CFM offered better terms for deal at centre of IndiGo row3 min read . Updated: 16 Jul 2019, 12:21 AM IST
- India’s largest airline, IndiGo, placed a $20 billion jet engine contract with CFM International in June
- IndiGo’s choice of engine assumes significance against the backdrop of the ongoing power struggle between the two promoters of the airline
Mumbai: IndiGo’s decision to drop Pratt and Whitney (P&W) in favour of CFM International for a $20 billion jet engine contract for its fleet of 280 Airbus A320neo and A321neo planes was driven by commercial considerations and not just technical or performance criteria, two people with direct knowledge of the matter said.
“P&W did submit an offer but it could not better its earlier offer to IndiGo, which had a generous compensation factor in case of glitches," one of the two people cited earlier said on condition of anonymity, adding that IndiGo chose CFM engines “purely on the basis of commercial benefits and technical issues were not the reasons for the airline to ditch the fuel-efficient P&W engines".
IndiGo’s choice of engine assumes significance against the backdrop of the ongoing power struggle between the two promoters of the airline in which one of the promoters, Rahul Bhatia, has cited the CFM contract as one of the key issues that he claimed upset Rakesh Gangwal and prompted him to write to the Securities and Exchange Board of India citing violations of several corporate governance norms at the airline.
India’s largest airline had in 2011 ordered engines from P&W for its fleet of 150 A320neo family of planes. The first of these engines was delivered in 2016.
IndiGo, which controls nearly half of India’s civil aviation market, has taken delivery of at least 90 aircraft fitted with P&W engines. In June, it placed a $20 billion jet engine contract with CFM International—a joint venture of General Electric and France’s Safran—to power an additional 280 A320neo and A321neo aircraft.
The second person cited earlier said that at the time of placing the 2011 order, P&W “had agreed to provide adequate compensation guarantee for any future technical eventuality" and as a result “IndiGo was paid hefty compensation when the glitches in the engines caused groundings (of aircraft) in 2017-2018".
Confirming that commercial factors influenced IndiGo’s decision to award the recent engine order to CFM, P&W said that it “worked closely with IndiGo to provide a competitive offer, but we respect their decision and look forward to continue supporting their large fleet of Pratt & Whitney-powered aircraft for many years to come".
“IndiGo’s decision was based on commercial terms rather than the geared turbofan technical issues in India," the company said in a statement to Mint.
In a 12 June letter to the board of InterGlobe Aviation Ltd, which runs IndiGo, Bhatia blamed Gangwal’s outbursts at the company, proceeding to make alternative arrangements for original equipment manufacturers (OEMs) following Gangwal’s refusal to lend a hand in the company’s ongoing negotiations.
“In hindsight, however, the company will remain eternally grateful to Mr. Gangwal for having attempted to hold the company’s business to ransom (by purposely delaying the ongoing negotiations with OEMs), as this paved the way for the company to institutionalize an area of operations which Mr. Gangwal had kept as his exclusive preserve (to serve his far-sighted motive, which has now become abundantly evident)," Bhatia said in the letter.
IndiGo didn’t immediately respond to emailed queries sent on Monday. Gangwal didn’t immediately respond to a text message seeking comment.
Meanwhile, The Economic Times said on Monday that the board of IndiGo plans to question co-founder Gangwal next week on the nature of “exclusive parleys" with P&W.
The airline’s board is scheduled to meet on 19 July to consider the quarterly results for the June quarter. In an 8 July letter addressed to the markets regulator, Gangwal alleged several violations at IndiGo, including those pertaining to related-party transactions; and appointment of senior management personnel, directors and the chairman, who has always been an independent director by convention. Bhatia has denied these allegations.
Sebi has sought a reply from IndiGo by 19 July.