3 Compelling Reasons That Make India a Strong Aviation Market

Despite a dull aviation environment, Boeing, Airbus, and other aircraft manufactures have raised their projections for India -- why?

Mar 29, 2014 at 9:48AM

Boeing's (NYSE:BA) Asia-Pacific & India sales VP Dinesh Keskar has said that global demand for new aircraft in the next 20 years would be nearly 35,000, and the bulk of those orders would come from the Asia-Pacific. Other than China, India would absorb a sizable fraction of the deliveries. Boeing has lifted its India outlook for commercial planes for the next two decades by more than 10% to 1,600 airplanes valued at $205 billion, and Airbus (NASDAQOTH:EADSY) raised its expectation by an even higher 24% to 1,290 aircraft worth $175 billion. 

This might raise some eyebrows because most Indian airlines have a history of struggling with uncompromising fuel cost, huge debts, inferior infrastructure, and fierce competition. So, are aircraft makers overestimating India? Well, maybe not -- here are three concrete reasons why despite the current slack, the Indian aviation market could heat up soon.

1. Passenger rate to improve
The $16-billion Indian airline industry is largely untapped. The country is home to more than 1.2 billion people, and only one out of every 20 travel by air. Airports Authority of India states that the number of passengers travelling by air has grown at a rate of 13% in the last 10 years, but it still stood at 159 million people in 2013. In contrast, 815.3 million passengers travelled by air in the U.S. in 2012.

Airbus projects that air traffic in India could increase five times by 2032. It estimates passenger traffic to rise 8.6% annually, well above the world and Asia-Pacific average traffic growth of 4.7% and 6.1%, respectively.

Currently, only two Indian city airports, Mumbai and Delhi, record more than a million passengers flying a month. But according to Dr Kiran Rao, Airbus EVP strategy and marketing, the number of cities is expected to increase to 13 by 2032. According to a KPMG report, the entry and increasing dominance of low-budget airlines, along with increased foreign investment in domestic carriers, would boost passenger numbers over time.

2. Increasing number of low-cost carriers
Low-cost carriers make up for 70% of India's current capacity and are estimated to increase further, bringing smiles to price-sensitive Indian passengers.

Bulgaria Air Boeing 737 LZ-BOO. Source: Wikimedia Commons.

Boeing feels fuel-saving single-aisle airplanes favored by budget carriers will account for 83% of the total aircraft demand in the future, which could mean more orders for the next-generation 737 and 737 MAX. Similarly, Brazilian airplane maker Embraer's (NYSE:ERJ) competitively priced single-aisle E-Jet, which has stimulated passenger traffic in emerging nations such as China and Brazil, is expected to get orders from low-cost carriers. 

Many Indian states are endorsing regional flights and making them pocket-friendly by reducing aviation fuel sales tax and making less fancy airports. That wouldn't immediately bring business to Airbus or Boeing, as they don't manufacturer small airplanes connecting Tier II and Tier III towns. But it could eventually create a market that could consume a 737, or an A320.

3. GDP and growing business relations
According to financial service firm Standard Chartered, India is expected to become the third largest economy behind China and the U.S. by 2030, registering $15 billion in GDP. It's true that India's GDP growth rate could be anything between 5% and 5.5% in the fiscal year ending March 2014, down from 8%-9% in 2009 and 2010. But even if the country witnesses approximately 6% growth rate in the next 20 years, as anticipated by Boeing, it can score over matured economies such as the U.S., which saw its GDP grow only 1.9% in 2013. 

Another factor aiding the Indian aviation industry is the growth in tech-oriented and outsourcing jobs that require more interaction with the western world. Nearly 52% of the global outsourcing work came to India in 2013, and that number is estimated to rise further. This means air travel for businesses is going to increase in the future.

As a result of the above factors, airlines are placing huge orders with the aero majors.

Demand expectations propelling orders
India's demand for new airplanes is making it the world's fourth largest aircraft market in terms of quantity and value. Airbus, which boasts that its A320 planes account for 70% of airplanes flying in India, has bagged massive orders of 220 jets aggregating to $22.2 billion from IndiGo and GoAir airlines. 

Airasia Plane Airbus A320. Source: Wikimedia Commons.

Boeing recently bagged a $4.4 billion deal from budget carrier SpiceJet to deliver 42 737-8 MAX jets starting 2018. A source close to the matter told The Wall Street Journal that Jet Airways also plans to order 50 Boeing 737 MAX. In India, fuel economy is an essential factor, so most of the orders are for Airbus A320s, which reduce fuel consumption by 15%-16%, and Boeing's fuel-efficient 737 MAX.

Embraer got a $2.94-billion deal last month for 50 E2 aircraft from Indian start-up airline Air Costa. Though the company has bigger expectations from China, it considers India a prime market as the country accounts for more than 95% of aircraft demand from Southeast Asia. 

Embraer 175. Source: Wikimedia Commons.

Investor takeaway
India's current aviation situation might be a bit difficult, but the rising air traffic and the need for boosting capacity augur well for the sector. The latest aircraft ordering trends could be the start of something big. If passenger traffic increases as per expectations, aero majors wouldn't just meet, but would beat their targets.

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