It could be diplomatic deal-making--and not the needs of India's State-owned airlines--that determines the outcome of this fight for the country's skies.

By A. Srinivas & J. Lahiri

Big-ticket diplomacy has always ruled India's skies: from the right to fly to deciding which birds will fly. Ask Dinesh Keskar, Boeing's 42-year-old India Representative, who has spent the last 8 years trying to convince the Air India (AI) board and the Union Ministry of Civil Aviation that the international carrier should buy 12 medium-capacity, long-range (MCLR) 300-seater planes from his company. Both Boeing and its arch-rival, Airbus Industrie--between them, they have a near-duopoly over the $75-billion global market--have been lobbying furiously for the Rs 4,000-crore pie in the sky.

Even as Boeing had all but clinched the deal, unexpectedly, in May, 1999, it fell through. Instead of the 12 MCLRs, the AI board decided to opt for a mix of six 250-seater small-capacity, long-range (SCLR) and six 185-seater small-capacity, short-range (SCSR) aircraft (value: Rs 3,500 crore). Within weeks, Keskar realised that Boeing was out of the deal because AI was going to buy the SCLRs from Airbus Industrie, the European consortium headed by France and Germany. Laments Keskar: "AI took the decision without even talking to us."

The flip-flop happened in a month. Just before the Paris Air Show, which opened on June 11, 1999, AI asked both Boeing and Airbus to make presentations on their present aircraft as well as those on the drawing-board. While Airbus did so on June 6, 1999, Boeing was asked to do the same in the last week of June since, an AI spokesperson clarifies, the airline refused to do so before the Paris Air Show.

At the air-show, Boeing realised, to its dismay, that AI had already decided to buy the SCLRs from Airbus Industrie. BT learns that, by then, Indian Airlines (IA) too had decided to buy six 50-seater turbo-prop ATRs, manufactured by a joint venture between Aerospatiale of France and Alenia of Italy, for Rs 450 crore. This, despite the fact that the IA board had made it clear that flying the ATRs would be unviable.

Clearly, the aircraft-acquisition plans of the State-owned airlines have become proxies for diplomacy, with their real needs taking a back-seat. Agrees an aviation expert: "It happens all over the world. After the Gulf War in 1991, Saudi Airlines purchased all its planes from Boeing, and Kuwait Airways from Airbus Industrie." Ever since it conducted its nuclear tests at Pokhran in May, 1998, India has used aircraft-deals as a lever to counter diplomatic pressure.

Convinced that aircraft-manufacturers can pressure their governments on foreign policy, the Vajpayee Administration dangled the carrot before them. Days after Pokhran-II, Union Minister For Information & Broadcasting, Pramod Mahajan, announced that his government could award the MCLR contract to Boeing if the transnational lobbied with the US Government to support India.

Later, the Vajpayee Administration decided to award the deals to the European company since their governments supported it on Pokhran-II. That explains the hurry to finalise the contracts too. In fact, on May 6, 1999, the Union Minister For Civil Aviation, Ananth Kumar, announced that both the AI and the IA deals would be finalised by June 15, 1999. However, his plans were stymied when the Election Commission's Code of Conduct came into play after the final dates for Elections 99 were announced on July 10, 1999. But the race will hot up once a new government is in place.

You can be sure diplomacy will play its role this time as well. For, the spectre of sanctions still hangs over India's head. On July 18, 1999, the G-8 continued its sanctions against India with regard to non-human international aid. In contrast, the US eased those that were imposed after Pokhran-II, and supported India during the Kargil conflict. So, Boeing could still bounce back.

Admits an AI spokesperson: "Boeing is still in the race because it has the 767-300s and 767-400s, which fit in with AI's requirements. Now, the 2 manufacturers will present their cases to the Technical and the Negotiating Committees. Finally, their bids will be evaluated on techno-economic grounds." Which implies that Boeing could lobby with the government that comes to power. That does not seem to bother Kiran Rao, the 35-year-old Airbus Industrie's India Representative, who says: "We are confident of meeting AI's requirements since we possess a family of aircraft of varying sizes and range."

What scares Boeing is the manner in which Airbus Industrie has emerged as the largest aircraft-manufacturer in the world in the last 3 years. By July, 1999, Airbus Industrie had bagged orders for 416 aircraft, or 65 per cent of the market. In the last 3 months, Airbus has sold 38 A340s--versus Boeing 777s--to 4 airlines. In fact, Boeing has become so desperate that, recently, it gave a commitment to purchase Singapore Airlines' fleet of 14 A340s in case they failed to find another buyer. In return, the airline would buy 10 Boeing 777s.

The scenario is worse in the SCLR category, where Airbus Industrie--which has received 260 orders for its A330s since 1996--has scored over Boeing's 125 orders for its 767-400s in the same period. Many airlines, like Emirates Air, which operates 250-seaters on all its international routes, are opting for the smaller planes. Even AI is convinced that it needs the SCLRs and the scsrs. Explains an AI spokesperson: "If we have to fly non-stop to low-density destinations like Frankfurt and Paris, we need long-range aircraft with fewer seats. So, the SCLRs will be more suitable than the MCLRs since they will ensure a higher Passenger Load Factor (PLF) even during the off-season."

