AIR INDIA LOSSES - FROM GENERIC CRITIQUE TO PRECISE STRUCTURAL ANALYSIS (PART 3 OF 4)

Part 1 covers "A Severe Contraction in Top-Line Revenue"
Part 2 covers "Catastrophic Foreign Exchange (FX) Losses"
Part 3 covers "The cost of fleet maintenance & supply chain stagnation"

Maintenance, Repair, Overhaul (MRO) costs:
2026 - ₹14,976.45 crore : 2025 - ₹13,901.82 crore

Most Singaporeans' perception of Indian work culture, stemming not from a racist bias but from so-called lived experiences with Indian bureaucracy, led to generic commentary that heavily points to the "transformation and refurbishment programme" of Air India's fleet as a massive corporate reinvention that somehow got mismanaged and blew up the costs. Local commentaries misinterpret the fleet stagnation as a mere failure of management execution or slow worker productivity. The disruptions to the spare parts supply chain simply compounded their problems and sky-rocketed costs. The mental picture of an inutile Air India bumbling through a massive problem of restructuring a huge airline is laid squarely on SIA, Temasek and the Singapore Government being seen as impotent to a call for capital injection. 

From the more educated public, media and academia - they simply regurgitate the fractured global supply chain ("supply-chain constraints and continuing difficulties in obtaining and deploying aircraft efficiently": Vinod Rai of NUS' Institute of South Asia Studies) as one of the major causes. A generic criticism tells you nothing at best, at worst it points to wrong directions for course correction. A precise structural analysis pinpoints the root causes, you can see what can be done about it, and you can see if Tata-SIA is doing anything about it. Only then do you have the correct lens to view the situation as an investor.

Vinod Rai and many others say MRO cost spiked to ₹14,976.45 crore is due to delays in supply chain. WRONG. This is lazy generic critique.

Firstly the increase in 2026 over the previous year is only about US$120mn which is 1% of total operating cost. Most of the MRO costs are in USD, so the increase of US$120mn is basically FX losses already captured in Part 2 of my blogpost. We need to avoid double-counting.

Secondly, we need to understand what exactly was spent when the aircraft was grounded waiting for spare parts - some admin and parking charges. There is no cash burn on engineering, parts, materials, shipment costs, certification costs, etc since parts have not arrived. In aviation economics, an aircraft frame only generates yields when it is airborne. The moment a plane is grounded due to a parts backlog, its financial character instantly flips from a revenue-generating asset to a high-burn cash liability on fixed costs. But there is no expense line that measures this cost. It is an opportunity cost - a lost chance to earn revenue, not a real cash burn. This opportunity cost does not appear anywhere in the Profit & Loss Statement. To say the 2026 spike in MRO cost is due to delayed supply chain is such an obvious mistake of financial analysis.

One way we can have a sense of whether Air India's MRO cost is high or not is to benchmark it. Fuel is the biggest cost item for an airline and it is roughly 30% of overall operation costs. In a healthy airline, the benchmark MRO cost = about 30-45% of fuel cost. In 2026 Air India MRO was 52% of fuel cost. The knee jerk assumption is there you go - Air India had massive MRO cost. The reality is it was not the case of MRO cost driven higher, but fuel consumption gotten lower because Air India cut capacity by some 22% due to fuel price hitting threshhold breakeven point (as described in Part 1)

Another indication is wet-leases. When for any reason an airline runs out of aircraft and needs a temporary arrangement fast, it takes up what is called a wet lease. These leases are very short term in nature and very costly as it is very much a price-makers' (lessors) market. With about 20% of it's fleet grounded for maintenance, did Air India incur heavy wet lease expenses? We do not know. Financial statements do not itemise this expense line and there is no mention by management. However we do know Air India cut capacity by some 20-22% due to fuel cost hitting breakeven threshold. It is illogical to expect Air India to take on wet leases whilst it is cutting capacity at the same time.

Just a matter of interest. Air India cut capacity by 20% on its international routes in 2026 which caused a massive drop in revenue. That 20% is significant. The crown jewel in Air India is an asset that does not sit in its ledger. As one of the older premium airlines, Air India holds a vast collection of "grandfather" airport slots. (Explained in older post "Air India Sitting In A Sweet Spot"). Airport slots have a condition of "use-it-or-lose-it". It has a quota of 80% usage. If Air India fails to meet the quota, it stands to lose the slot at the particular airport. This is the reason why airlines will take off even when they do not have a single passenger. This is called a ghost flight. That explains why Air India restrained its capacity cut to 20% in international routes.

