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Vol.
XXVI No. 30
August
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IA Airbus Deal
Up In The Air?
Raghu
IN late March this year, the Board of Indian
Airlines, based on inputs from various technical and financial committees
working over several years, had finally decided upon the long-awaited first
major fleet augmentation of the national domestic carrier since the mid
eighties. Despite having posted losses of over Rs 270 crore the previous year,
the IA Board announced its decision to place a massive order worth over Rs
10,000 crore (US 2 billion dollars) to acquire 43 aircraft from Airbus Industrie
to replace its entire aging fleet of Boeing 737s and Airbus A-300s, with the new
aircraft scheduled to be inducted during 2004-2008. Apart from the size of the
order, which is the largest ever placed by any Indian airline and among the
largest orders received by the European consortium, what surprised some
observers was the fact that IA had opted for an all-Airbus acquisition,
completely shutting out powerful US rival Boeing which had expectedly been
lobbying very hard.
Soon after this announcement, however, came other
statements from different authorities to the effect that this
“opinion” of the IA Board had still to go through various stages of
approval by different concerned authorities such as the Comptroller &
Auditor General (CAG), ministry of civil aviation, ministry of finance and chief
vigilance officer besides the cabinet which automatically comes into the picture
given the size of the order. Nothing
has been heard of the deal since then, and the rumour mills both in India and
abroad are already buzzing about possible behind the scenes manoeuvring.
Is the IA-Airbus deal up in the air due to
bureaucratic wrangling or procedural delays? Or have the principal rivals Airbus
and Boeing mounted massive pressure, one to go ahead with the IA decision as
announced and the other to reverse or somehow modify it in its favour? Or is
there political pressure from the USA and European governments and will
geo-political considerations ultimately prevail? Or, as many fear, are some
underhand dealings or kickback negotiations underway? This article examines
these issues and suggests that, in a fashion typical of Indian governments and
even more characteristic of the BJP-led one, all these factors are perhaps
simultaneously coming to bear upon the deal and the final decision.
REASONS FOR
IA CHOICE
Technically, one can scarcely fault the IA Board’s
decision. All major aviation industry analyses including those by Boeing and
Airbus had forecast that South Asia, and India in particular, would be the
world’s second fastest expanding aviation industry after China’s over the next
20 years. While Airbus had estimated that Indian carriers will require over 220
new passenger aircraft over and above the existing fleet of 112 aircraft with
22,000 seats, Boeing’s estimates was even higher putting the Indian requirement
at 380 passenger aircraft worth about US 24 billion dollars (Rs 125,000 crore).
Within this total fleet requirement, which also includes long-distance aircraft
used in the major overseas routes, the industry forecasts that most of the
domestic requirement would be for short or medium-haul mid-size aircraft. The IA
Board’s recommendation favouring the Airbus A-319 (122 seater), A-320 (145
seater) and A-321 (172 seater) is in line with this scenario.
All
these are single-aisle aircraft belonging essentially to the same family as the
A-320 which is already in service with IA which operates more than 40 Airbus
aircraft of different types. As per the IA Board decision, all these aircraft
are to be powered by General Electric CFM-56 engines, again already in service
in India. The IA acquisition would thus bring about substantial commonality
between the different aircraft in terms of similar cockpits, engines, spare
parts and even flight simulators. Pilots would find it easier to switch duties
from one aircraft to another, pilot training would become simpler and less
expensive and airline running costs would be substantially trimmed.
In financial terms, while aircraft prices across the
board had fallen by 10-15 per cent after the September 11 terrorist attacks in
the US and the consequent sharp downturn in air travel worldwide, prices offered
by Airbus to IA were said to be about 15 per cent lower than Boeing’s for
broadly comparable aircraft. In arriving at its decision, IA had considered 9
types of aircraft including Boeing’s 717, 737-600 and 737-900 models.
On the other hand, it is interesting that IA’s main
domestic rival, the private sector Jet Airways, is rapidly expanding its all
Boeing fleet. In a major recent expansion move, Jet Airways has signed a
Memorandum of Understanding with Boeing to acquire 4 Boeing 737-400s, the type
of aircraft already in service with it, and 6 next generation 737-800s, at a
total cost of about Rs 1136 crore.
From Jet Airways’ point of view, this choice of
aircraft makes sense since it is already operating Boeing 737-400s and
commonality issues favour acquisition of the same or similar aircraft. It must
be underlined that while the parent 737 number is the same for these aircraft as
for those 737s currently in service with IA or its subsidiary Alliance Air, the
latter are of early eighties vintage, the model in question having actually
entered into service as early as 1967. Boeing’s recent stretched 737 versions
are certainly later aircraft than the A-320 family and many airlines the world
over have opted for these even at the comparatively higher price at which they
come. But this in no way implies that the Airbus A-320 series are in any way
inferior, as testified to by the numerous aircraft of this family already in
service and even recently ordered by South African Airways, Air New Zealand etc
while many airlines have opted for the later A-330s comparable to contemporary
Boeing aircraft and of later vintage than Boeing’s 767.
