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Air India’s record aircraft order: 13 key questions answered

Air India's Airbus order is for 250 aircraft, while the Boeing order is for 220 firm deliveries with an option for 70 additional planes.

February 15, 2023 / 09:50 PM IST
A bulk order comes at a cheaper price since it gives an airline better negotiating power.

A bulk order comes at a cheaper price since it gives an airline better negotiating power.

Air India placed firm orders for 470 planes with Airbus and Boeing on February 14, the largest-ever in the history of commercial aviation. The Airbus order is for 250 aircraft, while the Boeing order is for 220 firm deliveries with an option for 70 additional planes.

Here are the answers to 13 key questions about the aircraft order:

1. How many planes is Air India buying?

Air India has agreed to purchase 250 Airbus planes comprising 140 A320neo, 70 A321neo, 34 A350-1000 and six A350-900 aircraft.

Air India will also buy 190 MAX aircraft, 20 Dreamliners (787-9) and 10 777-9 planes from Boeing.

The 250 Airbus aircraft and 220 Boeing planes are all firm orders.

2. What is a firm order and what are options?

A total of 470 aircraft are on firm order – 250 from Airbus and 220 from Boeing. Airbus has not announced any options, but Boeing has.

Air India has the option to buy 70 additional Boeing aircraft – 50 MAX planes and 20 Dreamliners. If the option is exercised, the Boeing order would go up to 290 planes.

There are also options with Airbus, but both Air India and Airbus have not announced them.

When an order is signed, it factors in a payment schedule known as pre-delivery payments (PDP) and also annual inflation, with the airline typically paying slightly different prices for the first plane and last one delivered.

For options, the PDP is not made immediately but comes with a cut-off date by when the airline has to confirm the options. This means that manufacturers block slots for these options on the production line and release them if they are not confirmed.

3. Why is Air India buying so many planes?

Air India has not ordered new planes since 2006, even as every other airline in the country has grown. This led to Air India losing market share in both the domestic and international segments. To regain market share and increase its presence in the country and beyond, Air India needs capacity and that will come with the new aircraft ordered.

The existing lot of Air India and Air India Express planes is also due for replacement with modern aircraft that are not only environmentally friendly but also consume 15 percent less fuel, leading to an improved bottom line.

Lastly, large orders come with bulk discounts like no other.

4. What are the benefits of a bulk order and why now?

A bulk order comes at a cheaper price since it gives an airline better negotiating power. This can potentially help with better sale and leaseback deals where the airline sells planes to a lessor who in turn leases it back to the carrier for a monthly rental.

The difference between the price that the airline pays for the aircraft and at which it sells it to the lessor becomes the sale and leaseback earning, which is a source of cashflow for the airline.

The aviation markets have been depressed due to the pandemic. While travel appears to be booming, most of it is due to lower capacity after airlines retired planes during the pandemic in anticipation of a slump. This aside, the war in Europe and a looming recession are other things to worry about.

5. What does the order mean for Indian aviation?

Indian aviation is set to change in more ways than one. An order that is bigger than IndiGo’s fleet by an airline group that has roughly half of IndiGo’s domestic market share will definitely set up a challenge for the domestic market leader and a battle for dominance in the international markets.

Customers may want better fares but instead they are likely to get better service and more importantly, more non-stop flights from Indian shores, including from cities beyond Delhi and Mumbai.

6. How will so many planes be accommodated at Indian airports?

Infrastructure is a perennial pain in many sectors in India, including aviation. But infrastructure is catching up. New airports near Delhi and Mumbai should become operational by the time the bulk of the Air India order is in the delivery phase.

7. Why order both the A320neo family and the MAX?

Air India and Vistara operate A320 family aircraft, while Air India Express has B737 planes as of now. A split order signifies continuity, where Air India, the full-service carrier, will continue with the A320 family, while Air India Express will continue with Boeing planes, albeit with MAX aircraft instead of B737NG, which are no longer in production.

This will help with minimal training requirements and save costs.

8. Why the A350 and 77X and Dreamliner?

The most interesting aspect of the split order is the A350, the widebody aircraft. The group already operates 30 Dreamliners, three of which are the 787-9, while 27 are 787-8. This also opens up the possibility of the low-cost arm operating Dreamliners, similar to what is done by Scoot, the subsidiary of Singapore Airlines. Will Air India group embrace that model?

The A350-1000 and the 777-9 serve different profiles. The 777-9 could be used to fly markets such as London, which are constrained in terms of both slots and bilateral agreements, while the A350-1000 will fly non-stop to North America.

The Dreamliners, on the other hand, will help open up new routes since they come with an optimum mix of seating and range. These routes can be handed over to the larger sibling when they mature.

In all probability, the B787-8 would start leaving the fleet by the time the last of the planes from this new order come in.

9. But does it not complicate operations?

Indeed, it does. Even now, with leased aircraft having a different layout of passenger amenities, swapping planes becomes an operational challenge.

But the A350, 787s and 777-9 cater to different market segments. However, the current mix could reduce the potential cost of training to move pilots from existing Dreamliners to A350s.

10. When do the planes start coming in?

The planes ordered will start being delivered in the second half of this year. The first ones include the A350-900 and the MAX planes, which would augment the capacity being added by inducting older planes on short-term leases.

11. Is this a sale and leaseback?

The airline hasn’t announced any sale and leaseback yet and it is too early to execute those modalities. These could start in the second half of the year. While a sale and leaseback can give an airline instant cash, uncertainty over the rupee-dollar exchange rate would mean an unpredictable future because lease rentals are in dollars.

12. How much will it cost Air India for this order?

Aircraft acquisition costs are closely guarded secrets. Airbus stopped publishing list prices a couple of years ago.

The list price cost for the Boeing part of the deal would be $34 billion.

13. What’s in it for India in terms of jobs or benefits?

It’s unclear if the Tatas have been able to bargain for anything for themselves and India.

China – where the government negotiates and buys on behalf of airlines and then distributes planes – has an Airbus finishing line. India, on the other hand, has been making doors for the A320 family.

Though things have moved beyond that, the market, which is the third largest in terms of domestic traffic and slated to grow exponentially, should have got a lot more.

Ameya Joshi runs the aviation analysis website Network Thoughts.
first published: Feb 15, 2023 09:50 pm