Air-India’s Rs 35,000 cr aircraft deal
Questions hang over order to Boeing

Air-India's decision to ditch the European Airbus aircraft in favour of the American Boeing in its 68 aircraft, Rs 35,000 crore deal, after the former had won the initial tender, is clouded with suspicion

By Shahid Faridi

The empowered group of ministers (EGoM) headed by finance minister P Chidambaram has cleared Air-India's plans to purchase 68 aircraft for a whopping Rs 35,000 crore. Air-India has chosen an all-Boeing fleet of eight B777-200 Long Range aircraft with GE 90-110 engines, 15 B777-300 Extended Range aircraft with GE 9-115 engines, 27 B787-8 with aircraft GEnx-64B engines, and 18 B737-800W aircraft with CFM-56B engines.

The EGoM's clearance ostensibly brings to a conclusion a long and bitter battle between the world's two primary commercial aircraft manufacturers—the American Boeing and the European Airbus. But, in truth, has it?

Realpolitik has learnt that the dogfight is hardly over, with Members of Parliament shooting off letters of complaint to Prime Minister Manmohan Singh.

At the core of the new war will be the Airbus plaint, through a written letter to Air-India, in which the European manufacturer has accused the Indian flag-carrier of scrapping tenders in which Boeing was ‘beaten’, and of reconfiguring the seating in the new tenders to give Boeing an unfair advantage.

Air-India had, in fact, decided to scrap the tender it floated in December 2002 for 17 250-seater medium-capacity, long-range aircraft, in which Airbus had beaten Boeing to the tape.

Since Airbus Industrie led the race in this category with its A340-300E, questions were first raised on whether the European consortium, comprising British Aerospace and EADS, had offered the same concessions for seven ‘optional’ aircraft as it had for the 10 ‘firm’ ones out of the total 17 in the tender.

Air-India's management committee, headed by Captain M K Haathi, erroneously ruled that Airbus had not given the concessions. The Air-India board had to finally intervene to clarify that Airbus had, indeed, given the concessions, and that the Air-India management had misinterpreted the issue.

When the Airbus A340-300 was declared the winner of the tender in November 2003, the proposal was sent to the civil aviation ministry. The ministry proceeded to sit on it for a while-after which the selection of A340-300E was scrapped, with Air-India announcing that "in light of the changing market conditions", it needed to look at other aircraft types. It was hardly unbecoming that Airbus expressed considerable consternation at this decision; its attempts to know from Air-India the precise nature of these "changing market conditions" became exercises in futility.
Air-India then issued a new tender in November 2004 in which the Airbus A340-300E was not even considered. As per the new tender, the Air-India evaluation team recommended to the board that Boeing's 787, 777-200LR and 777-300ER, and Airbus' 330-200, 340-500, 340-600 be evaluated. And there was an added twist in the new tender: Air-India reduced the seat and aisle widths, a structural reworking that gave an advantage to Boeing, whose 777 airframes are a few inches wider than those of the Airbus. The ‘redefining’ of needs clearly meant that Boeing, which offered nine seats abreast to Airbus' eight, finally got the upper hand. Retaliating, Airbus complained that in actuality little had changed and that the seat width had been reduced just enough to help Boeing squeeze in that extra one seat.

With this alteration in configuration, Boeing, which had originally offered 220 seats just a month ago in its 787 aircraft, was able to offer 250 seats in the same aircraft. These extra seats tilted the balance decisively in favour of Boeing. Airbus cried itself hoarse about the absence of ‘apple-to-apple’ (like-to-like) comparison. Airbus' senior vice-president in charge of marketing and pricing policies, Dr Kiran Rao, shot off a letter to Air-India which said: "…Nine abreast seating in a 787 is the norm for charter airlines and not the standard for full service international airlines. The fact is that the comfort level of the medium-long haul 787, nine abreast seating is less than the comfort levels operated by your low-cost subsidiary Air-India Express and much less than the comfort level of the A320s operated by (low-cost) Air Deccan and Kingfisher. We fully respect that the choice of comfort standards is yours, but let me state that we feel the 30-plus additional seats gained by Boeing are at the cost of comfort which I hope you will agree will put Air-India at a significant disadvantage versus the competition." Airbus also wrote letters to the ministry of civil aviation and held a press conference in Delhi, in which it demanded a probe into the deal by the Central Vigilance Commissioner.

Expectedly, Air-India reacted strongly to Airbus' protest. In a letter to Airbus, Air-India company secretary S Venkat said: "We are most upset with these allegations and take a very serious view of such allegations. These allegations are grossly defamatory and are clearly intended to lower the standing of the airline in the estimation of right thinking members of society.

"Air India's decision has been taken after an in-depth consideration and comprehensive evaluation and assessment of all relevant factors and aspects connected with the acquisition of the aircraft in question. The decision has been taken after a series of reviews at various levels within A-i and approved by its board after detailed analysis of all material and relevant consideration."

