Air India Updates on Restructuring Progress

Jay Shabat
April 10th, 2023 at 12:03 AM EDT

Air India is moving on to the second phase of its Vihaan.AI turnaround plan, after claiming a number of financial and operational records during the first six months. But absent from the update are any details on the needed cost cuts at the formerly state-owned airline that was privatized just over a year ago.

Tata Group and Singapore Airlines-owned Air India claimed to have achieved the “highest ever single-day passenger revenue,” as well as single-day load factor, in an update Thursday on its five-year restructuring plan. During the past six months, the carrier placed the largest order ever by an Indian airline for at least 470 Airbus and Boeing aircraft to renew its fleet and fuel growth in the coming years. It also began consolidating its share of the Indian market by taking full control of joint ventures AirAsia India and Vistara that have cemented its number two spot — for now, executives would likely say — in the country. Air India said it has also made a number of customer, employee, and systems upgrades, including a $200 million investment in new technology, that will support its planned growth.

“The first six months of our transformation journey has … made great strides in tackling many issues that had built up over the years,” CEO Campbell Wilson said. “During this taxi phase, we have also come a long way in establishing foundations for growth … As we move into our take off phase, we will start seeing these investments bear fruit.”

In 2022, Air India and its subsidiaries — AirAsia India, Air India Express, and Vistara — flew 3.5 percent more domestic India capacity than three years earlier, according to Diio by Cirium schedules. The group’s main competitor, and India’s largest airline, IndiGo flew 10.5 percent more domestic capacity.

Air India and its subsidiaries had a 24 percent share of the market compared to IndiGo’s 56 percent share last year, data from India’s Directorate General of Civil Aviation show.

All of the investments and upgrades in Air India are certainly needed. The airline has long been a bloated, state-owned albatross with bureaucratic decision-making, labor unrest, poor customer service, and unreliable operations, all contributing to significant losses over the years. The Indian government, after numerous attempts, sold the carrier to Tata in a deal worth $2.4 billion in late 2021.

Absent from Air India’s update were any details on costs. Most in the industry would agree that the airline needs to reduce expenses to become competitive with the “upper echelons of global aviation,” as Wilson put it, that Air India wants to join. How it does that, whether through thinning its workforce or in other ways, remains to be seen. The carrier did note that it had “decommissioned pending sale” many of its “long-grounded aircraft” — one needed step to reducing expenses. Air India does not release its financial results.

IndiGo reported unit costs (CASK) excluding fuel of 2.76 Indian rupees (3.4 U.S. cents) during the December quarter. That was up 6 percent year-over-year, and 15 percent compared to 2019, driven by the return of some staff from pandemic furlough and foreign exchange pressures. IndiGo executives said in February that the airline planned to grow capacity further to offset the increased costs.

“Cost leadership remains a very essence of our profitability going forward,” IndiGo CEO Pieter Elbers said in February.

Elbers called the restructuring of Air India, as well as its consolidation with AirAsia India and Vistara, “a good thing for the market and for all the players in that market.”

Air India combined Air India Express, its budget arm, and AirAsia India on a single reservations and customer service system at the end of March. The airlines are to be combined under the Air India Express brand in the coming months following, for one, approval to consolidate on a single operating certificate.

Air India’s merger with Vistara is pending government approval.

Edward Russell

KLM Faces Increased Pressure to Cut Emissions at Schiphol

KLM got some good and bad news last week that, in sum, show the airline and industry writ large can waste no time in making good on their commitments to reduce carbon emissions. The alternative is strict, some would even say draconian, restrictions on flights that could arrest the industry’s future.

First, the bad news: Amsterdam’s Schiphol airport on April 4 outlined plans to bar flight movements at night — no takeoffs from midnight to 6 a.m., and no landings from midnight to 5 a.m. — in order to cut emissions and reduce noise. While the plan does not appear to be final yet, Schiphol made it clear that it wants a concrete plan to reduce aviation emissions within the next two years, or by 2025-26.

“We have thought about growth but too little about its impact for too long,” Royal Schiphol Group CEO Ruud Sondag said. “We need to be sustainable for our employees, the local environment, and the world. I realize that our choices may have significant implications for the aviation industry, but they are necessary. This shows we mean business.”

KLM, in a statement, said it was “astonished” by the news from Schiphol, and that it would “revisit” the move amid ongoing discussions with the Netherlands’ Ministry of Infrastructure and Water Management.

And, the good news: KLM, and a consortium of other carriers including Delta Air Lines, won their court case challenging the Dutch government’s plan to restrict aircraft movements at Schiphol beginning this October. That plan, like the night flight ban proposed by Schiphol, also focused on reducing emissions and noise at the European mega hub by cutting annual movements to 460,000 initially from 500,000, and to 440,000 from November 2024.

“With our measures we see a better alternative for achieving less noise and [carbon] while meeting travelers’ need to fly,” KLM said Wednesday, referring to the European Union’s so-called “balanced approach” to cutting aviation emissions. “The balanced approach is about the best way to reduce the number of people affected by aircraft noise.”

A spokesperson for the Dutch Ministry of Infrastructure and Water Management said they were “committed” to finding a balance between the economic importance of Schiphol and emissions and noise complaints. The ministry was evaluating possible follow-up actions to the decision, they added.

