Boeing And Airbus’ Record Air India Order Hinges On High-Stakes Turnaround Of A Basket-Case Airline

For the last few decades, India’s rapidly growing economy and population have lured multiple startup airlines to their doom. Now the giant conglomerate Tata Group is making an expensive bet that the long-shimmering potential of air travel in the world’s second-most-populous country can be turned into profits.

After buying loss-ridden flag carrier Air India last year from the government for $2.4 billion, Mumbai-based Tata unveiled deals Tuesday to buy 250 planes from Airbus and 220 from Boeing
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. It’s the largest airliner order in history, topping the 460 jets American Airlines committed to buy in 2011. Pricing was not announced, but even with substantial discounts, it’s expected to be worth tens of billions of dollars. Chances are, however, the order won’t be fully filled unless Tata can turn around Air India, a basket case of an airline.

“They need their business strategy to work out to take all these planes,” Richard Aboulafia, an aerospace consultant with AeroDynamic Advisory, tells Forbes.

The purchase is part of a massively ambitious growth plan for Tata Group, which currently operates just 230 aircraft among the airlines it controls. Tata is merging Air India with full-service airline Vistara, a joint venture with Singapore Airlines, while combining low-cost carriers AirAsia India and Air India Express.

All are losing money. Combining them and their different corporate cultures while getting them on a path to profitability is a tall task against tough competition. Emirates and Qatar airlines have taken a dominant share of the lucrative international routes through the Persian Gulf while low-cost carriers led by IndiGo, the country’s largest airline, are scrappy domestic rivals.

Tata Group faces multiple challenges. Air India’s image has been tarnished by poor on-time performance and dismal, bureaucratic customer service. Before it was sold, the government said the airline was losing $2.6 million a day.

A question mark is how committed Tata Group is to what promises to be a long-term battle, Aboulafia says. Buying Air India was the reclamation of an heirloom for the Tata family, which founded the airline in 1932 and built it into India’s largest carrier before it was nationalized in 1953. But aviation is far from the present-day conglomerate’s core business. That would be IT outsourcing – Tata Consultancy Services is India’s largest tech company – followed by clothing, steel and automobile manufacturing.

India’s economic growth has seduced investors into funding a parade of new airlines since the government began privatizing air travel in the 1990s. The number of air passengers in India rose 2.5 times from 2010 to 167 million in 2019 before the pandemic cratered travel, according to figures from ICAO. But apart from IndiGo, Indian airlines have been almost uniformly unprofitable, with high-profile failures like Kingfisher and Jet Airways. They’ve been hindered by high fuel taxes, overregulation, inefficient airports and service providers and tough competition. Air India has also been part of the problem. Unprofitable since 2007, when it was merged with Indian Airlines, it was able to keep fares artificially low thanks to government support.

Now Air India is in the private sector and the government plans to build 80 new airports over the next five years, bringing the total to 220, while forecasters continue to predict big growth in air travel. Boeing projects that passenger traffic in India will increase 7% annually through 2041, leading to the sale of 2,210 new planes over that period.

India is widely seen as underserved. Indian airlines have 646 planes, compared to 3,922 in China, according to Jefferies analysts.

“It’s always about the future, right?” Brendan Sobie, a Singapore-based airline consultant, tells Forbes. “But a lot of the fundamental issues preventing the profitability of the Indian carriers have never really been resolved.”

Tata is making an expensive play to reclaim a bigger share of the international market by planning to buy 60 widebody planes — 20 Boeing 787s and 10 777Xs, plus 40 Airbus A350s. That’s good news for the plane makers. They reap a higher profit margin on the bigger planes but have seen little demand for them since the pandemic as orders have revived significantly for narrowbodies.

But Air India will be going toe-to-toe with formidable opponents in Emirates and Qatar, which have prospered in part by transporting Indians to the Gulf and onward through their hubs to Europe and the United States.

It may not be a zero-sum game. If the Indian market grows as expected, “there is room for many players,” Sobie says.

But that’s far from a given. “Certainly the Modi government has had a pro-growth agenda,” Aboulafia says. “But India has proven to be the land of disappointments from an aviation and aerospace perspective.”