:: February 2005 Letter ::
In travel, it’s the little things you notice. Example. In Indian airports, toilet paper is stamped “Airport.” That’s a smart anti-theft deterrent, I thought. Then I realized the paper looked as though it were stamped by hand. In fact, considering the way India works, I pictured an entire government ministry devoted to this task, an army of workers hand-stamping each and every square.
That’s pretty much India. They take their bureaucracy very seriously, and secure jobs, of any kind, are revered (and protected). That makes a lot of people happy. It also messes up an economy. India doesn’t even make the top 100 in Heritage Foundation’s economically free countries list. Ordinary business transactions take as long as a 747 D-Check. Competition is strongly discouraged, particularly if the government has a stake in the fight. The effect on Indian civil and military aviation has been devastating. Yet there are strong indications of change, at least on the civil side, transforming an aviation backwater into a fantastic growth market.
I’m just back from three weeks in India, where I outsourced my vacation. For my wife’s sake, I limited myself to one industry playdate, but I did talk to a lot of Indians, and the “flexible” nature of Indian domestic air travel gave me plenty of time to observe the situation in seven different Indian airports.
Until recently, India’s aviation scene reflected the broader horrors of a mixed economy. Flying Air-India (overseas) and Indian Airlines (domestic) feels like flying any other complacent, state-owned flag carrier, like something from pre-1990 Warsaw Pact Europe (or any pre-Chapter Seven US zombie airline). I’m told it was much worse before competition arrived. Hot, controversial topic now: partial privatization, the Bronze Age of airline development.
Yet India now has a thriving private low-cost carrier (LCC) industry, led by Jet Airways. Like Southwest Airlines, Jet Airways has succeeded by flying point-to-point circles around an established legacy carrier, using 737s. Southwest's Herb Kelleher is Jet Airways’ Naresh Goyal. Southwest's signature bag o' peanuts is Jet Airways’ signature bag o' weird anise seeds and sprinkles. Others have followed, including Air Deccan and Air Sahara. Kingfisher, which brews a stunningly ordinary beer, hopes to get it right by launching its own LCC. The scorecard so far: two for Boeing (Jet, Air Sahara), two for Airbus (Deccan, Kingfisher).
While we were there, the Indian Government gave Jet and a few other LCCs permission to fly abroad, engendering route fragmentation and some short-term prospects for new 200/300-seat jetliner sales. Air-India started repositioning itself as a quality, premium-traffic international player, in much the same way that I might quit my job as aviation analyst and take up professional wrestling. With continued government support, however, they are likely follow through on their plan to buy 50 new 250/380-seat widebodies.
Good news: 250 million Indians are middle class or above (not-so-good news: 750 million Indians most definitely aren’t). That’s a great air travel market. And with de-regulation, hundreds of millions of Indians are now free to move about the country, visiting Cousin Sanjay in Calcutta and Uncle Vikram in Mumbai.
In terms of new aircraft demand, India is the new China. After years of sluggishness, the Indian aviation market grew by almost 20% last year. Sensing a boom, Airbus and Boeing executives started booking flights to Delhi, and talking about the Indian market in the same bullish terms they usually reserve for China. In December, Airbus raised its 20-year market forecast for India from 222 planes to 400.
There are other similarities between India and China, aside from growth rates. Both countries are experiencing rapid economic growth that is heavily concentrated in 8-10 key zones. As a result, the air travel market is concentrated in three or four major hubs and five or six minor ones. Smaller regional markets (and regional jet demand) are growing much less rapidly.
In fact, India is also the better China. To sell planes to India, you don’t need to go through a state purchasing agency that makes drama queen pronouncements about not buying anything for a year. There are no WTO-violating implied demands for local jetliner work placement. There’s no asinine talk of the need for a homegrown regional jet, or a local RJ production line—just straightforward A320 and 737 purchases. And as airline routes fragment, there’s little interest in a politicized A380 sale. In fact, 80% of India-US/UK traffic now has to stop somewhere en route, another reason why India’s international carriers are shopping for long-range point-to-point 250/380-seat aircraft.
In short, the Dead Hand of The State is quickly loosening its grip on India’s civil aviation industry, producing growth and creating strong business opportunities. Sadly, prospects for India’s military side still look dismal. But there is one chance of a shock to the system. It all revolves around Pakistan.
For years, Pakistan has equipped its air force with a dysfunctional collection of Chinese-built MiG rip-offs and third-hand Mirage IIIs. But as a result of US foreign policy and the war on terror, Pakistan’s dreams might come true, in the form of late-model F-16s. India is disturbed by this possibility, and the Indian newspapers are full of editorials fretting over the prospect of a longstanding nemesis with real combat aircraft.
This leads to serious cognitive dissonance. On the one hand, the Indian pundits are right — Pakistan's new F-16s would be much more effective than most of the IAF's planes, creating strategic instability. On the other hand, whose fault is that? No one told India to equip its air force with locally built near-antiques and semi-maintainable Russian planes. No one forced India to start its indigenous Light Combat Aircraft (LCA) program, which may or may not succeed in delivering something of dubious value. It certainly isn’t a question of access — Dassault and the other Europeans would have sold India the latest and best a long time ago. Even the US is willing to sell. The proposed P-3 sale, widely viewed as a test case, includes better technology than the P-3 package offered to Pakistan.
