US embassy cable - 05NEWDELHI3147

C O N F I D E N T I A L SECTION 01 OF 03 NEW DELHI 003147 
 
SIPDIS 
 
COMMERCE FOR ADVOCACY CENTER/LOPP 
DOT FOR BHATIA 
FAA FOR LAVIN 
DEPT FOR E, SA, EB 
USDOC FOR 3131/OIO/ANESA/DHARRIS 
USDOC FOR 4530/ITA/MAC/OSA/ASTERN 
 
E.O. 12958: DECL: 04/26/2015 
TAGS: EAIR, BEXP, IN, Civil Aviation 
SUBJECT: BOEING WINS $8.5 BILLION AIR INDIA ORDER, LARGEST 
COMMERCIAL AIRCRAFT DEAL IN WORLD IN PAST YEAR 
 
REF: A. 2004 NEW DELHI 8096/8024 
 
     B. 2004 NEW DELHI 7702/7530/7343 
     C. 2004 NEW DELHI 6604/5054/4682 3587/3186/140 
     D. 2003 NEW DELHI 6556 
     E. 2003 NEW DELHI 6232 
     F. 2003 NEW DELHI 5978/5639/4628/4274/4212 
     G. 2003 NEW DELHI 3305/3042/2242/2212/2080 
     H. 2003 NEW DELHI 2624 
     I. 2003 NEW DELHI 2516 
     J. 2003 NEW DELHI 2282 
     K. 2003 NEW DELHI 2041 
     L. 2003 US DEL SECRETARY 51 
     M. 2003 STATE 123630 
     N. 2003 STATE 99494 
 
Classified By: Charge Robert O. Blake, Reasons 1.4 b,d 
 
1.  Summary: (C) On April 26, Boeing won a $8.5 billion order 
from Air India to supply 50 wide body B777-B787 class 
aircraft powered by GE engines.  Embassy believes it is 
unlikely that the PIB or the cabinet would reverse the 
selection, but advises we use high level visits to urge the 
GOI to quickly approve the sale.  We must be prepared to 
respond quickly and aggressively to Airbus efforts to derail 
the tender on technical grounds, as Air India has already 
done in its initial press release by dismissing Airbus' 
protests of seating configurations and delivery schedules. 
Boeing officials have told us lessons learned from this sale 
would be used in developing a new world wide sales strategy 
to counter Airbus' inroads on commercial aircraft sales.  Our 
attention must now turn to getting Boeing to use its offset 
requirement of over $1 billion to build lasting strategic 
partnerships with Indian companies.  The Boeing selection is 
one more in a long line of indications that the UPA 
government considers the U.S. its most important 
relationship. End Summary. 
 
2.  (C) Boeing won its biggest commercial aircraft order ever 
in South Asia on April 26 when state-owned carrier Air India 
picked Boeing over Airbus to fill a fiercely contested $8.5 
billion order to supply 50 wide body, double aisle aircraft. 
The order, which includes the new Boeing 787 Dreamliner, 
consists of three aircraft configurations:  8 Ultra Long 
Range (250 seats) B777-200LR; 15 Long Range (350 seats) 
B777-300ER; and 27 Long Range (250 seats) B787-8.  The 
desired schedule for delivery is from 2006-7 through 2012-13. 
 All three aircraft types will be powered by GE engines.  We 
are told that in monetary value this is the largest 
commercial aircraft deal in the world during the last year. 
In addition, Boeing late last year won a $1 billion Air India 
order for 18 B737-800 aircraft (Ref B). 
 
3.  (C) Cabinet Approval:  The Civil Aviation Ministry will 
now chaperone the two Air India procurements through the 
Public Investment Board (PIB) and Cabinet approval process. 
Civil Aviation Secretary Ajay Prasad told ECON M/C that he 
expects the PIB and Cabinet approval process to be completed 
within 3 months.  While the PIB or the cabinet can 
theoretically reverse the decision, Embassy believes it is 
highly unlikely these bodies would do so in the absence of 
some dramatic unforeseen development.  Nonetheless, we should 
urge the GOI to quickly approve the sale.  The longer the 
decision drags on, the greater the opportunity for Airbus to 
orchestrate a campaign to disrupt the sale. 
 
4.  (C) Airbus Reaction: Embassy expects Airbus to protest 
loudly and claim flaws in the technical evaluation.  Boeing 
and the USG should be prepared to respond quickly and 
aggressively to such allegations.  Even before Air India 
announced the Boeing award, Airbus wrote the Air India 
Chairman asking that Boeing be disqualified because its offer 
of seat configuration and delivery schedules on the B787 were 
in violation of tender requirements.  In its press release on 
the Boeing selection yesterday, Air India Board responded 
directly to Airbus' allegation and attempted to close the 
door on further protests by noting that there was no truth to 
the allegations.  Charge took the opportunity to suggest to 
MEA Joint Secretary Jaishankar that the GOI conclude the deal 
prior to PM Singh's visit to Washington in mid-July. 
Jaishankar agreed to put this request into the system. 
 
