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Going, Going... Boeing! By Raghu

THE Air-India (AI) Board finally announced its long-awaited decision on the procurement of new aircraft to replace its ageing fleet as well as to meet the challenging new environment in international air travel. To the surprise of some, but not to more perceptive observers, Air-India opted to purchase its entire requirement of 50 aircraft from the US aviation giant, Boeing Corporation, at a total cost of around $6-7$ billion (Rs 27000-Rs 32000 crore). Boeing's chief rival, the European consortium Airbus Industrie, reacted sharply, going to the extent of alleging malpractice and formally calling for the entire procurement process to be handed over the Chief Vigilance Commissioner.

Whatever the merits of the Airbus allegations regarding alleged irregularities, the entire deal and Airbus' reaction require to be examined and understood in the context of civilian aviation developments both worldwide and in India, especially the rivalry between the world's leading civilian aircraft manufacturers. Strategic considerations also undoubtedly play a role in such large deals and need to be factored in. Finally, the entire process of large-ticket acquisitions and related decision-making by Indian state agencies, including the AI deal, also needs to be looked at to see why these are repeatedly open to charges of irregularities and manipulation.

NEED FOR FRESH PROCUREMENT

For more than a decade, Air India has been badly in need of new aircraft and a larger fleet. It is a sad story that, while the national flag carrier Air India has been languishing and suffering losses year after year even while international passenger traffic has been growing rapidly (despite the odd hiccup such as after 9/11 and the SARS epidemic in Asia) including to and from India, the acquisition process has been agonisingly slow. Observers worldwide have therefore greeted the Air India decision mostly with a sigh of relief, so exhausted by the long wait that the decision itself has not received any detailed examination.

For the past several years Air India has been operating with a handful of seriously ageing almost 40-year-old Boeing 747 Jumbo Jets, having retired most of its even older Boeing 707s several years ago. Forget a national flag carrier, many charter operators have larger fleets! With its fleet restricted to 18 Boeings, and procurement badly held up, Air India was forced to lease additional aircraft a couple of years ago, ironically, Air India leased 19 Airbus A-320 short-haul aircraft from a Boeing-held company!

Meanwhile, the international aviation environment was seriously hotting up. India especially was experiencing dramatic growth in passenger traffic both within the country and on international routes to and from India: the civil aviation sector had been opened to private parties both domestically and recently to a few international destinations as well, several low-cost carriers had successfully emerged in the domestic sector, and the newly-announced "open skies" agreements signed with many countries, notably with the US, allowed unlimited flights and destinations between the concerned countries.

A few years ago, Boeing's forecast put aircraft requirement of Indian carriers to cope with this explosive passenger demand at about 300 planes at a cost of around $25 billion (Rs 112,500 crore) over the next 20 years. Reflecting the enormous growth potential, Boeing revised its forecast earlier this year to about $35 billion (Rs 157,500 crores) worth of planes. Airbus was even more bullish, projecting a demand for 570 new aircraft in the next 20 years, revising its projections upward from 220 estimated just two years ago. Both companies predicted that India will be the second fastest-growing aircraft market in the world after China which may require 1800-2300 planes in the same period.

AI ACQUISITION PROCESS

In this context, Air India began its acquisition efforts almost a decade ago which proceeded at snail's pace till recently. A Technical Committee of the AI Board had recommended in 2002 a mix of Airbus and Boeing aircraft compatible with its different major routes. The then NDA government, under pressure from the US and itself keen on using the transaction to curry favour with the US, delayed the procurement. As recently as November 2004, the AI Board broadly endorsed its Technical Committee's recommendations and resolved to acquire 10 Airbus A-340 long-haul aircraft and 18 Boeing 737-800 medium-range planes, a total of 28 aircraft. The Request for Proposals (RFP) were issued soon after based on these broad considerations. So how did it come about that AI's final decision differed so much?

First, the Ministry of Civil Aviation, headed by Praful Patel, asked the Board to review its earlier recommendations in light of recent developments, these being the growth in passenger traffic and the impending open-skies policy. Many observers had seen this step as a straw in the wind indicating a definite preference in favour of Boeing.

If further evidence was needed, it was provided by the launch of Air India Express, the budget international carrier floated as a subsidiary of AI which placed orders for and rapidly acquired 18 Boeing 737-800s costing around $1 billion (Rs 4500 crore).  Clearly the earlier Board recommendation for these aircraft had been shifted to its new "budget" subsidiary for operating the lucrative high-traffic routes mainly to West Asia and South-East Asia.