But here is what one Air-India board member, Sunil Arora, who was then also the chairperson and managing director of Indian Airlines, had to say about the methodology that Air-India had adopted. In a letter to the Air-India CMD, Arora said: "Kindly refer to Air-India letter number HQ/2(6)/988-A dated May 14, 2005, enclosing therewith the minutes of 106th meeting of the board

of directors of Air India. I have been subsequently informed vide your DO letter number HQ/9-52/1041 dated May 17, 2005, that due cognisance would be taken of my earlier DO letter number CMD/05/507 dated May 9, 2005, containing inter alia some observations on the acquisition of fleet by Air-India addressed to you prior to the confirmation of the minutes of the 106th board meeting. Vide this letter, I am making following requests for kind consideration of CMD Air India.
l A copy of my letter dated May 9 may kindly be made available to all the members of the board of directors so that they are aware of my observations on the subject.

l As far as I can recall, one of the board members viz Shri Raghu Menon, joint secretary in the ministry of civil aviation, in the course of the 106th meeting held in Mumbai had made a specific query from Ms (Shireen) Lalwani, director planning, who made the presentation to the board of directors on the issue of acquisition of fleet to the effect that no change, repeat no change, whatsoever had been made in the aircraft specifications after the same were approved by the board of directors of Air-India in the 103rd board meeting held on November 24, 2004. Responding to this query, Ms Lalwani had replied that no change indeed had been made after this meeting. This, however, has not been reflected in the minutes. In any case, since this is rather a fundamental issue, having a crucial bearing on the economics of the proposal, the response of the management may be incorporated unambiguously in the minutes of the 106th meeting at the time of confirmation of the minutes.

l It is but natural to presume that every aspect of the RFP circulated by Air-India to the manufacturers—irrevocable sanctity of which was upheld in the 104th board meeting held on December 22, in New Delhi —would be strictly in conformity with such aspects as were put up for approval of the board in the course of 103rd board meeting held on November 24, 2004.
l As per the previous papers available with me as a board member, the aircraft specifications related to seating capacity were specifically approved in 103rd meeting of the board and recorded in para 10(vi) (e) of the minutes. As per the power point presentation given to the board in 106th meeting, there appears to be some variation in number of seats of different categories of aircraft considered finally in the evaluation report of techno-economic-cum-negotiating committee (comparative tabulation enclosed). If this indeed is correct, would it not be contrary to what Ms Lalwani stated in the course of her presentation to the board on April 26, 2005, and also a departure from the decision taken on November 24, 2004? It is for the techno-economic-cum-negotiating committee to take a view on this as also other technical issues. But, if a departure was necessitated, the same should have been brought to the notice of the board along with justification thereof and more so when a specific query was also raised on this subject."
So, was the A-I board, in its meeting referred to by Sunil Arora, deliberately misled on the change in aircraft configuration that gave Boeing a huge advantage over its competitor? Intriguingly, while Air-India blasted Airbus for having publicly protested what it saw as a manipulative decision, there was no reply to the issues raised by Arora.
The Air-India company secretary said in a letter to Airbus "…Air-India hereby places on record its strong disapproval of the unwarranted and malafide insinuations against Air-India.”

But even while going hammer and tongs against Airbus, Air-India did a Houdini escape on the basic question about exactly why it had changed the seat and aisle width in the new RFP issued in December 2004. Didn't the change give Boeing an unfair advantage over Airbus? This is a question that is still waits for an answer. Then there was the controversy over Air-India dropping the evaluation of bids received following its RFP issued in January 2003 for 160 +-seater aircraft. Airbus had offered its A321 aircraft and Boeing its 737-900.

Airbus claimed in its letter to Air-India, "It is well known in the industry that the A321 is a much more capable aircraft than the 737-900 and, therefore, it became clear that over the network evaluated by Air-India, the Airbus solution was a clear winner in terms of profitability, performance, comfort and overall specifications. In the midst of the controversy over the interpretation of the A340-300E proposal, A-I issued a new tender for 150+-seater aircraft...
“This tender was issued on the basis that no market existed for 160+-seater aircraft and therefore A320s would be compared with 737-800…In June 2003, the 737-800 was selected by Air-India and the deciding factor was the revenue advantage of the 737 due to the extra seats, despite the fact that the A320 offered the lowest cost solution. You can understand our frustration when you consider that just a few months before, the airline dropped the A321/737-900 evaluation because these aircraft were considered to have too many seats....For the 737, however, where market conditions really changed from two-class full-service to one-class low-cost configuration, no re-evaluation was done. It should be noted that the A320 is the preferred choice for the majority of the low-cost airlines, but this is not the point. The point is market conditions changed dramatically, yet Air-India saw no reason to relook at its selection...An evaluation of A320 vs 737-800 in a low-cost model would have given completely different result. A320 would have won as it did in cases such as Air Deccan and Kingfisher... The Airbus A320 family is the most successful aircraft family in the world and the 'low-cost leader'—178 firm orders (81 per cent market share) from low-cost carriers in 2004...To summarise, the 737 selection should have been re-examined when the role of the aircraft was changed."

So, while Boeing is celebrating, and Airbus is truculent but morose, some questions about the fairness of the entire Air-India tender process, and how it selected the aircraft, still beg the question. MPs, one of whose tribe has been minutely scrutinising the enormous number of documents already at hand, are preparing to raise these questions in Parliament. Air-India is heading towards a deep and bumpy air pocket.