Podcast: Why India Won't Replace China In Commercial Aviation

India's airlines have ordered thousands of aircraft this year, but economic realities will keep it from replicating Beijing's growth miracle anytime soon.

Listen in as Aerodynamic Advisory's Martha Neubauer joins to discuss her recent analysis of the market with Aviation Week Network editors and experts.

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Rush Transcript

Joe Anselmo:

Welcome to Aviation Week's Check 6 Podcast. I'm Joe Anselmo, Editorial Director and Editor in Chief of Aviation Week & Space Technology Magazine.

Will India replace China as the aviation industry's growth engine? We first asked that question on this podcast back in February. Three months later, we witnessed two huge deals that underpinned those sentiments. Air India firmed up orders for 470 aircraft from Airbus and Boeing and IndiGo ordered 500 Airbus A320neos at the Paris Air Show. Airbus's Christian Scherer proclaimed that the IndiGo deal symbolized, "the enormous potential of the Indian market."

Meanwhile, India's government is pledging to invest $12 billion by 2025 to modernize airports and build new ones. Yet some observers still think India faces sizable structural hurdles, and its evolution to becoming a leading aviation market won't be nearly as fast or efficient as China's was. Martha Neubauer, a Senior Associate at Aerodynamic Advisory, has just written a column on that topic for Aviation Week and our sister publication Aviation Daily. Martha is with us for today's podcast. Joining her is “the numbers guy,” Daniel Williams, Aviation Week's Manager of Civil Fleet Flight and Forecast Data. And with us is Karen Walker, editor in chief of ATW magazine, who spoke with CEOs from Indian Airlines just last week.

Martha, let's kick off with you. India's GDP per capita will reach just 6,000 US dollars in 20 years, which is well below the $10,000 threshold for air travel demand to take off. What else did you write about?

Martha Neubauer:

First I'll start by saying that there's a lot of buzz around India that really I think for some good reasons with those orders that you mentioned and with their projected overall GDP growth. But as you said, GDP per capita is only expected to reach $6,000, whereas if you look historically, it obviously varies based on specific countries' demographics and their distribution of wealth, but typically when you look at countries' growth, it really requires a $10,000 per capita to really see an inflection point in air travel demand.

And something else that's kind of structurally different with India too than a lot of countries is that wealth distribution. So really what gets people flying is people coming into the middle class and being able to afford flying instead of never being able to fly at all. So in India, their annual travel propensity, which is measured in terms of trips per capita, is only 0.12. That's on average of each person traveling once every eight and a half years, but this isn't really how it's distributed in India. Really there's a percentage of the population that can travel maybe five, 10, even 20 times per year, but there's a large share of the population that doesn't travel at all. And really where you see growth kickoff is bringing people from never traveling to being able to travel, which requires a strong middle class.

Some other interesting things is people are looking towards India as a new manufacturing center for aerospace. And there are some challenges with China from an IP rights perspective, also just from a trade perspective geopolitically, and so people are looking to India for another source of lower cost manufacturing. Some of the challenges in India though with this is, it's kind of a chicken or egg, but something that makes a region attractive for aerospace manufacturing is that there's already a manufacturing industry for aerospace in that country already. This provides a source of engineering talent, manufacturing, mechanic talent and also provides services in the country so you don't have to outsource for things like heat treatment and then bring back into the country. So having this ecosystem can really help a country build up its value proposition as a low cost source. This takes some top-down strategy from a country's government in order to really develop this industry. So that's something that is definitely possible, but means that it'll take some time for this to develop and for India to really become a manufacturing center for the aerospace industry, both for commercial and defense.

Joe Anselmo:

Dan Williams, you were on that podcast I mentioned that we hosted in February and back then you said, "I am reasonably skeptical about India replacing China as the industry's growth engine." Then we saw a 500 aircraft order at the Paris Air Show. Are you still reasonably skeptical?

Dan Williams:

For once I stand by my words. I am reasonably skeptical. Is India going to grow? Yes, we're never going to doubt that. That's not the purpose of this podcast. India will grow, that's a fact. They do have some growth in the middle class, and as Martha has said, if you just take that 0.12 and shift it up to 0.15, shift it up to 0.2, the propensity to travel, then when you have a population of nearly 1.5 billion people, that's a lot of flights and that's a lot of bums on seats. So don't get me wrong, those numbers, whilst they're low, they don't have to move that much further north to have a big impact.

India still has two issues. One is infrastructure. They have announced the $12 billion of investment. That's a start, but that's all it is, it's a start. India wants to steal some of the Gulf carrier, the transit carrier. They've ordered some of their widebodies in part to try and do that. However, they've got a long way to go with their facilities at those transit points that need to develop before people will probably start traveling through them, especially when you got some aggressors for example, like the airlines in and around Saudi Arabia are also trying to steal some of that business as well. And whilst the, let's call them “legacy Gulf carriers” are going to try and keep that as well.