In November, KLM CEO Marjan Rintel told Airline Weekly that the airline could meet emissions and noise reduction targets through a “balanced approach” without restricting flights at Schiphol. Efforts underway include the modernization of the airline’s fleet with new more fuel efficient and quieter Airbus A320neo-family aircraft. She also called for the streamlining of air traffic control in Europe and more direct flight routings to reduce emissions; air traffic control reform is a rallying cry among European airlines but, given the strength of national unions, a third rail for many politicians.

Air France-KLM, which owns Air France, KLM, and budget airline Transavia, has committed to reduce carbon emissions per revenue ton kilometer 30 percent from 2019 levels by the end of the decade. The group is so confident in its ability to do this that it has even issued bonds benchmarked against meeting these targets. And, like most of the rest of the global airline industry, Air France-KLM is committed to achieving net-zero emissions by 2050.

The Dutch court’s ruling, coupled with Schiphol’s plan to ban night flights make clear that KLM cannot sit on its laurels and slowly wind down emissions to net zero by 2050. New aircraft and more direct flight routes will help but, as is increasingly clear, are not enough.

In a 2022 report, McKinsey & Company wrote that traditional ways for airlines to reduce emissions — new aircraft, fuel-efficiency programs, increasing seat density, and higher load factors — were “starting to bump up against the natural limit.” Sustainable aviation fuels, or SAFs, were the “most impactful short- and medium-term lever in the decarbonization pathway of the industry,” the adviser wrote in a follow-up report later that year.

SAF development is one area where KLM and the Dutch government could cooperate. The fuels, which generate at least 50 percent less carbon than traditional aviation fuel, are several times more expensive than their petroleum counterparts. The airline industry has made a strong case for government support to at least jump start the industry that has taken the shape of minimum SAF usage requirements in Europe under the still pending ReFuelEU Aviation emissions reduction scheme, and tax credits in the U.S.

Air France-KLM, which owns KLM, met 0.6 percent of its global fuel needs with SAF from suppliers like Neste in 2022, according to company data. That is more SAF than at most airlines but still well below the 2 percent usage by 2025 mandate under the EU’s pending rules. Closing that gap, and meeting the EU’s requirement that airlines use 6 percent SAF for their fuel needs by the end of the decade, will require significant investment in new production facilities.

However the widespread production and adoption of SAF occurs, the transition will cost KLM. The airline will have to pay the cost differential for the low-emissions fuels until prices of SAF come down, something that is unlikely to occur until production reaches something near scale. Some programs, including allowing passengers to add a SAF surcharge to their tickets, could alleviate some of these added costs.

But the alternative — a potentially successful limit on flights at Schiphol — could be even more costly for KLM. Flight restrictions could arrest the carrier’s growth, aside from flying larger planes on existing routes. And an airline unable to grow is an airline destined to incur higher non-fuel unit costs.

Edward Russell

In Other News

  • Avianca partially accepted Colombian regulator Aerocivil’s conditions for its merger with bankrupt Viva Air last week. The airline agreed to passenger protection conditions, but sought clarification on some of the operating and competitive requirements noting the “reality of the current market and to the operating conditions currently available to Viva.” For example, lessors have repossessed several of Viva’s aircraft. At the same time, JetSmart and Latam Airlines filed appeals to the tentative approval from Aerocivil. The regulator is increasing under pressure to take action following the closure of both Viva and Ultra Air in the past two months.
  • Yatra, an Indian online travel site, said in its latest earnings call that “domestic aviation [in India] witnessed a strong recovery with air passenger traffic up 17 percent year-over-year, and 19 percent quarter on quarter.” It added that India’s government is “committed to growth in this sector by way of infrastructure spending on new airports and expansion of existing airports.” Delhi is also incentivizing airlines to launch new routes. By Yatra’s count, the number of operational airports in India has jumped to 141 from 74 just in the past five years, with a goal of reaching 220 by 2026. The travel retailer, emphasizing the potential for further growth, also pointed to Air India’s privatization and aggressive aircraft ordering, which will greatly increase not only its own size but the size of India’s commercial air fleet more generally, notably on the widebody side. Yatra did explain that India still accounts for just 2 percent of total worldwide domestic traffic, compared to more than 6 percent for China. “[This] suggests that there are multiple years of growth ahead of us as we get into a similar environment as China over the next three years.”
  • Canada and the United Arab Emirates have reached a deal to increase the number of flights between them by 50 percent, or to 21 flights per week for each country. The move comes after years of pushback from Air Canada to the expansion of Emirates to Canada. However, that relationship thawed last year when the two airlines unveiled a new commercial partnership. Currently, the only nonstops between Canada and the UAE are from Toronto Pearson: Air Canada and Emirates to Dubai, and Etihad Airways to Abu Dhabi, per Diio. Emirates has already announced plans to increase frequency on the Dubai-Toronto route to daily from five-times weekly.
  • Global air travel demand, measured in revenue passenger kilometers (RPKs), rose 56 percent from last year’s deeply depressed levels in February, according to IATA’s latest traffic report. But RPKs were still 15 percent down from February 2019. IATA is hopeful that traffic will further rebound in 2023 as China’s recently-reopened market regains momentum. A closer look at that 15 percent decline from pre-crisis norms makes clear that international travel is still far less recovered than domestic travel. Worldwide domestic RPKs in February were just 3 percent down from February 2019. Capacity though, measured by available seat kilometers (ASKs), was up 3 percent, implying more empty seats. Of the six largest domestic airline markets in the world (the U.S., China, Japan, India, Brazil, and Australia), only the U.S. had more RPKs this February than in February 2019.

Jay Shabat & Edward Russell

Jay Shabat
April 10th, 2023 at 12:03 AM EDT

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