Mahindra wants to put taxis in the sky

Discussion in 'Economy & Infrastructure' started by AVERAGE INDIAN, Nov 13, 2013.



    Sep 22, 2012
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    Detroit MI
    The company is making a family of small aircraft that will make air travel only a little costlier than a hired car

    Hemant Luthra, the 62-year-old president of Mahindra Systech, which delivers components, materials and services to the automotive sector, had to postpone his promised leisure trip to Goa with his family during Diwali earlier this month because a one-way air ticket to the popular holiday destination from Mumbai was available for as much as Rs 35,000. Like Luthra, every year hundreds of thousands of Indians mothball their travel plans because air travel is expensive. Rail travel consumes a lot of time. Road journeys are for short distances.

    This is exactly the problem that Luthra and his team are out to fix. Mahindra Aerospace, a division of Mahindra Systech, wants to provide inexpensive air travel with its aircraft, the GA8 Airvan. How inexpensive? If the plans on the drawing board are to be believed, an air-conditioned cab from Mumbai to Goa costs Rs 3,600 and takes 12 hours to cover the 600-km distance. On the Airvan, a seat will cost Rs 4,500 and the journey will take less than two hours. The eight-seat fixed-wing aircraft - two crew and six passengers - can fly about 1,000 km on a full tank. It flies 14 km on a litre of jet fuel, which makes it as fuel efficient as group company Mahindra & Mahindra's bestseller SUV, the Scorpio. Just like the Scorpio, which is known for its ruggedness, the Airvan has the capability to land on short or semi-prepared landing strips.

    Luthra says the similarities between the Scorpio and the Airvan match with the group's ambition of creating taxis in the sky. About 159 million Indians flew in 2012-13. That's less than 12 per cent of the population. The possibilities for the sector would multiply if smaller cities and towns get air connectivity and fares become lower. This is where Mahindra's aviation plans fit in. Its aviation strategy is based on acquisitions as well as organic growth. In December 2009, the Mahindra group had bought a majority stake (75.1 per cent) in Australian companies Aerostaff Australia and Gippsland Aeronautics. The acquisitions were made jointly with Kotak Private Equity with a total commitment of approximately Rs 175 crore. Both the companies have a plant each in Australia to manufacture planes and components.

    The logic for the acquisitions was sound: the market for 2- to 20-seat aircraft (the turboprop market) was, and still is, amongst the fastest growing segments in civil aviation. Turboprops provide operational adaptability in environments with relatively poor infrastructure and can serve the market at the lowest cost per passenger seat kilometre. They can be used for commercial purposes, for personal use or even for spraying insecticides on crops. Luthra was bullish at the time of the acquisition. "Over five years, we believe that we could build as many as 475 aircraft in the 2- to 20-seat range and expect peak revenue of about Rs 650 crore," he had said while announcing the acquisitions. Four years later, it is not clear if this target is likely to be achieved.

    The group's strategy to go for outright purchase of technical know-how and manufacturing capabilities, instead of forging technological partnerships, has cut the go-to-market time and helped it save costs. "The cost of building the Airvan (in India compared to Australia) would be 15-20 per cent cheaper. If I were to collaborate with a Cessna or a Piper, I would have to pay for the technology. Here, the technology of our Australian company will be upgraded at Indian costs through our in-house engineering team," says Luthra.

    A sound move
    However, Mahindra group's ambitions stretch beyond the Airvan. Last month in Bangalore, the group unveiled a new Rs 150-crore facility that would make aero-structures, or components for airplanes, including for Boeing and Airbus. The plant, which can also make small planes like the Airvan, has inked a deal to supply parts to Spanish firm Aernnova Group, a Tier I supplier of aero-structures. Aernnova has taken a 24 per cent stake in Mahindra Aerostructures for Rs 48 crore. The deal holds significance as Mahindra on its own cannot supply parts directly to original equipment manufacturers as it does not have the required certification.

    The Spanish company will provide training and transfer technology to Mahindra, thus allowing it to become a part of the global aerospace supply chain for original equipment manufacturers. Among the parts the group is looking to supply are aircraft wings, ailerons, rudder and fuselage, all of which are high-margin products. "Getting a new facility of this size is important to send a message that we are going to shoot for something world class," says Luthra.

    Besides orders from foreign original equipment suppliers, Mahindra is also eyeing defence orders under the government's offset policy. Under this policy, which was formulated in 2005, foreign companies bagging deals worth Rs 300 crore and above have to purchase at least 30 per cent of the equipment from Indian companies. For instance, of the $11-billion purchase agreement for 126 Rafale fighter jets that India is set to sign with Dassault Aviation of France, over $3.3 billion will be invested back into India through offsets purchases of aircraft components and sub-assemblies. To secure that business, partnerships, like the one with Aernnova, will come in handy. Mahindra has also entered into a partnership with Eurocopter to manufacture sub-assemblies and provide engineering and customisation support to civil helicopters.

    More options
    Meanwhile, plans are afoot to create variants of the Airvan. A ten-seat turboprop derivative of the Airvan, and an 18-seat variant, are under development in Australia. Another variant called the GA10, which will be powered by engines from Rolls Royce, is set for launch next year. The company also plans to build 25-seat and 16-seat planes. Besides, a five-seat plane, the CNM5, for which Mahindra has joined hands with the National Aerospace Laboratories, India's second largest aerospace firm, is also under testing and validation in Australia.

    In Mahindra's aviation plans, a missing link right now is the personal jet business. Many companies like Bombardier, Cessna and Embraer have made their name in this business. However, in recent years, with the shift in technology, this business has become a loss-making proposition and, therefore, Luthra says he is in no hurry to mark the group's presence there. "Every company in the world has gone broke on account of jets. There is glamour associated with business jets. Corporate chieftains, film stars fly in them. But we want better return on our capital employed. That's why we don't make BMWs; instead, we make XUVs and Scorpios which give 40 per cent return on capital. We don't want to make jets because they have been the death knell for many others," adds Luthra.

    Many companies, which are into making business jets, are already changing gears to more profitable segments of the aviation market. American aircraft manufacturer Beechcraft Corporation, for instance, wants to focus on turboprop planes and move away from business jets. Mahindra is confident that the market for small planes in India after five years would reach 50-100 annually. In the US, about 4,500 such planes are bought and sold every year.

    Mahindra wants to put taxis in the sky | Business Standard
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