PARIS – Indian ultra-low cost carrier (ULCC) SpiceJet became the largest revealed customer for the 737 MAX 10 on Monday at the 2017 Paris Air Show (PAS), signing a Memorandum of Understanding (MoU) for 40 Boeing 737 MAX 10 jets.

The order consists of 20 new orders for the MAX 10 and 20 conversions from the carrier’s existing order book of 205 737 MAX 8s. It is worth $4.7 billion at the current list price of the 737 MAX 10 (~$118 million).

Boeing launched the largest variant of its re-engined 737 MAX family at PAS Monday morning, announcing that the type had 240 orders and commitments from 10 customers to be announced over the next few days.

At the time of writing (1:00 pm CET), Boeing had revealed six customers and roughly 110 orders (the exact split from Tibet Financial Leasing remains unknown). Of those 110 new orders and commitments, 64 are conversions from existing 737 MAX 8 orders, validating our analysis prior to the formal launch of the variant.

SpiceJet becomes third largest 737 MAX customer

With 175 737 MAX jets on order, SpiceJet is now (at least temporarily) the third largest 737 MAX customer in the world, behind fellow Asian ULCC Lion Air and Southwest Airlines in the United States. SpiceJet also has 50 purchase options for MAX planes.

Its first MAX 8 will be delivered in 2018. The 175 MAXs on order dwarf SpiceJet’s current fleet of 32 737 Next Generation narrowbodies split as two 737-700s, four 737-900ERs, and 26 737-800s. SpiceJet also has 21 78-seat Bombardier Dash 8 Q400 turboprops in its fleet serving regional routes.

“As a Boeing 737 operator and current customer of the 737 MAX, we are proud to be a part of the launch of the 737 MAX 10 and to be the first airline in India to order the newest version of the 737, which will enable us to maximize revenue on our dense routes while having a lower unit seat cost,” said Ajay Singh, Chairman and Managing Director, SpiceJet. “With the introduction of our 737 MAXs next year, we will be able to further expand our network, while keeping our costs low for our customers.”

“SpiceJet continues to be an aviation leader and strong Boeing partner, and we are honored to have them join 737 MAX 10 launch group,” said Boeing Commercial Airplanes President & CEO Kevin McAllister. “The additional 20 737 MAX 10s and capacity provided by these 20 new 737 MAX 10s will allow SpiceJet to offer even more passengers their award-winning on-board experience, while the airplane’s efficiency will keep SpiceJet profitable.”

SpiceJet looks to make its mark in the crowded but growing Indian market

The Indian aviation market has seen a massive revival in growth over the last three to four years under the government of Prime Minister Narendra Modi, thanks to a resurgent economic and income growth and lowered oil prices.

In 2016, India became the third largest domestic aviation market in the world and fourth largest overall, flying 260 million total passengers and 200 million domestic ones. In the domestic sphere, it trails just the United States and China, while in the combined statistics it trails Japan as well.

Year-over-year between 2015 and 2016, 16 of India’s 20 busiest airports grew passenger traffic at faster than 15%. The only two airports to have growth in the single digits were Mumbai, which is heavily constrained by infrastructure, and Srinagar in Kashmir, which has geopolitical challenges.

Over the next 10 years, Indian air travel volumes are expected to double or even triple, creating the world’s consensus third largest air travel market. And a highly competitive group of airlines is waiting in the wings to capitalize on that growth.

The leader in the proverbial clubhouse is SpiceJet’s fellow ULCC IndiGo, which operates 135 A320 family jets (including 22 A320neos) and has 408 more A320neo family jets (including 20 A321neos) and 50 regional ATR 72-600 turboprops on order. IndiGo is India’s most profitable and best-liked airline, and its growth has been nothing short of spectacular.

Joining IndiGo and SpiceJet in the ULCC space are Mumbai-based GoAir and Bengaluru-focused AirAsia India, part of the Southeast Asian LCC giant AirAsia Group. GoAir operates 18 A320ceos and 5 A320neos but has a staggering 139 additional A320neos on order. AirAsia India flies 10 A320ceos with 1 more on order, but can very easily bring over A320neo orders from the parent airline to fund growth.

Amongst full-service carriers, Jet Airways has orders for 79 Boeing 737 MAX 8 jets (four to be leased) against a present fleet of 93 narrowbodies (75 jets) and has resumed growth after years of stagnation.

Meanwhile Singapore Airlines joint venture Vistara has heady ambitions despite its limited size, with a fleet of 13 A320ceos and 1 A320neo (6 more on order). Vistara is widely expected, however, to grow its fleet both with additional A320neo orders and potentially a widebody order for the Boeing 777X.

Even beleaguered national carrier Air India has a fleet of 7 A320neos (out of a narrowbody fleet of 67 frames and a total fleet of 116 frames) with 7 more on order. Thus in all, the coming growth in the Indian aviation market has outstanding orders for 814 next generation narrowbodies to help support it with more to come.

India’s two-tier airport system and SpiceJet’s network structure work against 737 MAX 10 viability

Unlike many observers, we do believe in the potential for long-run growth in the Indian aviation market, much of which has already been realized in the last couple of years. And certain airports in India, most notably Mumbai, are already slot constrained.

If the expected growth in the Indian aviation market materializes, within 10 years all of India’s major airports, except the green field Bengaluru and Hyderabad facilities, and Indira Gandhi International Airport (IGIA) in the capital city of Delhi, will be capacity constrained.

The problem for SpiceJet is that it has both Hyderabad and Delhi as hubs, two of its three in all. The Indian market is like most around the world – sans infrastructure constraints, it tends to prefer higher frequency on smaller aircraft.

And Delhi in particular (by far SpiceJet’s largest hub) is hotly contested by all of India’s ULCCs (it is the largest hub for Vistara, SpiceJet, AirAsia India, and Air India with a massive hub from IndiGo to boot), which means that SpiceJet won’t be able to capitalize as much on the 737 MAX 10’s volume.

The other problem in India is that the airport system is very bifurcated, with six primary hubs and then a massive slug of secondary ones, as opposed to the more graduated system in say the US or China.

In all, there are six airports that handled more than 15 million passengers last year, including India’s four historic metros Delhi (57.7 million), Mumbai (45.1 million), Chennai (18.3 million), and Kolkata (15.8 million) along with Southern powerhouses Bengaluru (22.2 million) and Hyderabad (15.1 million).

The next busiest airport is Cochin at 8.9 million passengers, and then Ahmedabad, Goa, and Pune, are all clustered between 6.8 and 9 million passengers. After these top 10 airports, there is then a precipitous drop off to number 11 Lucknow at 4.0 million passengers. India’s air travel growth has not been very balanced.

What this kind of airport structure means for airlines is that for routes between the Top 10 airports, you can sustain some larger jets like the 737 MAX 10 and A321neo, but for routes to airports outside the Top 10, you are usually better off flying an aircraft the size of the 737 MAX 8. Even amongst the major metros, airlines will need to mix in smaller jets to enable fleet rotation and utilization.

As a result, we are not as enthusiastic about the prospects for the A321neo and 737 MAX 10 in India’s domestic market. They may have more relevance on international routes, but that is not where IndiGo and SpiceJet shine at present. This order is a big win for Boeing, but we are unsure about the potential for many more 737 MAX 10s in SpiceJet’s fleet.