Airbus Clinches $12.5 bn Order from Air Asia

Malaysian budget carrier AirAsia Berhad has announced a $12.5-billion firm order to buy 100 A321neo aircraft from Airbus on a rainy second day of the 2016 Farnborough air show. The airline co-owns AirAsia India, the Bengaluru-based airline which operates domestic flights to 10 destinations in India.

Addressing a press conference, Tony Fernandes, CEO, AirAsia Group, said that it was the first time that AirAsia has ordered this aircraft. “Low-cost airlines generally operate around 180-seat aircraft. AirAsia’s A320s are 180 seaters, but now we have moved in a new direction. The A321 aircraft can accommodate 240 seats, but AirAsia A321s will have 236 seats for passenger comfort,” said Fernandes.

The A321 induction begins only in 2019.

This happened in the midst of Farnborough air show participants reporting a lower level of deal making than in recent years. Trade experts expect turbulence ahead. They are analysing growing risks to the global economy – from slowing economic growth in China to Britain’s decision to leave the EU. This could dry up orders or even result in some cancellations.

AirAsia Berhad is the largest A320 operator in the world. The budget airline operated 199 Airbus planes as of the end of March 2016 in India, Malaysia, Thailand, Indonesia and the Philippines and is poised to start in Japan. This purchase brings AirAsia’s total orders for A320-series planes from Airbus to 575 aircraft.

It is now under speculation whether the A321s will be brought into the Indian market.

Amar Abrol, CEO, AirAsia India, said: “The option is there to draw on the parent. However, every decision will be evaluated commercially.” For now, AirAsia will concentrate on growing its aircraft fleet to 20 so as to begin international operations. “I already have a board-approved target to get to 20 aircraft. I don’t need to wait for A321 to get to 20 aircraft. In the next 24 months, we will certainly get to 20 aircraft,” said Abrol.

Asian budget carriers, following the growth of AirAsia, have purchased hundreds of jet airplanes from Europe’s Airbus Group SE and its US rival Boeing Co.

  • In 2013, Indonesia’s PT Lion Mentari Airlines ordered 234 planes from Airbus, the carrier’s second purchase contract for more than 200 aircraft.
  • India’s Go Airlines India Pvt. ordered 72 A321neos from Airbus, doubling its total purchases of the model. 
  • In 2015, Indian budget airline IndiGo ordered 250 Airbus planes for $27 billion.
  • India’s Spicejet, too, is poised to place orders for 100 planes in an attempt to catch up with its competitors.

Budget airlines in the Asia-Pacific region are expanding amid a burgeoning travel demand underscoring their ambitious growth plans. The 10-year old budget carrier, IndiGo has become the largest airline in India by market share surpassing everybody. China Southern Airlines Corp. is Asia’s biggest carrier by fleet size, with more than 600 planes.

Air Asia doesn’t want to lag behind and is anticipating that economic growth from India, China and Vietnam will encourage millions of new fliers in Asia – the world’s most populous continent. AirAsia has become a pan-Asian budget airline that has grabbed significant market share from other full-service airlines like Singapore Airlines Ltd. and Malaysia Airlines Ltd.

As per Simon Elsegood, an analyst at CAPA Centre for Aviation in Sydney, the Asia-Pacific is going to account for at least a third of all aircraft demand over the next 20 years based on planemakers’ forecasts. There’s particularly strong demand for intra-regional connectivity in Southeast Asia and North Asia, and then there’s very, very strong demand within China itself for domestic flights.

 

 

Out of the Ordinary Saga of Spicejet.

There are at least 8 budget carriers which regularly fly across the skies of India. As per a recent IATA disclosures, air travel in India has grown by more than 20 percent last year. In comparison, passenger traffic in China rose about 10 percent and less than 5 percent in the U.S. India is one of the key sources of aviation industry growth globally.

Aviation in India also poses numerous risks. Various airlines have fallen due to one reason or the other. ATF taxes, tariffs, low fares, to name a few. As many as 17 airlines in India have been shut down in the past 20 years. Accumulated losses of operating airlines have reached Rs 600 billion ($8.9 billion), as per a research paper published in June 2016 by consulting company KPMG and the Associated Chambers of Commerce of India.

One of such airlines, Spicejet, was on the verge of extinction till 2014. Its flights were regularly being cancelled; it was just struggling to survive. Its creditors had retreated, debts had mounted.

Liquor baron Vijay Mallya’s Kingfisher Airlines Ltd. had earlier flopped miserably in 2012. Mallya defaulted on payments to its lenders, vendors, airports and staff. Today, he is forced to assume an ostrich like position.

SpiceJet was almost about to tread the same path in December 2014. It was forced to ground its fleet for one day. Oil companies had refused to fill its aircraft on credit.