The other part of this deal is IndiGo order, 500 aircraft, wonderful. Nearly 400 of them are for A321s. The reality is those 400 A321s, that's fleet replacement, that's not necessarily fleet growth. That is up gauging. That is taking the same pilots, the same cabin crew, the same operations, the same slots, the same schedule, the same everything and doing nothing more but adding 20, 30 seats to every flight so you can increase capacity without increasing the in-service fleet.

So yes, they will grow. Is India the new China? No. China between 2013 and 2018, hey, I'm the numbers guy, I'm going to throw some numbers, they took over 1,500 deliveries in a six-year period, 1,500 deliveries. Our forecast is for India as, we class them as a continent because they're so big, to take under 1,400 over the coming decade. So whilst they're still taking a significant amount of aircraft, China took them in a shorter timeframe. They were taking up of 200, 300 for a period of time. Now we did see a little downturn in 2019, in part because of the MAX. The numbers were dented because of the lack of MAX deliveries. So there was a slight downturn, and we have seen the cooling of the China economy. However, when you compare that to India, it's still eons above.

Now do we get to 200-plus deliveries in our forecast in the coming decade? Yes, we do, but we only come to those in the last few years of the forecast. So is China the new India? I'm still reasonably skeptical and will probably forever remain reasonably skeptical. I'm glad when my words don't come to haunt me, and hopefully we shall see plenty of growth, but it's not going to be the new China, probably not in the coming decade. Now, in this time in 15, 20 years, if some of the numbers that Martha was talking about, the GDP were to go to $10,000 or above, then it comes down making very significant gains, but we're still a way off that yet.

Joe Anselmo:

Karen Walker, as I mentioned, you've just returned from an airline leader summit in the Asia Pacific. Why don't you weigh in here?

Karen Walker:

Thanks Joe. That was in Singapore and it's the Association of Asia Pacific Airlines, AAPA. And so they have all their Asia Pacific members, CEOs join. Interestingly, last year, India joined AAPA. That was a big, big move. And so I think, we're hearing some cynicism here, there's been some cynicism about the actual airlines themselves in India for a long while and a lot of them have got big then disappeared like Kingfisher and Air India all seems to be on the verge of doing some good things and then it just doesn't happen.

I think just to look at it from their perspective, the operating side, there are some big things that now, we talked about the huge orders by Air India and IndiGo, but there's also been very big changes in management as well. You've got Campbell Wilson is the CEO of Air India, highly experienced, highly capable person who is a New Zealander who was CEO to Scoot the Singapore Airlines low-cost subsidiary. So he's got massive amounts of expertise now to apply to that airline. And similarly, Pieter Elbers, a Dutchman who was the CEO at KLM for a long, long while is now running IndiGo. So you've got that happening.

And it was interesting. And Subhas Menon, who's the Director General of AAPA, in one of his opening remarks to the media was saying, everybody was talking very excitedly about India and the huge growth of India, and it's true, but what he said was, "So we now have an elephant in the room," referring to the Indian aviation market, but he said, "But for now it's still a baby elephant," which I thought was a nice way to put it. In other words, the conversations I heard from the room was that yes, what's happening in India is big, but you need to keep China in context.

So there was some interesting numbers that came up. Before COVID China was the largest aviation market in Asia. It counted for about a fifth of the region's international traffic. China of course also was the last to lift its COVID restrictions, that massively put it back. India reopened much earlier, and so a lot of what you're now seeing in terms of the numbers is also related to the difference in when they reopened. But the interesting thing is that China's air travel demand is growing at 1000% now. Now it's from an almost zero base, but it is coming back. I think we're going to see that. India, meanwhile, the air travel demand is already at 20% above 2019 levels. So you're definitely seeing that hunger for travel. We've talked about the infrastructure issues. China is some 30 years ahead of India in terms of it had this big aviation vision, it still does. It's already got all these big airports, et cetera. India is saying it's going to do that, invest in doing that, but it's going to take time.

And then I'll just refer to, I had a conversation with Robert Martin who is the CEO at BOC Aviation, one of the biggest leasing companies in the world, and also Steven Townend, who is the CFO at BOC, and he will take over as CEO on January 1st, and they had some interesting perspectives. The thing that Robert emphasized is that the big difference between India and China that is relevant to aviation and their ability to keep making these investments in aviation is that China has the four largest banks in the world to support this. And he was pointing out that Indian banks are way smaller and their ability particularly to finance US dollars is a lot less. So he was saying that that's why you're seeing a lot of operating leases in India and that is going to hamstringing some of this growth. So I thought that was interesting.