In addition, since its hub-and-spoke arrangement with IA has not worked out, AI wants to purchase the scsrs to fly the local feeder-routes. At present, AI's fleet is unsuitable for this since it has 6 Boeing 747-400 (400-seaters), which can only fly profitably to high-load destinations like London and New York. And its 12-year-old Airbus A310s (8 x 200-seaters) and A300s (3 x 250-seaters), which fly short distances, need to be replaced. Add to this its 20-year-old fleet of seven 747-200s (412-seaters).

Boeing, however, counters that the operational costs of running the SCLRs are 30 per cent higher than the MCLRs--a fact that is acknowledged by Airbus Industrie. But the latter insists that those savings can add to the bottomline only if the airline can generate large-enough PLFs on the routes flown by the bigger planes. Although AI contends that the MCLRs will not break even for 17 years, it does not know the break-even factor for the SCLRs. Admits the airline's spokesperson: "We will worry about those details when we conduct the techno-economic evaluation."

Still, the changing diplomatic realities may turn out to be more important. Consider how the Civil Aviation Ministry pressured IA to opt for the ATRs despite the airline's evaluation that operating them would be unviable, and that it should opt for 150- to 180-seater planes from either Boeing or Airbus Industrie. Last month, the IA board announced grandiose plans of buying 39 jets for $5 billion (Rs 21,250 crore) in the next 5 years even as the Ministry was pushing the French deal.

The average age of the 52-aircraft fleet of IA--which includes 12 Boeings (737s) and 40 Airbus (10 x A300s, and 30 x A320s)--is 15-18 years. With competition from the private airlines hotting up, IA is left with no option but to replace its ageing fleet--fast. That process could be delayed despite Ananth Kumar's contention that "IA is free to take its own decisions."

Documents with BT prove that the Ministry did push the ATR deal. Although the IA board--initially headed by P.C. Sen, and later, by Anil Baijal, the former Joint Secretary in the Civil Aviation Ministry--has managed to stall the decision, it may be forced to toe Kumar's line if the BJP comes back to power.

For months, Sen, backed by his board, opposed the Ministry's bid to buy the ATRs, meant to fly feeder-routes. For instance, in its meeting held on September 10, 1998, the board concluded that operating the 50-seaters would result in an annual loss of Rs 78 crore for a 10-year period. But the Ministry refused to accept this logic. According to the bureaucrats, IA had exaggerated the figure by assuming constant revenues, but increasing costs over the 10-year period.

So, when the Ministry insisted on buying the ATRs, Sen wrote a letter, on November 19, 1998, to V. Jayakrishnan, Secretary (Civil Aviation), charting out the scenarios to reduce IA's losses from the Rs 450-crore deal, which included:

• If the GOI refused to fund the acquisitions, IA would have to either hike all fares by 90 per cent, or the ones on the new routes by 132 per cent.

• If the GOI funded the acquisition, the airline would need to either resort to an across-the-board hike in fares by 28 per cent, or on only the new routes by 41 per cent.

A peeved Ministry promptly sacked the entire board the next month, ostensibly because it had given a green signal to the merger between IA and AI without consulting it. But the real reason was out 2 months later, after Baijal was inducted as the Chairman and Managing Director in January, 1999. In February, 1999, the Ministry suddenly announced that it was releasing Rs 125 crore to IA. Although the amount was budgeted for 1998-99, the Ministry attached a caveat.

R.S. Meena, Under Secretary, Ministry of Civil Aviation, wrote to Baijal, stating: "The Rs 125 crore to be released to IA may be utilised for (the) acquisition of 50-seaters and other aircraft." But IA refused to play ball. On March 10, 1999, Baijal wrote to Jayakrishnan: "The turbo-prop aircraft fleet is primarily aimed at extending the domestic network to smaller towns which will not add potentially strategic value to its existing network. On the other hand, IA requires to modernise its jet fleet particularly in the light of the fact that the competition is inducting newer fleet."

However, the Ministry said IA's blueprint was contrary to what its rivals were doing. While Jet Airways has bought 5 atr-72s (60-seaters), Sahara Airlines plans to buy 12 Embraer-120 (30-seaters) by April, 2000. Thus, the Ministry wrote back on May 12, 1999, promising more resources. Although the figure was hiked to Rs 325 crore as a contribution to IA's equity, the rider stayed. "The injection of government funds of Rs 325 crore should be utilised by IA/Alliance Air only for acquisition of six 50-seater and other aircraft"

Still, when the issue came up before the Public Investment Board, which ratifies investments by State-owned companies, on June 23, 1999, Baijal put his foot down. Fortunately for him, the announcement of Elections 99 stalled all decisions--including the ATR and the SCLR deals. However, the same factors that influenced them earlier will come into play again in future. Clearly, AI's and IA's presence in the sky will continue to reflect these realities on the ground.

Additional Reporting By Nanda Majumdar

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