Another public humilation for one of the world’s most troubled aviation markets
Progressive moments, as it pertains to the Indian Civil Aviation industry, is best characterized by “one step forward, two steps back,” with the latest drama involving failure to stay in compliance with United States Federal Aviation Administration (FAA) routine safety audits. As of January 31, 2014, the Directorate General of Civil Aviation (DGCA), representing the Indian governmental regulatory body for civil aviation, has been downgraded from a Category 1 Safety Ranking to Category 2, which means that India’s Civil Aviation authority does not comply with the International Civil Aviation Organization (ICAO) safety standards.
[Further Read: FAA announces revised safety rating for India – official spFAA press release]
The downgrade, which goes into effect immediately, will prevent two Indian carriers currently flying into U.S. airports, Air India and Jet Airways, from adding additional flights to the U.S. beyond their current capacities until the restrictions are lifted. They are also banned from participating in reciprocal code-share agreements with U.S. carriers and can be held indefinitely for safety checks at U.S. airports at any given time.
India joins a list of 10 countries – including Bangladesh, Barbados, Curacao, Ghana, Indonesia, Nicaragua, Philippines, Serbia, Saint Maarten and Uruguay – that are placed under Category 2 restrictions. Of these ten countries, only two – India and Philippines – send their foreign carriers to U.S. soil.
Both Air India and Jet have had negligible histories with regards to their expansion progress into the U.S., but either way, this recent turn of events is destined to create more headaches in the never-ending saga to transform India into a global aviation powerhouse. In spite of all the ups and downs over the years, Air India and Jet Airways have plotted out ambitious short-term plans to bolster their weak competitive positions in the U.S., but the FAA snarl will effectively de-rail most of them until the mess gets sorted out.
Having failed largely in the U.S. – India market, Cat II is the last thing AI and 9W need
The truth is, despite the fact that the U.S. – India market is very high volume, with roughly 1 million passengers traveling between each nation annually in both directions, neither Indian carrier has effectively been able to gain a slice of the market share successfully on a standalone basis (although arguably, U.S. and even Canadian carriers have been equally unsuccessful). The market relies predominantly on carriers based in countries located between the U.S. and India, capable of capturing on larger volumes of sixth-freedom connecting traffic between multiple points of origin in each country.
For a long time, the primary winner in the 6th-freedom race were the major European network carriers, Lufthasa, British Airways, Air France and KLM, and to a lesser extent, a few of the Asian giants across the Pacific. Indian and U.S. carriers did attempt to replicate this model by creating “scissor hub” operations at airports such as London Heathrow, Frankfurt, Amsterdam, Paris, Brussels and Shanghai, although these small-scale hubs were largely loss-making and lost relevance when global airline alliances and code-share agreements took off in the 1990’s.
In the mid-2000’s, with the introduction of longer-range aircraft from major manufacturers Boeing and Airbus, U.S. and Canadian-based airlines attempted to take advantage of polar routings to link the two countries and eliminate the European/Asian stopovers. The highly-anticipated successes of these operations were deflated with soaring fuel prices, a souring economy and overall inability to generate the optimal yield mixes to cover the high costs of operating such long flights.
In the wake of failed experiments by Air Canada, American and Delta, the ‘big three’ giants of the Middle East, Emirates, Etihad and Qatar Airways, rose to the occasion, bolstered by capitalizing on their advantageous transfer centers in Dubai, Abu Dhabi and Doha, to bring the two countries closer together at attractive price points for travelers with fast transit times between flights. With largely pro-aviation government influence, lower cost structures and the ability to tap into interior cities in the Subcontinent, these carriers have grown to capture larger shares of the U.S.-India traffic flows much to the chagrin of their European-based competitors.
Having largely failed at achieving similar successes between the same markets, Jet and Air India have shifted their stragetic focus on formulating partnerships and alliances with stronger carriers to avoid missing the boat. State-owned Air India, by far the most beleagured legacy carrier in India, set its sights on joining the Star Alliance network in tandem with its merger with Indian Airlines and a major rebranding campaign. Jet chose to avoid the complicated politics of joining a major alliance, realizing that times had changed and the neo-focus of the current decade is how to dance with the Big Three Gulf Airlines, ultimately choosing to partner up with Etihad.
However, after the events of this week, both carriers may face grim prospects for any future hope of achieving near-term goals with the restrictions in place.