AIRBUS Vs
BOEING
Fact of the matter is that the civil aviation
industry in the 100+ seat category of aircraft is completely dominated by these
two manufacturers, Airbus and Boeing. The two rival giants have roughly equal
market shares globally, with Airbus having sold more than Boeing for the first
time in 1995. And it would be a foolish person indeed who would pronounce
aircraft of one manufacturer to be superior to the other’s. Any choice between
aircraft of the two companies usually boils down to a question of six of one and
half a dozen of the other.
Boeing is, of course, the great US aviation giant
which has in recent times taken over all other US and Canadian civilian aircraft
manufacturing companies and which is also one of the two leading manufacturers
of military aircraft especially system integrators. This gradual process of
conglomeration of aircraft majors under roof had been proceeding steadily during
the eighties and nineties due to the steep rise in research and development as
well as manufacturing costs, and the inability of smaller manufacturers such as
McDonnell Douglas to withstand the competitive pressure.
The same process had of course been taking place in
Europe as well where companies in individual countries such as Britain or France
had long lost their ability to compete with the US giants in manufacture of this
class of passenger aircraft. This forced different national companies to get
together to form Airbus Industrie whose partners are the state sector
Aerospatiale of France with 37.9 per cent holding, the public sector British
Aerospace with 20 per cent holding (these two companies having jointly
manufactured the Concorde, the world’s first and only surviving supersonic
passenger aircraft), Germany’s cash rich Daimler Benz Aerospace (37.9 per cent)
and CASA of Spain (4.2 per cent).
GEO-POLITICS
&
PROXY BATTLES
The rivalry between these two giants has now assumed
epic proportions with both leaving no stone unturned to capture market share and
grab any contracts in the offing. Given the traditional US government’s
aggressive backing of US corporate interests, and the active participation of
European countries’ governments in Airbus Industrie, it is hardly surprising
that these governments themselves play a very active role in lobbying for
contracts and otherwise advancing the interests of the respective aircraft
companies. The US government is currently pursuing in the WTO a case arguing
against the subsidies given to Airbus Industrie by European governments,
ignoring the indirect but equally valuable support given by the US government to
Boeing in the way of government contracts and R&D grants, and in other ways
trying to weaken the European rival. In the corporate battle between Boeing and
Airbus, great power rivalry plays a large part.
In the past, some countries have utilised this aspect
in advancing their own geo-political interests. A few years ago when China was
planning a massive expansion of its national carriers, it successfully played
Airbus/Europe against Boeing/USA. While the then Clinton administration was
pushing China hard on human rights and seeking to put it in the dock
internationally, China got various US corporates with business interests in
China to lobby their government to protect their interests and continue to
extend most favoured nation status to China indefinitely. While carrots of
different types were dangled by China to attract US business, China also
unmistakably showed the stick by cold shouldering Boeing representatives and
pursuing negotiations with Airbus. When China finally struck the massive deal
with Boeing, it not only showed where the greater bargaining power lay but also
advanced China’s goal of deepening ties with the US in pursuit of which it had
been playing the rivals off against each other.
It is not yet known whether any such considerations
have been operating in India, but it would be naïve to think that geo-politics
would not have a role to play here. With the BJP-led government showing a
pronounced pro-US tilt almost to the exclusion of all other ties, it should not
surprise anyone if the US government’s numerous emissaries trooping in and out
of Delhi these days are having quiet persuasive words in the ears of various
ministers and top officials dealing with the IA acquisition. It is already
rumoured that it is US-Boeing pressure which is causing the delay in formalising
the IA Board’s decision favouring an all-Airbus fleet. While the US pressure may
be expected, it is also clear that India, certainly under the BJP, unlike China,
has not learnt to leverage such mega deals in its strategic advantage. It would
also come as no great surprise if the government, under pressure from various
quarters, merely ends up trying to please everybody by ordering a mix of Boeing
and Airbus aircraft while not bringing any major long-term benefits to either IA
or India’s geo-political interests.
SLEAZE WAITING
TO HAPPEN
As for kickbacks and other sleaze, there does not
have to be anything bad about the deal for this to happen. Signing of such a
major deal is itself an occasion for the beneficiary company to celebrate the
occasion by “giving something back”. The Chief Vigilance Officer’s job
will not end with scrutinising the IA Board’s decision or the processes leading
up to it. It may be recalled that the CBI’s inquiry into the Airbus A-320 deal
entered into by Rajiv Gandhi’s government in 1986 is still continuing, with no
signs of producing results or winding up! In India, such truths have a way of
hiding for ever.
Till today, nobody is clear why Air India’s Board
decided in 1999 to buy small capacity small-range (SCSR) and long-range (SCLR)
aircraft in preference to the long-standing specification of medium capacity
long range (MCLR) aircraft, thus overnight making an about turn which also swung
the decision in favour of Airbus from Boeing. That the deal has not yet been
clinched, and that memories are short, may have something to do with it.
But readers are advised to follow this space in the
months to come. Mega deals for passenger aircraft acquisition are in the offing,
but everything is up in the air and the sky is not getting any clearer.