The global supply chain backlog and AOG (aircrafts on the ground) drama is not an Air India exclusive problem. This operational disaster is a global phenomenal that hits all airlines. Yet noises from Singapore seems to say it's only an inutile Air India being hit. The affable Mr Goh Meng Seng stressed the bad investment in Air India by comparing Indigo which he sees favourably solely on its 2026 net profit of  ₹7,502 crore compared to the former's loss of ₹22,238, again a generic statement that does not reveal a core rationale. I have explanation further down.

Nobody notices one thing -- the paradox of the spare parts backlog good timing for Air India in 2026 and possibly 2027.

The Intersecting Economics of the Two Crises

This is the exact core of modern airline risk management: the supply chain crisis essentially subsidized the cost of Air India's capacity cuts.

My regular readers would have observed I often hold contrarian views on some issues. Here is another highly astute and contrarian operational insight. Looked at through a strictly defensive financial lens, the overlapping timing of the global supply chain crisis and high fuel volatility did provide an unintended "blessing in disguise" or a natural hedge for Air India’s treasury department. When an airline is forced to cut 20% of its flying capacity due to grounded planes and missing parts, it is a commercial disaster under normal economic conditions. However, doing so during a period of highly volatile or spiking fuel prices changes the math.

If Air India had its entire fleet fully operational during a peak fuel crisis, they would have been forced to buy massive volumes of expensive Aviation Turbine Fuel (ATF) to power old, fuel-guzzling aircraft (like their un-refurbished Boeing 777s). They would be flying below their threshold breakeven. Operating at 100% capacity can actually lose more money than keeping it on the ground.

Because supply chain stagnation meant new parts weren't arriving, Air India was forced to park a significant portion of its fleet. Financially, this allowed them to do two things:

- Controlled cash burn: A parked plane does not burn fuel, incur heavy airport landing fees, or run up per-hour engine maintenance fees (Power-by-the-Hour contracts).

- Operational consolidation: Air India could consolidate its remaining active pilots, cabin crew, and high-demand spare parts onto its most profitable, premium routes (like Delhi to London or New York), ensuring that the fuel they did buy was utilized only on high-yield flights where tickets were expensive enough to cover the fuel spike.

Anatomy Of Supply Chain Crisis

The OEM bottleneck:

This is where the ecosystem is at : Aerospace OEMs → rely on small group of specialist casters/forgers → who faced post-pandemic labour shortage + under-capacity + titanium shortage from Russia → new carbon emissions and fuel-efficiency targets led to technical over-sophistication, new materials → this caused a durability trade-off (parts failing faster).

The simultaneous supply chain crisis across all major aerospace OEMs (Rolls-Royce, Pratt & Whitney, and GE Aerospace) is the result of a systemic bottleneck at the lower tiers of the aerospace supply chain, rather than independent failures by each company. Because aircraft engine manufacturing is highly consolidated, these competing OEMs all rely on the exact same specialized suppliers for raw materials and advanced components. When those foundational tiers broke, every OEM choked at the same time.

While there are several engine OEMs, there are only a handful of specialized companies globally capable of casting and forging the extreme high-heat, high-pressure metal components (like rotating disks and turbine blades) required for modern jet engines. Companies like Howmet Aerospace and Precision Castparts Corp (PCC) supply structural castings and titanium forgings to all major OEMs (GE, Rolls-Royce, and P&W). These foundational suppliers suffered severe labor shortages and capacity constraints. Because they couldn't ramp up production fast enough, a shortage of a single critical titanium or nickel-alloy casting delayed engine deliveries across GE, Rolls, and P&W simultaneously.

During the 2020–2022 aviation downturn, the aerospace supply chain laid off tens of thousands of highly specialized workers. Aerospace manufacturing requires precision machinists, certified welders, and specialized quality-control inspectors whose training takes years. Many retired or left the industry permanently. When airlines ordered a record number of new planes in 2023–2025, Tier 2 and Tier 3 suppliers lacked the skilled workforce to meet the sudden surge in demand, causing compounding lead-time delays that peaked in 2026.