The AI Board has now steeply hiked the quantum of aircraft sought to be acquired from 10 to 50 (if you discount the 18 shifted to AI Express) and gone for a mix of Boeing aircraft: 8 Boeing 777-200LR (250-seater medium capacity ultra-long range), 15 Boeing 777-300ER (350-seater medium capacity extended or long range) and 27 Boeing 7E7-8 or 787 "Dreamliner" (250-seater medium-capacity long-range) planes. By this decision, the Air India Board has reflected not only its preference in aircraft types but also its perception of the routes it would like to fly and the passenger traffic in them.

Air India has clearly decided in favour of a major long-term expansion and is targeting the European and US markets, which latter can be reached non-stop with the longer-range models. The open skies agreement with the US also means that various destinations there can be reached directly with passenger loads to match. Of course, other destinations in South America, Africa and Australia can also be reached although there is little indication that AI has very much interest in these markets excepting Australia.

After decades of being an international sloth, it is good to see AI reaching out ambitiously and not allowing, by sheer default, all the money to be made from the increasingly lucrative Indian market to be siphoned off by domestic private players or other international carriers. From this point of view, there is also fairly sound logic in the above mix of aircraft range and passenger loads. Air India has also indicated its preference, like most major carriers, for a single-manufacturer fleet, in this case an all-Boeing fleet, which normally improves operating efficiency, reduces repair and maintenance costs as well as engineering and other technical requirements.

The question is was the selection process fair and transparent, and were there any irregularities in it? But before we examine these specifics, we should look at the Airbus-Boeing rivalry worldwide and in India.

AIRBUS-BOEING RIVALRY

The rivalry between these giants, the only manufacturers of large medium or long-range passenger aircraft, has today reached epic proportions. Airbus overtook Boeing five years ago to be No.1, mostly through the success of its medium capacity long-haul Airbus A-330 and its shorter-range variations such as the A-340. Boeing overcame its earlier complacency and soon launched an aggressive campaign based on long-range aircraft especially the 777 and the most recent 787 "Dreamliner" launched barely two years ago. In just one year, Boeing has received letters of intent from 19 companies for 237 "Dreamliner" 787s aircraft which, based on next-generation technologies, uses considerable amounts of composite materials, claims to lower fuel costs by 20 percent and is loaded with various passenger comforts. To directly take on the Boeing 787, Airbus has only very recently launched its A-350 model which is yet to make a mark among the world's airlines, only one manufacturer so far expressing interest in it.

Airbus meanwhile was actually focusing on the large-size long-haul segment in which the venerable Boeing 747 "Jumbo" Jet with a capacity of 427 passengers had held undisputed sway for over 30 years but which, due to relatively high operating particularly fuel costs and its ageing technology, sold only 10 aircraft in the previous year. Airbus launched its "super-jumbo" A-380 with a passenger capacity of 500, with variants planned to go as high as 800 passengers. The A-380 made an impressive maiden flight in Toulouse, France, last week. 15 airlines, including the savvy Singapore Airlines, have signed up for 154 of these "super jumbos", 144 of these being firm orders.

In India, the honours are fairly evenly divided between Boeing and Airbus. Indian Airlines bought 19 A-320s in 1986 gradually phasing out its older Boeing 737s to its subsidiary Alliance Air. In 1994, Boeing sold 20 short-haul 737-400s to the private-sector Jet Airways and recently received fresh orders for 30 similar aircraft from Jet and the soon-to-be-launched SpiceJet.  In turn, Airbus has secured orders for 43 short-haul A-319 and A-320s from Deccan Airlines and Kingfisher Airlines. The IA Board's decision to place orders on Airbus for 43 more A-320s worth $2.3 billion (Rs 10,350 crore) is awaiting Cabinet approval which, hopefully, will be forthcoming despite the Airbus outburst! Yet Airbus is clearly upset at missing out on the much larger AI deal and its decision to go in for an all-Boeing fleet which will leave Airbus out in the cold for the next 20 years.

AIRBUS ALLEGATIONS

Airbus has reacted furiously to the AI decision with far more than understandable disappointment. Airbus Industrie vice-president (Sales) for India and Asia Nigel Harewood explicitly said there were "irregularities" in the selection process which were "biased in favour of Boeing" and called for "scrapping the deal and re-conducting the tender process." The main charges are that (a) Airbus was not given a chance to offer its A-350 or "super-Jumbo" A-380 aircraft, (b) the Boeing-787 selected would not be ready for delivery before 2007 violating a crucial tender conditionality and (c) Boeing was allowed to modify its 787 to a 9-abreast seating configuration rather than 8-abreast as earlier offered.