Air India’s Star Alliance integration saga will become even more hotly contested
The tug-of-war scenario between Air India and the world’s largest global alliance group, Star Alliance, has been drawn out for the better part of a decade. After a highly dramatic fall-out in 2011, during which Air India’s impending integration was officially severed from failing to meet IT-related deadlines, the two parties resumed talks in fall 2013 before ultimately citing a truce before year end. Star ultimately swallowed its pride upon realizing the void in the Indian aviation market was too large to ignore, and without any new members in the pipeline slated to join in 2014, the group decided to give AI another chance.
Moreover, the Government of India, in response to Star’s decision to boot Air India back in 2011 from the alliance, retaliated by denying foreign carriers permission to operate Airbus A380s into Indian airports. This has been hugely problematic for Lufthansa and Singapore Airlines, who wish to operate higher-density planes into markets like Delhi and Mumbai. These restrictions have been lifted in recent weeks following the resumed integration timeline between Air India and Star.
There are also rumors that Star played dirty politics with Air India back in 2011 by capitalizing on the implementation delays as an opportunity to ditch AI and instead pursue Jet Airways, a much more attractive option as a privately-owned carrier. Of course, Jet Airways ultimately shunned Star and the whole point became moot.
This time around, both Star and Air India have been much tighter-lipped about the implementation deadline this time around, but one thing is for certain: with the demotion to Category 2, Air India will have to put on a brave public face about the situation and possibly contend with the fact that its membership will be placed on hold, if not reassessed entirely, until Category 1 is restored.
At high-level, Category 2 restrictions are generally looked down upon and at present, not a single member of Star Alliance hails from a country placed under Category 2 restrictions. Of the three major global alliances, Star by far views itself as the most premium and tightly-integrated, and the soured relationship that once formed between it and Air India in the past has already been regarded as a very high-profile and humiliating blunder for both parties to recoup. With AI under Category 2, the situation looks even more compromising by pouring salt into a wound that is still very much in the process of healing.
There is only one other country with Category 2 restrictions home to a major network carrier with impending plans to join a global alliance, which happens to be Indonesia’s Garuda Indonesia airlines, set to join SkyTeam in March 2014. While seemingly an equally parallel example to the dilemma that Star is facing with Air India, the truth is, SkyTeam is a much more loosely-integrated group of carriers than Star is, with generally more relaxed views on the individual politics of its members. Garuda is also insulated by the fact that it has currently does not serve any U.S. airports, and has never publicly declared intentions to open up any U.S. stations in the near-term future. Given the highly unprofitable nature of linking SE Asia to North America, Garuda has its expansion sights set on the EU at the moment.
AI also badly needs the assistance of a codeshare agreement with Star carriers, particularly on its long-haul flights to the US. At present, Air India offers 3 daily nonstop services between US and Indian city pairs: Delhi to Chicago and New York JFK, and from Bombay to Newark. These routes are publicly rumored to be highly unprofitable for the airline, despite decent load factors, but given that Chicago O’Hare and Newark are mega-hubs for Star founding member United Airlines, without question, a closer relationship between the two airlines, facilitated by ties forged through Star alliance, would help improve yield mixes by expanding distribution and interline opportunities across both carriers and offering reciprocal frequent flier benefits and lounge access privileges.
Also up for grabs would be the possible resumption of service to Toronto, which Air India halted back in 2012 following a massive pilot strike on its long-haul services. Although Air India’s Canadian outstations are not directly impacted by US FAA decisions, there will be a second-hand affect given the fact that the Category 2 ranking will spill over to impact the Star Alliance-decision for AI. Given the large Indian diaspora in Ontario, and the ability to leverage Star carrier Air Canada, which operates its largest hub at Pearson International, Air India might be able to succeed in finally linking the Canada – India nonstop market, which is vastly underserved, but also not necessarily high-yielding, and on a break-even or even profitable basis.
Currently, Air India does not codeshare with any North American carriers, but has strong ties with several European joint-venture partners that enjoy anti-trust immunity agreements with both Air Canada and United, including Lufthansa, Austrian Airlines and Swiss. Given the fact that Star Alliance is very United and Lufthansa-centric, the setbacks caused by Category 2 designation will be hard to sway the leaders of the pack.
Jet Airways’ ‘new’ US gateway plan (via Abu Dhabi) now significantly foiled
Privately-owned Jet Airways, based in Mumbai, had stalwort plans to expand its footprint in the U.S. after Etihad Airways purchased a minority stake in India’s second largest network carrier. The Jet Airways – Etihad deal, sealed in April 2013, was motivated by a desire to capture a greater share of sixth-freedom traffic between the U.S. and India over Abu Dhabi by using a two-pronged approach: one, expanding bilateral access agreements between the United Arab Emirates and India, and two, the creation of a U.S. border pre-clearance facility in Abu Dhabi, replicating similar models long-established in several Canadian, Irish and Caribbean airports.