Modern jet engines require advanced metallurgy, including aerospace-grade titanium and specialized superalloys (using metals like rhenium, cobalt, and nickel). Prior to geopolitical conflicts and sanctions, Russia (via VSMPO-AVISMA) was the world's largest supplier of aerospace-grade titanium. Forcing the entire global aerospace industry to pivot away from Russian titanium caused a massive logistical backlog. OEMs and their sub-contractors had to recertify new supply lines in the US and Europe, creating a multi-year queue for raw materials that affected every engine program.

To meet strict carbon emissions and fuel-efficiency targets, GE, Rolls-Royce, and P&W all pushed the boundaries of metallurgy at the same time, introducing ultra-high-pressure ratios and new materials like Ceramic Matrix Composites (CMCs). These new-generation engines run at temperatures hotter than the melting point of the metals themselves. These extreme physics caused parts to wear out much faster than simulated—particularly in harsh, dusty, and hot environments like India or the Middle East. Consequently, the OEMs were hit with a double demand shock: they had to produce parts for new engines while simultaneously fabricating an unexpected mountain of replacement parts for existing planes grounded by premature wear.

The Refurbishment Bottleneck:

The cabin refurbishment bottleneck is arguably the most public and damaging part of Air India’s operational delay. While passengers see broken inflight entertainment (IFE) screens and worn-out seats on long-haul US/Europe flights, the core constraint is a multi-layered logistical failure. The US$400 million widebody retrofit programme (affecting 26 Boeing 787-8s and 13 Boeing 777-300ERs) has faced continuous delays, pushing full completion out to late 2028. (Cash not yet burnt!!)

Unlike replacing a line-fit engine component, completely gutting and rebuilding a widebody commercial aircraft cabin relies on an entirely different set of suppliers and complex global certifications:

- The Seat Supplier Meltdown (The Primary Choke Point): Building a modern, premium premium cabin (like a 1-2-1 lie-flat business class configuration) is dominated by a few global manufacturers (e.g., Safran, Collins Aerospace, RECARO). These manufacturers face a severe post-pandemic raw material and electronics shortage. They simply cannot build seats fast enough to meet the global surge in retrofits and new aircraft builds. 

- Regulatory Certification Backlogs: Every new custom seat configuration must pass intense aviation safety tests (such as 16G crash testing and fire retardancy certifications). Global aviation regulators (like the FAA and EASA), as well as India's local DGCA, are heavily backlogged. Without active safety certification, aircraft cannot fly passengers, even if the seats are physically finished.

- Customs and Tax Frictions: Because India’s domestic aerospace supply chain is underdeveloped, nearly 70% to 80% of raw cabin materials -- including custom leather, wiring harnesses, advanced plastic panels, and premium flooring -- must be imported. In India, custom clearings, complex Goods and Services Tax (GST) allocations for parts, and high import duties regularly delay simple part packages for weeks at local ports.

What Tata-SIA Can Do About It

This is exactly where the Singapore Airlines (SIA) connection acts as Air India's strategic leverage. Because SIA owns 25.1% of Air India, Air India is not just a standard airline trying to build a workshop from scratch; it has direct, corporate backdoor access to SIA Engineering Company (SIAEC), one of the most powerful and technically respected MRO giants in the world.

To bypass these delays and accelerate the turnaround timeline, Air India is moving aggressively toward long-term structural changes, leaning heavily on its strategic partnership with Singapore Airlines Engineering Company (SIAEC). Air India’s recent Strategic Base Maintenance MoU with SIAEC allows it to tap directly into Singapore's massive global aviation relationships. Air India is currently scaling a massive column-free hangar in Bengaluru, specifically designed to handle multiple widebody and narrowbody checks concurrently. The first phase includes dedicated workshops for composite repairs, cabin interiors, and sheet-metal work. Co-developing this facility with SIAEC means Air India can transition from shipping planes to California or Singapore for retrofits to handling them entirely within India by 2027.

But setting up a local MRO facility does not solve the core engine parts shortage. If the tier-1 suppliers in the US or Europe haven't cast the turbine blades or forged the rotating disks, an MRO facility in India will still just be an expensive garage housing a grounded aircraft. However, building a local MRO is a strategic move designed to solve three other major bottlenecks that amplify those OEM delays:

- Eliminating the "Queue Within a Queue"
When an engine fails, it must be sent to an OEM-authorized shop for overhaul. Currently, India has very limited widebody engine overhaul capacity, meaning Air India has to ship its giant GE or Rolls-Royce engines to facilities in Singapore, Europe, or the US.

