with new engines and slanted wingtips reducing fuel burn by 15 percent.

If ever a country needed an aircraft like the A320neo it is India. Airlines are taxed at 35 percent for their fuel,sometimes up to 50 percent depending on the state,said Rao.

Manufacturers have also leaped in to help address pilot shortages which threatened to stymie the industry8217;s growth,providing help with training and recruiting.

Yet even without poor logistics there are funding concerns.

Borrowing in the capital-intensive industry has become increasingly difficult in India,where the government has raised interest rates ten times since March 2010 to combat inflation.

There is no way airlines can get loans of this magnitude in the country. So they have to go for overseas loans as it does not make sense to borrow at 12 or 13 percent,Arun Kejriwal,director at research firm KRIS,said.

The top three carriers 8212; Air India,Jet Airways and Kingfisher 8212; already have more than 12 billion of debt. Lenders now own nearly 30 percent of Kingfisher.

On the positive side,India has joined the 2004 Cape Town Convention which makes it easier for foreign creditos or lessors to recover aircraft and engines if an airine gets into trouble.

The absence of such guarantees had hampered the aircraft leasing industry,which is a key source of finance for airlines.

Although airlines in India have a large order pipeline,funding would still be an issue. 8220;They may look for private equity players,8221; Nidhi Goyal,Director at Deloitte India,said.