Is this the thin end of the wedge? The death knell for India's public sector airlines that have flown through choppy skies for over a decade? A change from the way the aviation industry is ordered in this country?
It was a move that came right from the top. Last month Prime Minister Atal Bihari Vajpayee took the aviation industry by surprise when he declared an open-skies policy for all foreign airlines in the Asean region.
That was followed a few weeks later by an announcement that private Indian airlines like Jet and Sahara could fly as many flights as they wanted to Sri Lanka.
To top it all, the government put its usually restrictive policies on the backburner and allowed foreign airlines the freedom to operate as many flights as they want during the peak season between November and January.
The effects of Vajpayee's pronouncement were first felt this week when India's Ministry of Civil Aviation called together a meeting with top officials from the 10 Asean countries.
The aim: to turn Vajpayee's words into reality. Under the policy that's now being hammered out, Asean carriers will be allowed to operate one flight every day to the country's four metros and 18 tourist destinations.
- Asean carriers may be allowed to fly daily to the four metros without signing bilaterals or paying royalty.
- The big winners will be Thai Airways and Malaysian which are keen to have more flights to India.
- The Asean carriers and Sri Lankan Airlines score because they can carry Indian passengers to onward destinations like the United States.
- Air-India and IA expect to lose market share dramatically because they don't have enough planes.
That means airlines like Thai or Malaysian Airways will be able to fly as many as 28 flights a week (seven days a week in the four metros).
They won't need bilateral agreements between the two governments to bring these flights into or out of India. Nor will they pay any royalty to national carrier Air-India for flying in.
The government's moves have stirred predictable reactions. Indian Airlines and Air-India have greeted the news with glum silence. Aviation industry experts point out that the moves could be like a ground-to-air missile that will hit the two airlines amidships.
Points out an aviation expert : "The open skies policy should come only after A-I and IA are strengthened or privatised so they have the strength to fight competition."
Unsurprisingly, the tourism trade doesn't feel that way. Says Subash Goyal chairman, Stic Travels: "The only way you can grow tourism is by opening up the skies and allowing more tourists to come in, rather than protecting domestic airlines."
That's a view backed by Ankur Bhatia, managing director, Amadeus, an international reservation system: "A-I gets only $40 to $50 per passenger as royalty. But each tourist coming to India spends over $600. So the question is should we protect A-I's revenue or grow our foreign exchange?"
Will the new policy bring Asia's airlines rushing to India? Certainly, there are three regional airlines that have always shown an interest in India -- Singapore Airlines (SIA), Thai and Malaysian Airways. SIA already operates 29 flights a week so it couldn't ask for more even under the proposed new rules.
Thai and Malaysian could, however, boost their capacities if they are inclined. Today both airlines fly between 13 and 15 flights a week to India. That means they could together add about 26 new flights weekly.
Other airlines could also get into the game. Many Asean carriers from countries like Indonesia, Philippines and Vietnam don't even fly to India.
Together the Asean and Sri Lankan airlines currently have around 40,000 seats a week into India -- that's a 114 per cent rise since 2000.
Says a top source: "While the foreign airlines used virtually 100 per cent of these seats we could utilise only 50 per cent because we do not have new aircraft which we had asked the government to allow us to buy. But the argument that there is a shortage in capacity is bunkum."
The domestic airlines say about 26,000 new seats will be created weekly from the Asean region and Sri Lanka as a result of the open-skies policy.
But aviation experts say this is an overestimate and there are unlikely to be more than 8,000 new seats.
There's a good reason why foreign airlines find it easier to attract passengers.
Anywhere between 40 per cent to 60 per cent of the passengers on foreign airlines are heading to other destinations like the United States.
That means a passenger flies from India to Colombo and flies on to another destination.
"So they are taking away our passengers from the United States and Mid-East markets. We can't do the same thing, because their outbound market is small and they don't use India to go to a third country," says an IA executive.
Executives at the national carriers reckon the financial impact of the latest moves could be staggering for them.
Internal estimates by aviation experts reckon that while the Asean and Sri Lankan carriers might generate additional revenue of over Rs 2,500 crore (Rs 25 billion) the potential revenue loss to A-I and IA combined could be over Rs 700 crore (Rs 7 billion).
Of course, the foreign carriers are not complaining. "We would like to take optimum advantage of the proposal. Thai Airways has been wanting to increase its capacity out of India for some time now," says a senior Thai Airways executive.
Similarly, Malaysia Airlines says its business is growing by 20 per cent to 25 per cent annually. It would like to grab the government offer and operate daily flights from Delhi and Mumbai.
A senior Sri Lankan Airlines executive says the airline plans daily flights from all destinations that it flies to currently.
But does this mean there will be an oversupply on the south east Asian route?
Amadeus reckons there's a latent demand for 15 per cent to 20 per cent extra capacity. Then there is a natural growth in tourism passengers which is around 5 per cent per annum.
Says an aviation expert: "I think demand and supply will balance out and will not be dependent on the whims of bilateral agreements which are virtually created shortages." But A-I executives say it will lead to a fall in their passenger load factor.
Says an A-I source: "Our PLF in Asean flights will fall from 75 per cent now. And that is because we cannot create more capacity because our fleet acquisition plan is far from being cleared by the government."
Many aviation experts say the government is hurting the two national carriers in the worst way possible. On the one hand, it is sitting on the fleet renewal and expansion plans. And, on the other, the open-skies policy will erode the valuation of A-I.
