Corporate May 16, 2013
By Paranjoy Guha Thakurta, Abhishek Angad and Patrick S.L. Ghose
Air India (AI), which is currently seeking compensation from Boeing for losses incurred due to the grounding of its Boeing 787 jets, will have to incur further losses even after these aircraft have resumed flying on domestic routes from 15 May onwards, an aviation expert told Firstpost.
AI, which used to fly its Boeing-787 jet aircraft, also known as Dreamliners, on three international routes (to Paris, Dubai and Frankfurt) as well as domestic routes, will start operating international flights again, according to Minister for Civil Aviation Ajit Singh. "AI will start flights on the Dreamliner to Birmingham, Sydney and Melbourne in August. In October, it will start flights to Italy (Rome and Milan). And, early next year will see flights to Moscow. These flights will be to and from Delhi," he was quoted as saying by The Times of India on 15 May.
The aviation industry worldwide was affected by the grounding of an entire fleet of 50 Boeing-787 aircraft on 17 January following persistent problems with the aircraft's lithium-ion batteries. AI has six 787 jets in its fleet and will be acquiring eight more B-787s by December.
Boeing recently concluded its 787 "final certification test for the new battery system", as required by the US Federal Aviation Administration (FAA). With the requirements fulfilled, Boeing has been permitted to resume 787 flights. However, aviation experts speculate that FAA may restrict the extended operations certificate known as ETOPs on 787 "as a result of battery modification".
The Chicago Tribune reported on 19 April, "The FAA said that next week it will issue instructions, about a 500-page manual, for making changes to the aircraft and publish a directive allowing 787s to return to the skies with a revamped battery system, officially ending the three-month grounding."
ETOPS is an acronym for ExTendedOPerationS, as redefined by the FAA in 2007. Previously, ETOPS applied to only twin-engine operations over water and remote areas. Today, ETOPS also covers extended operations by three- and four-engined aircraft. ETOPS-certified aircraft may fly on routes that are a certain number of minutes from suitable alternate airports. The Boeing 787, with a range of over 8,500 miles, was certified to fly up to three hours from the nearest airport in 2011 by the FAA, based on Boeing testing and safety assurances. Boeing, before grounding, was planning to extend it to five-and-a-half hours, for which it was originally designed.
The New York Times stated in March: "Boeing designed the jet to fly 330 minutes - five-and-a-half hours - from the nearest airport at any point on its routes, a feature that would allow extended flights over water or deserted regions like the North Pole. That held tremendous appeal for airlines, which often must stay within three hours of emergency landing spots, and Boeing estimated that 450 new routes would be created."
But the restriction, if applied, would make the Dreamliners unable to meet their performance targets as promised. As the Chicago Tribune goes on to say, "Scrutiny of Dreamliner batteries is not over. Next week, the National Transportation Safety Board will hold a two-day investigative hearing into the 7 January Dreamliner battery fire, exploring the design, testing, certification and operation of its lithium-ion battery the fire." It is very important for the survival of 787s as it allows the jet to be used over long routes. Conventionally only three- and four-engined jets are used over long routes except for the Boeing 777. This restriction would make the aircraft deviate from the original routes, thereby affecting efficiency.
Speaking to Firstpost in an exclusive interview on the issue of compensation and ETOPs in relation to AI, an Atlanta (US)-based aerospace engineering consultant of Indian origin, Arnab Lahiri, concurred that there would have to be some amount of compensation involved, depending on the contractual bindings of Air India and Boeing. However, he pointed out the efficiency-related issues of these jets: "The problem that may surface is what restrictions the FAA may put on ETOPS. For many, certain planned routes may have to be cancelled or re-routed where the viability will come into question. This is especially true for airlines that had planned to fly long ranges over water or the poles. For the time being, it appears that the FAA has not touched upon the 180 minutes permission on ETOPS originally granted."
Lahiri has 12 years of working experience as lead engineer in the National Simulator Program at FAA in Atlanta. He is presently a Flight Simulation/Aerospace Engineering Consultant at ZenSim/RoyalSim USA in the US. He started his career as research worker at the aeronautical engineering department in the Indian Institute of Technology, Kharagpur, from where he obtained his Bachelors degree. He went on to obtain a Masters degree in aerospace engineering from the University of Texas, Arlington.
