Cautious customer

For many decades now, the narrow body, twin engine, mid-range commercial aircraft—the likes of 737s and A320s that take you from Mumbai to Delhi or Kochi to Kolkata—came from Boeing and Airbus, both of which extensively source aircraft parts
from China.

It was only a matter of time before the Chinese cobbled together all that knowledge from making aircraft parts to actually build a large airliner. If all goes according to plan, the first 150-plus seater to be made in China will take to the skies in just about five years, and in about a decade they should be flying across the globe.

The Commercial Aircraft Corporation of China (COMAC) was set up in 2008. Its big plane, COMAC C919, is intended to take on similar craft from Boeing and Airbus.

As with most things Chinese, the corporation has set an ambitious target: It hopes to sell 2,000 jetliners by 2030. COMAC has already bagged orders for big planes from Air China, China Eastern Airlines, and international leasing firm GE Capital Aviation Services.

India is tipped to be one of the largest markets for narrow-body aircraft over the next few years. A Boeing study on market potential indicates that India, and the rest of South Asia, would need around 960 single-aisle aircraft over the next couple of decades. That’s about 75% of the demand for aircraft in South Asia, and a large chunk of a market valued at $160 billion (Rs 7.1 lakh crore).

That’s the market COMAC is eyeing. But it’s not alone. IRKUT of Russia, with its MS-21, and Bombardier of Canada, with its C Series, are also in the race to challenge Boeing and Airbus in the growing Indian market. Out of these three new entrants, the Chinese have the least experience in aircraft manufacturing. Bombardier has been in the business jet space for a long time now, but this is the first time it is selling a large airplane.

Airplane salespersons have been doing the rounds of the offices of Indian carriers, extolling the virtues of the C919, MS-21, and the C Series. But one hurdle the new players face is the reluctance of Indian carriers to be early customers. “I don’t think Indian carriers want to be guinea pigs,” says K.G. Vishwanath, vice president, commercial strategy and investor relations, of India’s largest carrier Jet Airways.

Rishikesha Krishnan, a professor of corporate strategy at the Indian Institute of Management, Bangalore, who tracks the aviation sector, agrees. He says the chances of Indian carriers being among the first few customers are slim. “They would want to wait until these aircraft get some history in other countries, with established airlines.”

The Irish low-cost carrier, Ryanair, could be one of those names. Earlier this year, Ryanair CEO Michael O’Leary shocked the aviation world when he said his company had broken off negotiations with Boeing and was in talks with the makers of the MS 21 and the C919. Michael Cawley, Ryanair’s deputy chief executive, has been reported as saying that his company would do anything that saves money. “At the right price, it makes perfect sense, so long as it’s fuel-efficient. We aren’t wedded to any aircraft manufacturer.”

Ryanair’s decision indicates that established airlines are not averse to shopping around if the new aircraft make financial sense and offer the latest technology.

But so far, Indian carriers have taken little notice. “With around 150 seats, these aircraft seem to be competing more with the Boeing 737-700, and the Airbus A319,” says Neil Mills, CEO of budget airline SpiceJet. “As they are smaller than our current aircraft, I don’t believe they offer an option in terms of lower cost per seat mile, which the 189-seater Boeing 737-800 or the 212-seater Boeing 737-900 does.”

SPICEJET USES 21 737-800s and five 737-900s. Although the aircraft in the fray are smaller than the Airbus A320 and Boeing 737-800, they wouldn’t be of much help in opening up new markets, which the existing fleet is unable to service. That is because sub-100-seater aircraft—from the likes of Embraer, Bombardier, and ATR—would be needed to serve smaller airports with much less traffic and shorter runways. A fleet of smaller turbo-props, the Bombardier Q400s, would start joining SpiceJet’s fleet this year for this reason.

With oil at $112 a barrel and pressure mounting to cut emissions, airlines these days are more interested in technology that can bring savings in operating costs and earn a green tag. This explains their pitch to Indian carriers.

Vishwanath says airplane makers are highlighting technology, such as ultralight composite materials used for the airframe, and the next-generation engine technology, because that’s key to lower operating costs. “The initial talks we had were about technology. Pricing comes later,”
he says.

Another senior executive with a leading Indian airline, who did not want to be named, says if the new aircraft live up to their promise to cut fuel consumption by 15%, the manufacturers will have a winner on their hands.

That said, if any carrier does consider these aircraft, it would be because they are expected to offer an attractive price advantage. Mark Martin, commercial director of Dubai-based Aviation Services Management, says the Chinese can offer prices that are 30% to 35% less than the biggies.

Still, it will be some time before these new companies can make a dent in the market, because Indian carriers have already placed huge orders for other aircraft from Boeing and Airbus, which are due to be delivered over the next 10 years. IndiGo, the country’s second largest low-cost carrier, for example, has ordered 180 Airbus jetliners for a total of $15.6 billion.

The possibility that these carriers will not exercise the available options of adding to the orders or exit current deals is remote, says Raajeev Batra, executive director at the consultancy firm KPMG.

For an existing carrier, shifting to or even inducting a new type of aircraft is a complex exercise, starting with training pilots—in industry parlance, they have to be type-rated on the new aircraft—and moving all the way to maintenance. This involves safety issues as much as cost. Investments in training and procuring new simulators have to be made. Also, there’s time lost in training.

WITH SUPPLIERS SUCH AS Boeing and Airbus, there is a better chance of commonality between old and new planes, which helps reduce cost and saves time. The new players, sensing that training can be a headwind, are joining hands with large airlines to offer training. For example, in Germany, Bombardier has tied up with Lufthansa Flight Training to train pilots for European operators of the C Series.

Also, the new aircraft makers will source a chunk of the components from the likes of Honeywell, Pratt & Whitney, GE, and Rolls-Royce—the same set that supplies parts to the well-entrenched aircraft makers. “This will reassure potential customers about maintenance issues,” Martin adds.

The new players seem to understand that they have to work together if they want to get a foot in the door. In late March, Bombardier and COMAC agreed to collaborate in marketing and customer support. In a press release announcing the partnership, COMAC chairman Zhang Qingwei said: “Both our companies have specific strengths which, when combined, will enhance the competitiveness of our respective aircraft programmes and businesses.” They will evaluate commonalities between the C919 and C Series aircraft and joint procurement as well as collaboration on future Bombardier and COMAC projects.

Airbus and Boeing are sitting up and taking notice. Airbus has announced a revamped version of its bread-and-butter A320, christened A320 Neo. The aircraft, in which the company is investing €1 billion (Rs 6,552 crore), is due to in 2016. Aviation circles are abuzz that Boeing will go one better and announce an all-new successor to the 737.

As M. Thiagarajan, managing director of Paramount Airways, which is looking to launch again this year, says, “If they manage to break the duopoly of Airbus and Boeing, that will be a big thing.” But for now, India’s fast growing carriers are content to wait and watch the dogfight from the sidelines.