5.  (C) Strengthening the State-owned Carriers: Along with 
the 18 single aisle B737 order last year and a handful of 
recently leased B777 aircraft, the wide body order represents 
Air India's first fleet enhancement in over a decade and a 
half.  This contract, when approved, would bring an end to an 
on-again off-again procurement process that began in 1996. 
Air India's acquisitions are part of a broader GOI strategy 
to reform the civil aviation sector and revamp the two 
state-owned carriers.  It has been clear to most observers 
that unless the GOI and the 2 state-owned carriers moved fast 
to replenish their fleets, they would fall even further 
behind their competitors.  Prolonged uncertainty about 
whether to privatize or sell or IPO the carriers had caused 
them to decay and deteriorate.  The new GOI plan is to: 
strengthen the carriers quickly by expanding their fleet; 
restore their financial strength and raise their value on the 
markets; float an IPO on the bourses; and then gradually 
privatize them completely.  The GOI's offer of its sovereign 
guarantee for fleet expansion is a sign of the urgency and 
seriousness with which the GOI is committing itself to 
turning around the carriers. 
 
6.  (C)  India's Growing Aviation Market: The Indian 
commercial aircraft market is fast becoming one of Boeing's 
best and one of the few where Boeing is beginning to trounce 
Airbus.  When the two Air India orders are combined with over 
$1 billion in orders from private Indian carriers, Boeing has 
picked up $10.5 billion worth of orders in India during the 
last year.  This is several times greater than Airbus' $2 
billion order for 43 A320 aircraft from Indian airlines and a 
few much smaller orders from private Indian carriers.  With 
the imminent entry of several new start-up airlines in the 
domestic market and the plans of Jet Airways and Air Sahara 
to start international service, there is potential for the 
Indian market to continue to be strong.  Some analysts 
estimate the Indian market could absorb $25 billion dollars 
worth of aircraft in the next 20 years.  The spending on 
aviation facilities, equipment, and systems to service this 
growth could be equally high. 
 
7.  (C) The Perfect Campaign:  This USG-Boeing effort was 
well scripted and provided a new paradigm in how to marry USG 
advocacy with a commensurate level of company commitment at 
the highest levels.  Boeing officials have told us lessons 
learned would be used in developing a new world wide sales 
strategy to counter Airbus' inroads on commercial aircraft 
sales.  Embassy believes that the USG played a pivotal role 
in the campaign.  The Embassy felt that large procurements 
such as this one require multi-pronged strategies.  While it 
is important to nurture the technical interlocutors on 
technical aspects of the bid (e.g., price, delivery 
schedules, counter-trade offsets), it is equally if not more 
important for the company leadership to touch the right 
political bases at the right levels.  We made USG advocacy 
conditional on two actions by Boeing: an assurance by Boeing 
that it would make its most competitive offer the first time 
around; and the visible commitment of the Boeing leadership 
to the sale.  We made clear that the Embassy would not 
support any effort to reopen or renegotiate terms if Boeing 
lost the bid on the basis of an uncompetitive offer as it did 
last year in the Indian Airlines and Air India tenders (Ref 
B).  The Boeing Chairman flew to New Delhi on short notice in 
December (Ref A) to deliver a strong message to the Indian 
leadership of the company's long-term commitment to India 
across the whole range of its businesses.  The Boeing 
Chairman also pledged that the company would make its best 
and most competitive offer up front.  The USG weighed in with 
the top of the GOI leadership in a multi-pronged advocacy 
effort in which the economic, political, public affairs and 
foreign commercial service all contributed. 
 
8.  (C)  Strategic Relationship:  The Boeing selection is 
significant for the US-India relationship from many angles. 
Boeing's Indian orders during the last year ($10.5 billion) 
are about twice the annual U.S. exports to India ($5.3 
billion in 2004).  They will help redress the growing trade 
imbalance between the two countries.  The order for 27 
Dreamliner 787s helps strengthen the viability of this new 
aircraft, on which Boeing has bet heavily.  The Boeing sale 
can also open up good strategic opportunities in India.  We 
understand that the offset requirement could be more than $1 
billion.  This requirement could be used by Boeing to enter 
into strategic partnerships in joint ventures or 
co-production in the defense and related sectors.  The sale 
also helps to alleviate some of the concerns analysts and 
policy makers have had on whether the UPA government, with 
the socialist past of the Congress party and heavy influence 
of the Left parties, would be able to sustain the momentum of 
closer US-India relations. The Boeing selection is one more 
in a long line of indications that the UPA government 
considers this its most important relationship.  Other recent 
cases where the UPA government took decisions to move forward 
the bilateral relationship are: -- Open Skies, Tsunami 
Relief, Nepal Cooperation, Dabhol, the US-India Economic 
Dialogue, and the US-India Energy Dialogue. 
BLAKE