The largest (and strangest) part of the IAF fleet is 380 MiG-21s. The most effective way to deploy MiG-21s: mounted at the end of long poles on carnival rides, revolving around a central wheel as calliope music plays and delighted children laugh mirthfully. Unfortunately, the IAF has chosen to upgrade them to stay in-service for at least another decade at a cost of over $5 million per plane. Combat effectiveness is minimal, but hey, you go to war with the air force that you have….
Once again, this is the equivalent of the toilet paper stamping ministry. Hundreds of expensive MiG-21s are effectively doing the job of dozens of modern aircraft, but think of the pilots, mechanics, and upgrade supervisors all enjoying their happy and useless employment. I too spent a happy afternoon at Bagdogra Airport watching dozens of MiG-21s take off and land, converting fuel into noise and smoke. And jobs.
It’s not as simple as jobs alone, of course. Large aircraft fleets also have a psychological value, beyond their worth as job creation devices. India also wants to avoid dependence on any one country (which explains the reluctance to buy US planes). Then there’s the more complicated economics question. The current fleet was cheap to acquire, but operating, maintenance, and upgrade costs are painful. My industry contact in Delhi, a General Electric representative, told me that half the battle is creating a customer awareness of life-cycle costs. Looking at the IAF fleet, life-cycle costs have very clearly not played a role in previous purchase decisions. In short, India needs to copy Egypt, saving money by replacing large fleets of inferior planes with smaller fleets of more effective aircraft.
There are glimmers of hope. India has announced a 126-aircraft medium fighter acquisition, in parallel with ongoing Su-30 procurement and the LCA. Contenders include Eurofighter, Gripen, Mirage 2000, F-15, and F/A-18E/F. Ominously, the sixth option is the MiG-29, and there’s also talk of putting the resources into yet another homebuilt oddity, a Medium Combat Aircraft (MCA). Either path opens the door for more of the same — a baroque IAF fleet, and politicians fretting about neighboring countries getting real planes.
Yet there’s the chance of a major strategic shift with this competition. Possibly, some lucky European manufacturer will win the export lottery, impacting Europe’s defense industrial future. Alternatively, there could be a shift to US planes — the F-16 itself is an unspoken player, and there’s even vague JSF talk. Since this would lead to other defense exports, plus industrial joint ventures, joint training, and other cooperative defense measures, there could be a major change in US-Indian relations. The military side of Indian aviation has some way to go before it looks as promising as the civil side; but the fighter decision could change that instantly.
India’s aerospace industry is a different topic altogether. The scene is dominated by Hindustan Aeronautics Ltd (HAL), but there are lots of smaller players, all doing their part to promote indigenization, self-sufficiency, and combat ineffectiveness. After decades of trying, the country’s weapons import bill continues to rise, exports are minimal, and there are no meaningful subcontracts on international programs. There are, however, jobs at stake. Big problem: they prize technology, in and of itself, distributed in a government-mandated, top-down manner.
Most of the world has decided that the real prizes are access to capital, quality manufacturing techniques, and work on important multinational programs. I suspect India’s defense and aerospace industries have a very long way to go before they change course. Meantime, India’s IT and software industries are adding more value than anyone ever dreamed, while aerospace looks like a state-run relic.
And that’s India. But don’t believe me; go and see for yourself. There’s something really great about a country of one billion people, with very different cultures, who have decided that the only way to make things work is democracy. The government doesn’t mess around with theocracy, military rule, state-sponsored “Asian Values,” or communism; India is civil, secular, and even (slowly) embracing free markets. There’s magic in that.
Hotels? In New Delhi stay at The Imperial, a luxurious urban oasis resembling the Los Angeles Department of Water and Power. A guy at the bar told me the Lockheed Martin guys like it too. If you go to Jodhpur (you should), stay at the Umaid Bhawan, a weird, opulent art deco heap. Udaipur’s Lake Palace Hotel is amazing, notwithstanding the small problem that the lake itself is almost dry. In Kochi, the Taj Malabar or The Malabar House are both great in different ways (the former big and resort-like, the latter small and charming). In Chennai, The Park is where India’s trendy outsourcing recipients go to talk about outsource work. Things to read? William Dalrymple’s City Of Djinns, Christopher Hibbert’s The Great Mutiny, and Rudyard Kipling’s Kim. Also, Trying Really Hard To Like India on Slate.com (http://www.slate.com/id/2107063).
There you have it. Three weeks in India, and I’m an instant expert. But I’m forgetting it all gradually, and returning to my day job. And February’s report updates include the Fighter and Special Mission Overviews, plus the F-16, 777, A330, B-1, and S-3. Have a good month.
Yours, By The Many Arms Of Vishnu,
© Richard Aboulafia 1997-2006, All rights reserved.