Says an expert: "Companies which wanted to buy A-I during the previous attempt towards divestment were ready to pay a premium for the company provided the government froze the bilaterals for seven years. With open-skies valuation there will be no buyers for A-I even if you privatise."
The national carriers are also losing sleep over the fact that Sri Lanka is being opened to private airline companies.
Executives in the national carriers point out that Sri Lanka is already turning into a hub which Indian passengers use for onward travel to the Mid east, Australia and even the US.
The fact is that Sri Lankan Airlines, (after Emirates bought a stake in it) now flies an amazing 44 flights a week into India -- one of the highest by any foreign airline.
Says a senior Indian aviation executive: "With Emirates buying out an equity stake in Sri Lankan Airlines we fear that it will be used as a hub for getting Indian passengers to the Mid East via Colombo. This will seriously impact our business. They have already dropped prices."
However, India's private airlines don't appear worried by the open skies policies. In fact, they are putting together their own plans for Sri Lanka.
Air Sahara has already announced that it will start two flights daily to Colombo. One will be directly from Mumbai and the other from Delhi-Bangalore via Chennai.
Says U K Bose CEO, Air Sahara: "The yield on a one hour flight from Chennai to Colombo is 30 per cent to 40 per cent higher than a similar flight from Delhi to Lucknow."
No doubt the new government policy could change India's aviation map. But the question is whether it will push India's national carriers to the brink of collapse.
Two's company
They could be the odd couple of the aviation world. On one side is trim, lean and mean Singapore International Airlines with a reputation as one of the world's best aviation companies.
On the other is our own Indian Airlines, slightly past its best days, in desperate need of more aeroplanes and profits.
Now the two airlines are talking about joint ventures that could have a radical impact on Indian aviation.
Top of the list is a proposal to turn India into a maintenance hub to service airlines across Asia. Also on the cards: a joint venture to carry out ground-handling in Indian airports.
Why is Indian Airlines an attractive partner for SIA Engineering Company? That's easy enough to figure out in these days of outsourcing.
It's cheaper to carry out maintenance checks (they are called maintenance, repair and overhaul or MRO in aviation parlance) in India than anywhere else in Asia. Also, geography works in India's favour.
The potential customers include any airline from a swathe of countries within five hours' flying time of Delhi. So, they could include planes from Gulf states like Saudi Arabia, Oman, Iraq or the Emirates.
Head towards south east Asia and countries like Malaysia, Singapore and Thailand come within the five-hour radius. In fact, even Kazakhstan is within five hours' flying time of the Indian Capital.
Executives familiar with the project reckon that Indian Airlines could reap a rich bonanza if the project does take off. Conservative estimates are that it will bring in between $40 million and $50 million in the first year.
Says an executive: "We expect business to double within three years. After all, Asia has a shortage of maintenance companies. It could become a money spinner."
That's only one part of the deal being proposed between the two airlines. IA is also planning to hive off its ground-handling business into a JV with Singapore Airport Terminal Services.
The proposed venture will offer ground-handling services in 10 airports across the country, for both IA and international airlines.
Again, this could be a gigantic and lucrative proposition for both sides. IA itself has over 50,000 flights annually that take off and land at these airports.
In addition, there are about 10,000 flights by foreign airlines. Says an executive associated with the project study: "The market is huge. There's a ready business waiting to be tapped."
IA officials are tight-lipped for the time being about the feasibility studies that have been conducted. That's understandable as the airline is certain to face tough opposition from the company's unions.
In fact, the first salvo has already been fired. After rumours about the possible alliance became known the Indian Airlines Engineering Association immediately threatened to go on strike.
For the time being the management has assured the unions that nothing has been done beyond a feasibility study. More importantly, it has also promised that no jobs will be on the block.
But for IA the two alliances could provide major benefits. One tangible benefit is that it will reduce the airline's fixed costs dramatically.
There are other savings for IA on the maintenance front (which is around 13 per cent of its total operating cost).
Experts reckon that routine checks will be carried out faster and that planes will, therefore, be available for service more quickly.
But more importantly it will provide IA with lucrative and new sources of revenue. IA has offered three hangars which undertake maintenance of A-320 and 737s in Delhi. Under the proposal two additional hangars would be built at an investment of $20 million.
The existing hangars will offer both facilities for the mandatory C and D checks. An airline has to carry out a C check after every 5,000 hours of flying or 18 months. The more comprehensive D check is carried out every five years.
Sources close to the deal say that the hangars have enough capacity to take in over 100 aircraft for a C check and as many as 25-35 for a D check annually.
So even private domestic airlines which today undertake in house maintenance and have to fly as far as Singapore to undertake the D checks could save money (around $100,00 per journey) by using this facility.
Says a source: "Jet Airways, Air Sahara and IA together have over 90 aircraft. That itself can fill the entire capacity we have. It is pointless for them to run their own maintenance units."
By comparison, international airlines might find it worthwhile to fly here. Says an executive: "Our costs for C and D checks are about 20 per cent to 25 per cent cheaper than most Asian maintenance companies."
There are advantages for IA in the ground-handling facility too. Says an executive: "At the moment IA spends between $1,000 to $1,100 on each flight as ground-handling. Under the new JV we could bring it down by $300." That itself could add up to a cost saving of over $15 million for IA.
But that is not the only advantage. The JV can aggressively pitch for business from international airline companies which have been looking at means to cut costs by outsourcing. For instance, in the 10 cities there are over 10,000 international flights which take off and land.
But the key challenge for IA is to convince unions that the JV route is the only way to climb to blue skies. The question is whether IA's militant unions will bite.