The move was designed to swing a sizable chunk of the US-India traffic in favor of Jet and Etihad. For starters, the expanded UAE-India bilateral gave Etihad a major leg up on its two largest rival carriers, Emirates and Qatar Airways, in terms of market access to the Subcontinent.
As I previously wrote…
Alongside a nearly three-fold increase in weekly seats allowances from 13,600 to 36,670 between India and the Abu Dhabi, the agreement also permits Etihad access to 20 points of call in India from its Abu Dhabi base. Additionally, it also allows a change of aircraft gauge for Indian carriers serving Abu Dhabi, according to CAPA.
Quick to exploit this new advantage, Etihad has already increased frequencies to Delhi and Mumbai from 7 to 14 weekly flights to each market, and will also add second daily rotations to Kochi, Bangalore, Chennai and Hyderabad between June and October 2014, proceeding the DFW route launch (source: routesonline). Etihad will be up-gauging capacity from its narrowbody Airbus A320s on these routes to widebody Airbus A330s and A340s.
Alongside this, Etihad and Jet Airways announced two new U.S. long-haul route expansions slated for 2014, including service to Los Angeles and Dallas/Ft. Worth. Although these routes will not be impacted by the Category II decision, as they will be operated on Etihad metal, any potential Jet Airways route in the pipeline from Abu Dhabi to the US (allegedly, plans to launch a new Chicago O’Hare – Abu Dhabi flight operated on Jet metal were expected for summer 2014) will be halted.
Of the three major Middle Eastern carriers, Etihad is the smallest, and its presence in the U.S. is also overshadowed by Emirates and Qatar. Etihad’s business model revolves largely around equity investments in fallen State-owned or end-of-line carriers, and lending its managerial expertise to strengthen the airline to become more globally competitive. The Jet Airways deal involved an integrated loyalty program between the two carriers, reciprocal codesharing agreements, and limited aircraft leasing agreements. As such, it’s safe to say that both carriers have swapped DNA as part of this major agreement.
Moreover, the creation of a US Customs and Border Protection pre-clearance facility at Abu Dhabi, which opened this week, was designed to incentivise more U.S.-India traffic to opt for purchasing tickets on Etihad/Jet Airways flights over Abu Dhabi as the preferred carrier combination to minimize hassles and long customs and immigration queues at U.S. airports. Per usual, the concept has been highly controversial as both EU and U.S. carriers contend that this poses a risk to American jobs and gives the U.A.E. and Abu Dhabi an unfair competitive advantage.
Unlike Air India, Jet Airways does codeshare with U.S. carriers, specifically United and American. However, the codeshare is rather limited in nature given that its sole remaining US route operates to Newark airport from Brussels, Belgium. It recently pulled the plug on its services to New York JFK from Brussels, and also lost out on codeshare opportunities with American after AA pulled transatlantic flights from Brussels to Chicago O’Hare and New York JFK. Etihad’s codeshare agreements with American are fairly extensive over Abu Dhabi and on several of American’s transatlantic routes between the U.S. and Europe. With Category II in place, Jet will be missing out on some of those key opportunities.
Impact will be felt harder by Air India; regardless, it is time for the DGCA to shape up
Luckily for Jet, the blow dealt by Category 2 will be minimal compared to Air India given that its Abu Dhabi gateway hub is still in development stage. It may also be a blessing in disguise by allowing time for Etihad to shoulder the growing pains of the PBC facility and sort out initial kinks. Jet can also get the undivided attention of Etihad to sort out a new strategy in the mean-time, as the situation is still fairly malleable, whereas Air India’s relationship with Star is now on the rocks and as time has proven in the past, the greater share of the alliance team members tend to hold more unfavorable views towards AI than the reverse scenario.
The unfolding of events over the course of the next few weeks will prove to be very interesting as the DGCA will have to come up with a resolution plan to bring Indian carriers back up to normal safety standards. This will represent a crucial milestone in the history of Indian Civil Aviation as it is now time for the Ministry to shape-up, or ship-out. Failure to pass safety audits is uncompromising, and the GOI has a history of pointing fingers and refusing to take accountability over petty disagreement and human error. There is far too much at stake, and India has been given too many second chances to resort to its usual tactic of playing the victim card and seeking out political chronyism in defense.