Whatever the procedural issues, it would surely not have hurt AI if Airbus had been formally invited to make presentations for the A-350 and A-380: AI could still have decided to buy Boeing. A tender is not cast in stone and, in the interests of the Airline and its owners (the Indian public in case everybody has forgotten!), if new circumstances arise as was certainly the case here, re-negotiation should take place, especially when there are only two parties involved! An AI spokesman’s claims that “there was no question of modifying the RFP” to take account of new aircraft on offer is specious and only reveals a tendency to hide behind bureaucratic technicalities when it suits, or circumvent them when it does not.

For instance, the decision in favour of the Boeing 787. The RFP states explicitly that the aircraft offered should be ready for delivery commencing 2007.  The Boeing website and publicity brochures make clear that the aircraft will fly for the first time only in 2007 and, after certification procedures, will be ready for delivery starting 2008! Yet, in response to Airbus criticism, the AI Board summarily rejected this charge and even adopted a resolution disingenuously stating that, “the final delivery schedule can be decided only after the necessary government approvals have been obtained and orders are placed”.

The third charge by Airbus about seat configuration can simply be ignored as this is clearly the prerogative of the carrier, even if it is a poor configuration cramping passenger space as Airbus alleges. The Airbus contention that “it is not in a position to offer 9-abreast seating” is difficult to understand if it actually believed that this was one factor the AI Board “used” to tip the scales in Boeing’s favour.

What seems clear from all this is that the AI Board had already made up its mind to go in for an all-Boeing fleet. Quite apart from considerations of a single-manufacturer fleet or estimations of cost per passenger, there may also have been pre-determined preferences or judgement calls involved. For instance, the AI Board may have made an assessment that 500-passenger super-jumbos are not its cup of tea: Airbus or some commentators may agree or not, but the Board is within its rights to decide so!

TENDERING PROCESS

The reality is that a tender in such acquisitions is always merely a basis for decision-making and not a rigid framework expected to throw up an objective formula according to which only one choice can be made. As for tender specifications being cast or interpreted apparently favouring one or other party, this too is not unknown. Airbus should itself know this only too well, having been a beneficiary in the past!

Airbus is screaming today about the Boeing 787 being still on the drawing board but still ordered by AI. But in 1986, IA decided to buy Airbus A-320s in similar circumstances when PM Rajiv Gandhi, himself a pilot, sat in its cockpit in France and fell in love with the aircraft! Sauce for the goose should be sauce for the gander!

Charges and counter-charges are a part of business especially when rival giants are involved. Yet there is no reason why the tender process should be clouded by secrecy, bureaucratese and a sense of behind-the-scenes manipulation. Greater transparency in the tender negotiations and decision-making process are needed even if some people may disagree with the final decision. Huge delays in acquisition processes, as repeatedly happens in India when years sometimes decades pass by which witness huge changes in the market environment or the technologies on offer, combined with procedural strangleholds and opaque decision-making processes, can only lead to “creative” interpretation of parameters, sheltering behind technicalities and other procedural manipulation. Behind this cloud, it will then become very difficult to fathom if irregularities have been deliberately committed. And in any case, in India, it is customary for illegal gratification to be paid by any party which wins a contract!

STRATEGIC CONSIDERATIONS

In the din thrown up by this slanging match, an aspect that has received scant attention is the strategic dimension of the AI decision both internationally and domestically.

India, and the EU, may have missed an opportunity for mutual long-term benefit. India could have set up and acted as a regional provider of maintenance and other technical services to Airbus aircraft, having already established some co-production which could have been extended further. Boeing is not known for such arrangements. Airbus' recent decision to set up such a facility in China, the largest outside Europe, reflects this missed opportunity.

It is well known the world over that immense pressure is exerted by governments on behalf of corporations in their country. The Boeing case was pressed hard by powerful US visitors to India such as Transportation secretary Norman Y Mineta and Secretary of State Condoleezza Rice, with president George W Bush himself lobbying with Indian dignitaries in Washington. Airbus being essentially a state-sector entity is no stranger to this process either. France's transport minister Gilles De Robien even met Praful Patel in late April to press Airbus' case but clearly, the weight of US persuasions has been greater. Was there also perhaps some secret linkages with the US offer of F-16s and F-18s (this latter being manufactured by Boeing)? Or is this another "message" being sent by the UPA leadership that it wants to cosy up to the US and wants its active support to gain a seat in the UN Security Council?

Regrettably, there is no evidence of India leveraging such a large commercial deal to obtain anything concrete – diplomatic gains or otherwise in return except the purchase it has made.

Last Updated on Thursday, 24 January 2013 07:13