- The global bottleneck
Those overseas facilities are packed with engines from Emirates, Qatar, Lufthansa, and Delta. Air India is forced to wait in a global queue. By building its own massive MRO (like the ₹1,400 crore facility Air India is currently constructing in Bengaluru), Air India jumps to the front of its own queue. The moment parts become available from the OEMs, Air India can install them immediately rather than waiting for an overseas facility to free up a maintenance bay.

- Sashing transit and logistics dead-time

Shipping a multi-million-dollar widebody engine across continents requires complex logistics, customs clearances, and specialized air or sea freight. Transporting an engine to a foreign shop and back adds 30 to 45 days of pure transit and customs buffer to the turnaround time. Having a local facility eliminates international transit time entirely. It shortens the total "Engine Off-Wing to On-Wing" cycle, getting the aircraft back into revenue-generating service weeks faster once the parts arrive.

- Lowering labor costs and capturing airframe work

While the engine parts themselves must still come from the OEMs, an MRO handles the entire aircraft. A local MRO allows Air India to perform heavy structural checks (C and D checks) and extensive cabin retrofits (a major pain point for Air India's legacy fleet) using highly skilled but significantly cheaper Indian engineering labor. This drastically lowers the non-part overhead costs of maintenance, protecting their margins even when parts are expensive.

The Real Fix For Engine Parts: Strategic Joint Ventures

To actually solve the engine parts issue, Air India cannot just build a generic workshop; it has to sign Joint Ventures (JVs) with the OEMs. For example, Tata/Air India's long-term plan involves convincing GE Aerospace or Rolls-Royce to co-invest in local component manufacturing or dedicated parts warehousing within India. Only by embedding the OEMs into the local ecosystem can they truly secure a guaranteed, prioritized supply of those elusive turbine parts.

Comparing Indigo vs Air India

A bottom line comparison of Indigo's 2026 profits performance against Air India's losses and then saying SIA should have invested in the latter airline instead, underlines why a generic critique is so dangerous. First Air India has a legacy problem of state bureaucratic mismanagement to overcome which Indigo is not burdened with. Once the restructuring is completed, who knows how Air India can take off? Secondly, and specifically to 2026 performance, there is something critics do not understand. This is about the wet leases I promised to return to.

IndiGo had been using wet-leased widebody aircraft (Boeing 777s) from state-backed Turkish Airlines to fly international routes from Delhi and Mumbai to Istanbul. But it was not using it the way wet-leases were intended - for temporary relieve due to aircrafts out-of-service. Indigo was using the Turkish wet-leases as a permanent arrangement. This gives IndiGo primary advantage of total capital asset flexibility. By utilizing a wet lease (technically an ACMI contract: Aircraft, Crew, Maintenance, Insurance), IndiGo managed to enter the lucrative long-haul international widebody market with zero capital expenditure (Capex) and zero structural legacy risk.

Air India’s complaint was that Turkish Airlines was effectively using IndiGo as a "feeder mechanism" to bypass India's strict bilateral seat caps. Turkey had been aggressively begging the Indian government for more seat allocations to India, which New Delhi repeatedly denied to protect Indian carriers. By wet-leasing its idle planes to IndiGo, Turkish Airlines successfully funneled thousands of Indian passengers into its Istanbul hub anyway, pulling that high-yield international traffic away from Air India's direct flights to the US and Europe. Air India contends there was a camouflaged breach of the 6th Freedom in aviation.  Air India argued it was unfair that IndiGo could instantly scale up massive international capacity using foreign planes, foreign pilots, and foreign crew, bypassing the standard requirement for domestic airlines to invest heavily in buying and certifying their own widebody fleets.

The Ministry of Civil Aviation and the DGCA stepped in to draw a hard line. They rejected IndiGo's requests for long-term multi-year wet leases. They forced a strict sunset clause, mandating that IndiGo permanently terminate its Turkish Airlines wet leases by early 2026, forcing IndiGo to either transition those routes to true "dry leases" (using their own Indian crew) or wait for their own factory-ordered long-haul aircraft. At the core, the government's position is the airline should operate in a way that benefits the country's aviation industry.

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