The grounding of the Dreamliners has cost airlines across the world considerable losses.
Reuters has reported the grounding has cost Boeing an estimated $600 million. Air India itself has lost an estimated Rs 18 crore a month and this includes monthly interest of about Rs 7.5 crore. AI is also paying an annual interest of 4 percent on its aircraft acquisition loans. Besides the loss of revenue on account of the grounding of aircraft, the higher costs of fuel (due to the use of the less fuel-efficient Boeing 777s), re-routing with other airplanes and maintenance related expenses have also added to AI's losses.
If the ETOPs restriction is reimplemented in the future, it would affect Air India's use of this fuel-efficient aircraft for international flights. This could result in deviations from the planned routes amounting to further inefficiency.
With losses of around Rs 20,000 crore incurred over the last four years, it was believed that this airplane would cut AI's operational costs significantly. Since its induction in September 2012, AI has been reporting an improvement in its financial performance. The aircraft earned Rs 172.7 crore in the October-December 2012 quarter from domestic and international flights combined, or an average of Rs 2 crore a day. In September 2012, Air India included two Dreamliners in its fleet, after a delay of four years. Four more Dreamliners were subsequently acquired by AI.
The Boeing 787 Dreamliner was touted as an aircraft which would "revolutionise" the aviation industry. Made of carbon fibre-reinforced plastic composite instead of aluminium, it is light in weight and much more fuel-efficient. The highly-awaited airplane was delivered to customers after three years of agonising delays. AI too got the aircraft four years after placing orders.
The problem with the Dreamliner started in mid-January when these airplanes were grounded worldwide by the FAA after two battery-related fires damaged 787s in Boston and in Japan respectively. The first problem happened on 7 January when the lithium-ion battery in the Japan Airlines 787 caught fire as it sat on the tarmac in Boston. The second problem, in a separate incident, happened on 16 January when an All Nippon Airways flight made an emergency landing in western Japan after a cockpit message warned of battery problems and a burning smell was detected in the cockpit and cabin. A Japanese investigator said that the burnt insides of the aircraft's lithium-ion battery showed the battery received voltage in excess of its design limits.
These incidents made the FAA conduct a comprehensive review of Boeing 787's critical systems, including its design, manufacturing, and assembly. In a statement, the FAA said that the review would validate the work conducted during the certification process and ensure that the aircraft met FAA safety standards. On 17 January, FAA issued a directive to ground the Boeing 787s due to safety hazards, stating that "operators of US registered 787 must demonstrate to the FAA that the batteries are safe".
One of the major problems surfaced with the lithium-ion battery used in the aircraft. The Dreamliner is the first aircraft to make extensive use of lithium-ion batteries to power its main electrical systems. As Associated Press's Elaine Kurtenbach says in The Big Story put out on 17 January: "The batteries were chosen for their quick charging times and capacity to fit into space-saving shapes, facilitating the use of energy-efficient, light-weight composite materials for the plane's body instead of the usual aluminium. But like other lithium-ion batteries, they do pose risks. Such batteries are used in countless electronic devices and overheating that has the potential to cause fires resulted in laptop recalls in recent years."
The most alarming consequence of using lithium-ion batteries was the incident in Boston that led to a fire that took nearly 40 minutes to extinguish. The fire also questioned FAA's role in clearances given to Boeing.
Nonetheless, Lahiri states otherwise. He mentions that on paper, any regulatory agency is honour-bound to follow the regulations with the backing of technical expertise and experience and nothing so far has suggested that anyone overlooked any obvious inherent problems. He said, "They (FAA) make the best assessments based on their experience with whatever tools are available. The key is to learn from mistakes."
He also ruled out the risks involved in the usage of lithium-ion batteries in aircraft, terming them simply as engineering issues. He added, "Li-on (lithium-ion) batteries are possibly the next wave. They are used in many aviation-related applications and when properly integrated, they should not pose any problems."
Quoting Boeing's chief engineer for the 787, Mike Sinnett, Reuters reported on 9 May: "Lithium-ion batteries can catch fire if they are overcharged and, once alight, they are difficult to put out as the chemicals produce oxygen." He said lithium-ion was not the only battery choice, but "it was the right choice".
