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GoAir has secured necessary slots for the fuel efficient narrow-body airplanes in the world. Photo: Reuters
GoAir has secured necessary slots for the fuel efficient narrow-body airplanes in the world. Photo: Reuters

Why GoAir wants to buy 72 Airbus A320neo aircraft

A320neo planes are expected to offer 15-20% savings on jet fuel, which makes up the largest chunk of spending by airlines

Mumbai: GoAir, the fifth largest airline by passengers carried, signed a preliminary agreement with Airbus to buy 72 A320neo aircraft worth $7.73 billion on Tuesday. Why did it place such a big order given its size?

The airline has just 20 planes and had placed an order for 72 A320neo planes in 2011. To be sure, Tuesday’s agreement was only a preliminary agreement and will be followed by a definitive contract.

“The MoU (memorandum of understanding) is already quite detailed and covers all the commercial terms and delivery schedules. So it’s more than a preliminary agreement," clarifies GoAir chief executive officer Wolfgang Prock-Schauer.

So what is the rationale?

The timing of GoAir’s initial public offering (IPO) is directly linked to the induction of A320neo planes into its fleet and its continuity.

GoAir has secured necessary slots for the fuel efficient narrow-body airplanes in the world, said Prock-Schauer in an interview. A320neo planes are expected to offer 15-20% savings on jet fuel, which makes up the largest chunk of spending by airlines.

Through this offer, GoAir has secured consistent, steady inflow of aircraft and enabled better commercial terms owing to the size of the order, said Prock-Schauer. Prock-Schauer has plans to start international operations too. “We are looking at starting international operations by early next year," he said.

GoAir has been alloted traffic rights to Iran, Azerbaijan, Uzbekistan, Kazakhstan, China, Vietnam, Saudi Arabia and Doha. Under the new rules, an Indian airline can start international operations once the airline has 20 planes in its fleet.

Prock-Schauer said these routes are largely underserved and has good potential. “Every country has its own dynamics and traffic flow characteristics. With our superior cost structure, we will be able to attract passengers at the right price," Prock-Schauer hoped.

Craig Jenks, president at New York-based consultant Airline/Aircraft Projects Inc., said essentially this is a vision-driven aircraft order. This “may prove disastrous or brilliant", Jenks said.

“When Ryanair and AirAsia were ramping up, many said they were too ambitious. But the skeptics then were wrong. On the other hand, plenty of others have over-expanded," Jenks said.

Some say the order is not very aggressive given India is the fastest-growing aviation market in the world.

“For a country that is growing in double digits, 72 more aircraft is not big," said K.G. Vishwanath, a partner at consulting firm Trinity Aviation Consultants Pte Ltd of Singapore and former vice-president (commercial strategy and investor relations) at Jet Airways (India) Ltd.

Vishwanath also said that GoAir would be receiving 72 planes from the second order after 10 years which would mean that the airline is equipping for replacing the older aircraft from the first order for 72 planes.

GoAir is not hassled about the funding of these planes. Prock-Schauer said these aircraft would be acquired via sale and lease back mode. A sale and leaseback arrangement is common in the airline business. Airlines sell their planes to a lender in a process that helps them generate revenue, and then lease the same planes for a fee.

Asked about its IPO, Prock-Schauer said the firm is watching the situation and will determine a further course of action in due course.

“Our economic performance is improving, we have a secured order book. This shows the confidence of manufacturers in GoAir and we also commence international beginning next year. So we are confident," he added.

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