SINGAPORE Singapore Airlines has chosen Airbus's A320 (AIR.PA) to launch its new Indian joint venture with Tata Sons TATA.UL, scoring a victory over rival Boeing (BA.N) as the airline market in Asia's third biggest economy shows signs of a revival.
Sources familiar with the decision said a project team picked the European plane in preference to Boeing's 737 - the aircraft ordered by low-cost operator SpiceJet SJET.BO to expand its fleet in a deal reported by Reuters on Tuesday.
The demise of Kingfisher Airlines in 2012 marked an end to the bitter competition that led to low ticket prices for Indian consumers and high levels of losses for its airlines.
The subsequent drop in aircraft capacity gave the airlines some breathing space, allowing them to raise fares and return to profitability. Two years later, despite a slowing economy, international and passenger demand has continued to grow.
That, and a liberalization of Indian regulations that now allow foreign airlines to invest in local ventures, means that two new carriers will begin operations in 2014.
TATA SIA Airlines will start flying in the full service segment in the second half of 2014, as will an AirAsia-Tata joint venture in the low-cost market.
"The fundamentals of the Indian market should eventually improve, but patience and initial losses may have to be withstood," the Centre for Aviation, a consultancy, said in a report in September.
Sources said that the SIA-Tata joint venture will get up to 20 A320s worth $1.83 billion at list prices. The planes will be sourced from leasing companies, rather than purchased direct from Airbus.
A Singapore Airlines spokesman referred queries to TATA-SIA Airlines' office in India, while an Airbus spokesman in Singapore said: "We do not comment on commercial discussions with existing or potential customers."
The new airline has begun recruiting pilots and is close to confirming its top executives, including a Singapore Airlines executive as its chief executive officer.
It will initially operate out of New Delhi on domestic services and compete with full service carriers Air India and Jet Airways, which are the only players left in the full-service market after the collapse of Kingfisher.
Jet, in which Abu Dhabi-based Etihad has a 24 percent stake, and Air India are also expected to open tenders to replace some of their older narrowbody and widebody aircraft in the coming year.
Airbus has been promoting its Airbus A350 variants strongly in the country, while Boeing expects to sell more of its 787s and get orders for the latest variant of its 777, the 777X.
However, more than 70 percent of the Indian domestic market is dominated by low-cost carriers such as IndiGo, SpiceJet and GoAir.
The decision by TATA-SIA extends Airbus's domination of India's single-aisle aircraft segment.
IndiGo, which has the largest share of the Indian domestic market, has more than 70 A320s in its fleet and orders for around 190 more of the family of aircraft to be delivered over the rest of this decade. GoAir, which will have 20 A320s in its fleet this year, has orders for another 72 of the updated A320neo variant.
Air India's narrowbody fleet comprises mostly the A320-family of aircraft, while its low-cost subsidiary Air India Express operates around 20 737s. Jet's narrowbody fleet comprises only 737s.
Boeing's only other presence in the low-cost market comes via Spicejet, which operates just over 40 737s. On Tuesday, sources said that the airline has placed an order for 40 of the re-engined 737 Max variants worth more than $4 billion at list prices.
The deal comes as India's fourth-biggest airline by domestic market share seeks new planes and new investments to revive its fortunes after posting a record quarterly loss in November, hit by costly fuel and a weak rupee.
SpiceJet's auditor said in its annual report as of March 2013 that its ability to remain a "going concern" depended on establishing profitable operations and raising funds.
Industry sources say the long-awaited fleet renewal and the search for a new investor have become intertwined, with the airline seen as potentially more attractive once it secures valuable delivery positions for the new jets from 2018 onwards.
Kapil Kaul, chief Executive for South Asia at the Centre for Aviation, said that concerns remain over SpiceJet's ability to finance its operations and the aircraft purchases.
"Our assessment is that $150 million-200 million are required for the current set of operations. If they have to fund the fleet, their requirement could be closer to $300 million," he added.
Sources in the banking sector, however, were more optimistic about SpiceJet's aircraft order.
"This is an asset-backed transaction. It does not matter whether the airline is making a loss because the aircraft is a pretty liquid collateral," said a senior banker with a private sector Indian bank, which is in talks with Spicejet to part-fund the deal.
"You just paint it and sell it, anybody can use it. Financing aircraft is never a problem," the banker said on condition of anonymity.
(Additional reporting by Tim Hepher in PARIS and Devidutta Tripathy and Swati Pandey in MUMBAI; Editing by Alex Richardson)