4 min read.Updated: 10 Nov 2015, 01:13 AM ISTP.R. Sanjai
India's second largest airline will start taking delivery of the planes, with a list price of $8bn, from mid-2018
Mumbai: Jet Airways (India) Ltd on Monday said it will buy 75 fuel-efficient Boeing 737 MAX aircraft at a list price of $8 billion from Boeing Co., as India’s second largest airline by passengers carried races to catch up with rivals who have previously ordered similar planes.
This is the single largest aircraft order yet from Jet, which will start taking delivery of the planes from mid-2018. The actual price Jet will pay can vary, depending on the outcome of negotiations for a discount.
After the joint announcement made by Jet and Boeing in Dubai, the airline’s shares rose 5.93% to close at ₹ 440.35 on BSE; the benchmark Sensex fell 0.55% to 26,121.40 points at the close.
“Incorporating the latest design and technology features, the highly efficient 737 MAX will allow us to drive our operational efficiency and reaffirms our commitment to providing a best-in-class full-service travel experience to our guests," said Naresh Goyal, founder-chairman of Jet Airways. “This order is an endorsement of our confidence in the long-term prospects of the Indian aviation sector, which reflects the positive forecast for the country’s economy and offers tremendous potential for growth and development."
With jet fuel in India 60% costlier than in Singapore, local airlines are increasingly buying fuel-efficient planes.
Airlines including state-run Air India Ltd, GoAir (run by Go Airlines (India) Ltd), IndiGo (run by InterGlobe Aviation Ltd) and SpiceJet Ltd are buying or leasing Airbus A320neos from Airbus SAS and B737 MAXs from Boeing, which promise fuel savings of 14-20%.
“Its a great thing to happen to Jet Airways. Else, it would have severely landed in disadvantage with respect to operating costs compared to rivals," says K.G. Vishwanath, partner at consulting firm Trinity Aviation Consultants Pte. Ltd of Singapore.
A 15-20% reduction in jet fuel cost is too big an advantage for airlines to ignore, said Vishwanath, former vice-president (commercial strategy and investor relations) at Jet Airways.
Jet fuel prices account for more than 45-55% of an airline’s revenue in India. A 4% reduction in fuel costs adds around 2% to the operating margins of airlines, according to India Ratings and Research Pvt. Ltd.
“In terms of the size, I am not sure if this is big enough from a growth perspective as Jet Airways needs to replace its leases as well. Moreover, the delivery starts in 2018, which means IndiGo, SpiceJet and GoAir will be ahead of the curve in terms of new technology and lower costs. But it’s a good beginning and soon, Jet Airways will need to consider ordering more airplanes to remain relevant in the Indian domestic market," Trinity’s Vishwanath added.
Large orders help airlines in many ways. IndiGo, in a presentation to investors last month, pointed out that a large order size enables favourable terms with manufacturers and unique lease arrangements mitigate technological obsolescence and create cost advantage. Each of IndiGo’s orders were the largest single Airbus orders in their time. IndiGo ordered 100 A320 planes in 2005, 180 A320neo planes in 2011 and 250 A320neo planes in 2015. It is the most profitable airline in the country.
In 2016-17, Wadia group-promoted GoAir will get 10 of the 72 A320neo planes it ordered in June 2012.
IndiGo will start taking delivery of its A320neos by 2015-end. By March 2017, IndiGo will have 29 A320neos, out of an expected fleet strength of 123. By March 2018, it will have 43 A320neos out of 137 planes. Air India is in the process of leasing 14 Airbus A320neos.
In 2014, low-fare airline SpiceJet said it had ordered 42 Boeing B737 MAX planes worth $4.4 billion by swapping existing orders for 12 Boeing 737 planes. Deliveries will start from 2018 and the airline will fund the acquisition by selling and leasing back the planes. In August 2013, Mint reported that Jet will introduce 50 new fuel-efficient Boeing 737 MAX planes and expand aggressively from 2018.
Jet Airways on Monday said the new aircraft will support the airline’s replacement strategy and ensure it maintains a modern, environment-friendly fleet. Jet currently has 115 aircraft with an average age of 6.04 years.
The transaction will be completely financed and managed through a sale and leaseback arrangement. The Monday order, previously attributed by Boeing to an unidentified customer, includes conversions of 25 next-generation 737s to 737 MAX 8s, as well as options and purchase rights for an additional 50 aircraft, Boeing said in a statement on the sidelines of the 2015 Dubai Airshow.
Boeing Commercial Airplanes president and chief executive officer Ray Conner said Boeing is proud that Jet Airways will be the first airline in India to take delivery of the 737 MAX.
The jet incorporates the latest CFM International LEAP-1B engines, advanced winglets and other improvements to deliver the highest efficiency, reliability and passenger comfort in the single-aisle market. The new single-aisle airplane will use 20% less fuel than the first Next-Generation 737s and the lowest operating costs in its class—8% per seat less than its nearest competitor, Boeing said.
Airlines can increase planes’ fuel efficiency by fitting winglets.
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