Runway Rush

There’s a dogfight taking place in Indian skies. Right now, the honours are pretty evenly divided between U.S.-based Boeing and European Airbus, which are battling for the world’s fastest growing passenger aviation market. Boeing has cornered the wide-bodied craft market, while Airbus has the lead in narrow-bodied aeroplanes. But since both manufacturers make both kinds of craft, they are not content with what they have now.

For all the doom and gloom reported for some Indian airlines, the fundamentals of the industry seem solid. People are travelling more. Airports are being modernised and smaller centres are increasingly coming to the fore. Over-capacity is not a crippling issue any more and the addition of capacity is more or less in tune with demand growth. That’s what both Airbus and Boeing are aiming for.

Globally, Airbus is a strong proponent of the hub-and-spoke model, where narrow-aisle aircraft are used to fly people into hubs, from where larger aircraft take them to other destinations. This kind of thinking is exemplified by Emirates. Smaller aircraft ferry passengers to its Dubai hub and planes such as the A380 (Emirates has ordered some 90 of those from Airbus) then take them around the world.

Boeing’s vision of the future of global air traffic is different. It believes people prefer flying directly from point to point, say from Delhi to New York. So, it is pushing longer range craft, including the 777 and the 787, which, despite production problems, have been immensely successful.

The global order books for aircraft that fit the point-to-point vision, such as the 787 and the A350, suggest that Boeing’s theory might have an edge. Of course, it’s too early to call, but for the moment, Boeing is winning globally. Marc-Philippe Lumpé, consultant at A.T. Kearney and professor at Embry-Riddle Aeronautical University, says only when Airbus gets its act together on the A350, slated to fly in 2016, will it be able to compete against Boeing’s 787.

India doesn’t have an international hub with strong traffic for Airbus’ theory to work. However, things seem to be going the Airbus way thanks to the phenomenal growth of the low-cost carrier (LCC) market; two out of three passengers use these airlines today. These LCCs use smaller capacity, narrow-aisle craft. Howard Wheeldon, analyst at London-based BGC Partners, a global brokerage firm, says: “In India, over the last two or three years, Airbus has stolen a march over Boeing in the narrow body segment with a re-engined A320, while Boeing is exceptionally strong in the long-haul segment.”

India’s two biggest carriers, Air India and Jet Airways, mostly use Boeing aircraft. The long association that Dinesh Keskar, Boeing’s head of sales for the Asia Pacific region, has with India—he started selling planes in 1987—gives him an advantage. Jet chairman Naresh Goyal has relied mostly on Boeing ever since operations started and it was natural he would prefer Boeing when he took the airline international. In fact, the only reason why Goyal has any Airbus aircraft in his fleet is because Boeing couldn’t assure the delivery of the aircraft he wanted, says Keskar. (Airbus did not respond to repeated queries.)

Air India bought 27 Boeing 787s and 23 777s for $7.2 billion (Rs 36,058 crore) in 2005. But that deal is now at the centre of a controversy, with India’s Comptroller and Auditor General saying it plunged the company into the red. Questions are also being raised about the Airbus deal with the erstwhile Indian Airlines.

Airbus has its loyalists as well—low-cost players IndiGo and GoAir. (SpiceJet, has taken a different route, opting for a mix of Bombardier jets and Boeing aircraft.)

But the industry (like most) is not based on loyalty alone. Airbus fired the first shots in the price war in 2004. Till then, India was a Boeing market despite a large order from Indian Airlines for Airbus craft in the 1980s. Airbus missed out during the private airline boom of the 1990s, with Jet, Damania, East West, and ModiLuft, all going to Boeing. (It’s another matter that of all these carriers, only Jet has survived.) It was Air Deccan’s G.R. Gopinath who gave Airbus its big moment in India. Gopinath, who is considered responsible for the birth of the low-cost boom in India, wanted 60 planes at a huge discount.

The story goes that Gopinath called Kiran Rao, executive president (marketing and contract) and president (India), Airbus, and his boss John Leahy, and demanded 60 Airbus A320s at $28.5 million apiece, when the list price for the aircraft was roughly $55 million. Airbus, desperate for a share of this market, agreed. The decision to give in proved crucial for Airbus. Jitender Bhargava, a former executive director with Air India, says Airbus should be given credit for aggressive marketing, especially pricing, as seen in the Deccan deal. K.G. Vishwanath, head of commercial strategy and investor relations at Jet Airways, agrees that aggressive pricing was the only way for Airbus to enter the market.

Most airlines stick to the same make of aircraft to save on costs, including maintenance and training of pilots. This is especially true for LCCs. In effect, winning a launch order almost guarantees that if the airline is successful; it is locked in with the manufacturer for good. The customer’s negotiating power is almost always reduced on subsequent deals. As a senior executive with a Delhi-based carrier says, “The only time an airline has real choice is at the startup phase.” (Unless you’re the Micheal O’Leary-led easyJet, who went against the grain and moved from Boeing to Airbus.)

There is a technical reason too for Airbus’ success in narrow body aircraft, best explained by Kingfisher Airlines’ chief executive Sanjay Agarwal: “A320, the Airbus single-aisle offering in the 150- to 180-seat range, can be powered by either IAE or CFM engines; whereas the Boeing 737 offers the CFM choice only. This means A320 buyers have more options and hence a greater potential to lower costs.”

Airbus’s decision to invest in a re-engined A320neo which uses less fuel, rather than design a completely new plane, also helped it have a head start at a time when oil spiked to $100. “Aviation is an industry where 80% to 90% of costs are fixed costs. There is always pressure on the aircraft manufacturers to cut costs by designing new planes and fitting new engines. When Airbus and Boeing do it, it is like war,” says Amber Dubey, director, KPMG.

Airlines want to squeeze the most savings from improved fuel burn as soon as possible, rather than wait while a plane is designed from scratch. So, in terms of total orders, not adjusted for cancellations, Boeing sold 921 aircraft in 2011 while Airbus’s end-November total was 1,521 orders.

Boeing’s Keskar admits that the Seattle-based company was late in deciding whether to re-engine the 737 or go for an all-new design. “We were late, but we are finally there,” he says referring to the re-engined 737 MAX which was announced last year and has already garnered large orders globally. The aircraft, expected in 2016, is tipped to burn up to 12% less fuel, a massive cost saving.

In a few years, Boeing and Airbus will have aircraft of every possible permutation for capacity and range. With customers getting even more demanding, and all these aircraft to sell, it’s time to fasten the seatbelts.