In 2016, less than two years later, the story is vastly different. Fortunes of the company have seen a remarkable turnaround. Spicejet’s customers and investors did not betray it. Today, Spicejet has bounced back in style. Its share prices have become more than 3 times in 1 year. (What more can an investor ask for ! ) It is compared with a 1.2 percent decline in the benchmark S&P BSE Sensex.  The signal was there for everyone to see that its co-founder Ajay Singh’s has returned to the helm. Enter Ajay Singh, exit Maran.

Read : Spicejet Shares Might Jump Another 300%

Stake for Spicejet.

Spicejet appears keen to catch up with IndiGo. It is believed to be looking to order close to 100 new aircraft. It is looking at all options for its ambitious fleet expansion plans.  Spicejet needs to ramp up its 43-plane fleet as soon as possible to pose a challenge to its competitors – IndiGo, GoAir and others. IndiGo presently has 38.5% market share with its 108-aircraft fleet. It has placed orders for 430 more Airbus A320neo planes, with an ultimate target to build a 1,000-jet fleet !

Read : Indigo in 100 Aircraft Club; Spicejet in 150 Aircraft League!!

Spicejet’s recovery also reflects a boom in Asian air travel. It has given a bright spot for the plane makers of the world despite recent events, like last month’s so-called Brexit referendum, that have impacted the financial markets. Asian airlines were set to give big boosts to both the biggest plane makers of the world – Boeing and Airbus.

  • China’s Xiamen Airlines slated to buy 30 Boeing 737 Max 200 planes valued at $3.39 billion at list price.
  • India’s GoAir to purchase 70 more A320neos worth $7.5 billion.

Both Boeing and Airbus are upbeat for the aircraft market over the next 20 years. They see a demand driven by a growth in travel, especially in Asia. They estimate that Asia will account for nearly 40 percent of demand.

The Chicago-based company, Boeing: It expects demand for 39,620 new planes worth $5.9 trillion over the next 20 years.

Europe’s Airbus Group SE Airbus: The Company forecast demand for more than 33,000 new planes worth $5.2 trillion. By 2035, the world’s fleet will have doubled from 19,500 to nearly 40,000 planes.

Read : Airbus or Boeing: Whosoever Delivers early, wins Spicejet’s Order

Stake for Boeing.

A Spicejet order like this would be the key for the U.S. manufacturer Boeing. It is lagging behind Airbus in India’s burgeoning budget-airline market.

Segment leader IndiGo and the local units of Singapore Airlines Ltd. and AirAsia Bhd., have only Airbus jets. They have dampened Boeing’s prospects in India’s market.

Stake for Airbus.

“Airbus enjoys 70 percent market share in India and most Indian carriers are growing their business with us,” said Airbus spokesman Justin Dubon. “We’d be delighted to help SpiceJet too.”

Apart from Boeing and Airbus, Spicejet is also going to buy 50 small planes. “The Indian market can absorb as many as 60 narrow-body aircraft a year,” said KPMG’s Amber Dubey, adding that Prime Minister Narendra Modi’s push for regional connectivity will help expand the flier base significantly. “Looking at the delivery schedule of existing orders, there’s clearly space for more,” he said.

Thus, 3 other plane makers – Bombardier Inc., Brazil’s Embraer SA, and the Avions de Transport Regional, or ATR, are in a separate race for more than 50 smaller planes that SpiceJet is buying.

Bombardier Inc. is enjoying a revival with its C Series narrow-body jet starting service and winning a benchmark deal with Delta Air Lines Inc.

Spicejet is now in a position to dictate terms to the plane makers of the world. Today the situation is that the biggest such players – Airbus and Boeing, along with other plane makers are trying to appease Spicejet to win a potential blockbuster order worth $12 billion (approx). Both Boeing Co. and Airbus Group SE are eager to supply SpiceJet with as many as 100 planes with hefty discounts as per speculations that negotiations have intensified in the past few months.

“Losing SpiceJet would be a big blow to Boeing,” said Amber Dubey, “SpiceJet Chairman Ajay Singh knows this and hence is perhaps having interesting conversations with both.”

Win-Win situation for Plane Buyers.

It is now clear that the Airplane market has now become the buyers’ market. Thanks to aggressive Indian buyers like IndiGo, GoAir and Spicejet. They dictate terms now. The sellers have no option but to negotiate hefty discounts. This precisely is the situation where the saga of Spicejet has reached. Sitting comfortable.

All these airline operators now need not worry about the day-to-day operations of the aircraft and any possible frequent fare-war. A major part of the Investment can be easily recovered through the resale of the machine. It will surely return attractive profits. 

Operating an aircraft may not yield any noticeable profit, but reselling it surely will.

Thus, an airline might consider itself becoming an Airplane dealer!

However, the catch is : One must possess the money required to be paid as advance while confirming the order.