The price of aircraft & the price of power

I joined as director in the ministry of civil aviation and tourism on February 17, 1992. That was the time when the monopoly of the two state carriers, Indian Airlines and Air India, was nearing its end, and a new era of private operators was about to begin. There was chaos and confusion all around. Amidst this, I received an unusual file: an urgent enquiry-cum-request from the Central Board of Excise and Customs (CBEC) to inform it about the accurate (at least approximate) valuation of a used UK-origin British Aerospace One-Eleven twin-turbofan short/medium-range transport aircraft, imported from Romania by a prospective non-resident Indian private airline promoter. I found it unusual as it’s the CBEC’s mandate to do the valuation of all imported (or exported) goods, and fix the rate of customs duty.

On going through the papers and after a gentle prod to the finance ministry, it transpired that despite being professionals, CBEC officials had no idea of how to evaluate passenger jet aircraft, perhaps as aircraft were not run-of-the-mill trading commodities or normal machinery or machine parts, described and prescribed in their operational manual for tax assessment. Aircraft valuation clearly lay beyond their standard operating procedure. Hence, when the Indian importer of a two-engine British Aerospace aircraft from Romania declared its value as Rs 1 crore, the CBEC officials were flummoxed; realising well that one cannot get a flightworthy twin-turbofan jet transport aircraft for this amount, however, old, archaic and dilapidated its condition may be.

Although I didn’t have any extra skill or special knowledge on the subject, the compulsion of the official position made me give it a try. Fortuitously, I came across a “fresh file” which showed that the Government of India had just concluded a deal to import four Boeing 747-400 (fitted with Pratt & Whitney turbo-jet engine) aircraft for Rs 2,223 crores, thereby making it Rs 555.75 crores per aircraft.

I got a window to try through the deductive method. If a brand new (imported) four-turbofan jet transport had cost Rs 555.75 crores per unit, the price of a new (imported) twin-engine jet aircraft could never be less than Rs 220 crores!

There, however, emerged another tricky situation. Though of British origin, it came to light that vide a February 1987 announcement, the imported British aircraft was manufactured by Romania’s IAv Bucuresti, it being the prime contractor for licenced manufacture. Therefore, the price of the Romanian and British aircraft could not be the same, despite being similar in type. The price of aircraft in Western Europe is invariably higher than those produced in Eastern Europe.

After due diligence, discussion and several rounds of debate and having considered the date, time, place and year of manufacture and a careful study of the flight log, maintenance manual and overhaul and repair record and flying hours logged, along with depreciation, etc, it was suggested that the imported aircraft could not be worth just Rs 1 crore. It was a case of gross under-valuation to avoid payment of customs duty. If my memory serves me right, the price subsequently arrived at by the customs department was more than Rs 40 crores.

I recalled this case just to make a point — that an international transaction, whether private or governmental, is invariably fraught with fraud and falsity (and rarely with finesse), which transcends all barriers. Aircraft, military or civil, are a high-tech, high-margin profitable business, specially for its makers and sellers. The non-manufacturing users and importers are always at the receiving end, except during the times when there is glut in the market.

There was a time when there were many manufacturers of commercial aircraft — like Boeing, Lockheed and McDonnell-Douglas (in the United States), Europe’s British Aerospace, Dutch Fokker, the four-nation Airbus Industrie, and Russia’s Antonov, Ilyushin, Tupolev. It allowed buyers to have a better and wider choice pertaining to the type of aircraft as well as the price. That is no longer the case now, as the number of aircraft-makers has dwindled drastically owing to the spiralling cost of production and technology and the emergence of a unipolar power equation in the world market. Today except for Boeing, there is no US-made commercial aircraft available. Lockheed has gone totally military and McDonnell Douglas was acquired by Boeing in 1995. The British and the Dutch too closed their factories, and Russia (former Soviet Union) is concentrating more on military than commercial aircraft manufacture.

Coming back to the valuation of commercial aircraft, there exists some sort of unwritten code of conduct in international aircraft manufacturers’ business systems which usually has a declared (printed) “list price” of different models and versions, thereby giving a fair idea about a plausible way to transact business. Thus, looking into the contemporary scenario of the two most prominent manufacturers of the West; Europe’s Airbus and America’s Boeing, it is found that the 2016 average list prices of the former’s (widely used) Airbus-320ceo stands at $98 million and that of Airbus-320neo at $107.3 million. Again, the heavier and larger Airbus family’s A-321ceo 2016 cost stands at $114.9 million, (depending on engine choice and customisation), and the A-321neo cost is $125.7 million.

In all this, the term “average price” clearly gives flexibility to the seller pertaining to the price of aircraft owing to the different needs of different airlines. Hence, it is obvious that the price of an aircraft in an international transaction is bound to fluctuate in accordance with market buoyancy or slump, and the “special needs of the buyer”, if any.

It is, however, one of the ironies of the aviation market that India has persistently and consistently been afflicted by serious allegations of the “corruption bug” in both civil and military aircraft deals for a long time. It began with the Anglo-French “deep penetration strike aircraft” Jaguar in 1979, followed by the civil passenger aircraft Airbus-320 in the 1980s, which in turn was followed by the “mega purchase of Airbus as well as Boeing” commercial aircraft in 2005. The bug seems to be fixed with, and aligned to, a magnetic GPS pointed towards the Indian establishment and those who surround it, thus creating unresolved issues in the Indian aviation market. So much so that it is virtually impossible for India to come out of this mess anytime soon. The price of aircraft is therefore fraught with an end, with paying the price of power.