Joe Anselmo:

Martha, there were two points you made that I want to connect to ask you a question. You talked about airplane builders are interested in IP protection. We have a company called Embraer that's really good at that, sourcing the best components from all over the globe and providing ironclad IP protection. And then we have India where there's at least rumblings of a wish to have an indigenous capability to produce commercial aircraft. Could you see those two marrying up at some point?

Martha Neubauer:

Yeah, Joe I think that's a really interesting thought since Embraer has been looking for a partner and there are limited options in the world. We saw what happened with Boeing and Embraer, obviously concerns with China. And so I think India, it's a really interesting prospect, especially because of the potential for the growth of a regional aviation market in India. The regional aviation market overall has been kind of faltering over the past few years, especially in the US with rising pilot costs, and there are so few new regional aircraft out there to replace ones that are retiring.

But India really we see has the potential to become a strong regional market because it sits kind of in that sweet spot where we think it will in the coming years of having enough air travel demand domestically to need connections between the parts of the country that are far apart that really can't be met with any other form of transportation, but not so much demand that you're just going to jump up to narrowbody aircraft or even widebody aircraft as done in some places in China and Japan. So I think there's really some synergies there with the need for regional aircraft potentially in the next 20 years in India and also for India to be seeking that manufacturing growth.

Dan Williams:

Just jumping on two points, one that Karen said and one that Martha says. Karen quite rightly says China's 30 years ahead, there or thereabouts, in their progression, their industry, their infrastructure, brilliant. What did Airbus do a number of years ago? They invested on a final assembly line in China. Now, Martha, you made a great point about Embraer, they could look for a partner there. I think in maybe slightly different circumstances, maybe Boeing would look potentially to India and say, "Hey, look, come on. We saw how successful it was when Airbus put a final assembly line in China." Boeing tried with a fit-out facility in China and, okay, the MAX hasn't helped that, and there's other geopolitical issues that are way too complex for my little brain to go into.

However, could India be an investment route for Boeing? Could Boeing install a final assembly line there? Could they therefore seek a lower labor cost pool source? How do they get the snowmen hold the fuselages from the spirit across the pond? Airbus have been doing transporting fuselages or sections thereof around the globe for years, Boeing do it with the 787. So as ridiculous as my stupid little comment might seem on a podcast, I'm either going to look really clever in 15, 20 years when Boeing have opened a final assembly line or I'll just be written off in the annals of history and said, "That guy was an idiot."

Joe Anselmo:

Okay, well, I will note that I said Embraer and you had to one-up me with Boeing for final assembly lines. Karen, we shouldn't lose sight, we're talking about growth engine, I use the word growth engine. I mean, China and India are both going to be very important airline markets for decades to come, right? Let's not lose sight of that.

Karen Walker:

Correct, yes. One aspect that we haven't touched on, and again, this was something that Robert Martin at BOC raised and I think is important, he also pointed out that China has now got a very strong focus on growing the freighter fleet and capacity. And he said that's very smart, and he pointed that as sort of another difference there because e-commerce is definitely also something that everybody agrees is going to keep growing, and it's another part of that whole economic engine, if you like.

I think it all goes really back to what Martha was saying in her commentary that the bottom line when it comes to air travel and transporting goods, bottom line, it needs people with the wealth to buy that air travel and to buy the goods. And the truth is that India, from a per capita perspective, is a much smaller engine compared with China right now. Not to say that it won't keep growing, keep happening, but that, I think, just keeps things in perspective.

Joe Anselmo:

Unfortunately, we're starting to run out of time, but Martha, I wanted to give you the last word.

Martha Neubauer:

Yeah, Karen, I think that's a really good point that India's GDP is expected to grow above 5% per year for the next 20 years, which really is kind of unheard of steady growth in today's world. But China saw 14% growth year over year for the 20 years leading up to COVID. So really meteoric growth is not something that you can expect to be replicated, and so while the 5.5% growth per year is very meaningful and will be a strong market for aviation, we can't just assume because it's very strong growth that it will be able to replicate something that was quite historic

Karen Walker:

That baby elephant has still got to grow.

Martha Neubauer:

And elephants I learned take, I think it's 16 years to become fully grown.

Karen Walker:

Right.

Joe Anselmo:

Well, Martha, Daniel, Karen, thank you all for a very insightful conversation. I'm sure we'll all be back in the coming months to talk about this story, it's not going anywhere. That is a wrap for this week's Check 6. A special thanks to our podcast editor in London, Guy Ferneyhough. To our listeners, thank you for your time and we'll be back with you at the start of December with another Check 6.