However, even before the battery issues that grounded 787 aircraft worldwide, there were problems with the reliability of the batteries. Japan's All Nippon Airways, the world's biggest operator with 17 of the carbon-composite aircraft, had earlier acknowledged that it had experienced problems before, but had not disclosed this information to US investigators because the incidents (including five batteries that had unusually low charges) did not compromise the plane's safety.
The National Transportation Safety Board (NTSB) of the USA is further investigating whether the FAA guidelines were properly followed. Reuters reported: "The NTSB has published hundreds of pages of findings about the Boston fire, and conducted two rounds of hearings last month. It is expected to recommend changes to the Federal Aviation Administration when it concludes the investigation, likely by the end of the year."
The second reported problem, according to the Washington Post (18 January), is that Boeing massively increased the percentage of outsourcing in the manufacture of its aircraft parts. The wing tips were made in Korea, the cabin lighting in Germany, cargo doors in Sweden, escape slides in New Jersey, USA, and the landing gear in France, and very coincidentally the Japanese made lithium-ion batteries which have caused all the recent woes.
According to a report in The Guardian a day after the Dreamliners were grounded, "...these were exacerbated by Boeing's decision to massively increase the percentage of parts it sourced from outside contractors. ...The plan backfired. Outsourcing parts led to three years of delays. Parts didn't fit together properly. Shims used to bridge small parts weren't attached correctly. Many aircraft had to have their tails extensively reworked. The company ended up buying some suppliers, to take their business back in-house. All new projects, especially ones as ambitious as the Dreamliner, face teething issues but the 787's woes continued to mount. Unions blame the company's reliance on outsourcing."
Talking about the risks involved in outsourcing, Lahiri termed these problems as normal. He believes that outsourcing is the result of financial, and to some extent political, as well as knowhow factors. He emphasised, "Risk is an integral part of any business - it's the calculations behind the risks and the price one is prepared to pay when things go awry- that is the business model."
Reports say that excessive outsourcing broke the supply chains, creating huge log-jams. But some reports also say that it was Boeing's own failure to integrate the parts well. This led to an overall delay in delivering aircraft to its customers. Seattle Times reported in February: "Company engineers blame the 787's outsourced supply chain, saying that poor quality components are coming from sub-contractors that have operated largely out of Boeing's purview. The risk to the company is not this battery, even though this is really bad right now," said one 787 electrical engineer, who asked not to be identified."
Speaking on this problem, Lahiri said that Boeing has been undergoing its own internal issues. He said, "Outsourcing is a current reality and the allied problems may create backlogs if one has not geared up for it. Any such problems Boeing may have faced can be attributed to planning and management."
In India, the Directorate General of Civil Aviation (DGCA) grounded the Air India fleet of six 787s based on the recommendations issued by the FAA because of the battery problem even though there wasn't any problem with the Dreamliners in India.
AI has ordered a total of 27 Dreamliners but has now put on hold further acquisitions for sale and lease. This option has freed the capital tied up in a fixed asset while the lender obtains a guaranteed lease. The airline can also claim tax deductions as the asset is no longer owned by it but leased which would help in streamlining its operation and cutting costs.
Civil Aviation Minister Ajit Singh has said that "Boeing has agreed to compensate Air India for the grounding of 787 Dreamliner passenger jets ... the details have yet to be finalised."
Despite grounding its Dreamliners since 17 January, "AI is expected to post an operating profit or EBITDA (earnings before interest, tax, depreciation and amortisation) of Rs 1,040 crore for the 2013-14 financial year, two executives at the airline said on condition of anonymity", states the Mint, adding :"The total revenue next year is budgeted at Rs 19,393 crore- an increase of 20 percent over the previous year."
However, on 8 May, Minister of State for Civil Aviation KC Venugopal said in a written reply to a question in the Lok Sabha: "Air India has decided to sell five out of its eight Boeing 777-200LR aircraft owing to change in market dynamics due to global recession, steep increase in fuel prices and poor yields on non-stop routes."
Will the fortunes of Air India change with the return of Dreamliners? Whereas one will have to wait and watch what happens in the months ahead, the chances do not seem all that bright.
More From R Jagannathan.