Tata's Air India gamble could reveal the path of group's aviation business

Topics Air India | Tata group | Boeing

If the group does go ahead and eventually wins the bid, it will mark the culmination of its aborted attempt 19 years ago to buy the airline which it once owned before it was nationalised in 1953
With the August 31 deadline for submitting a bid for Air India nearing, the buzz that the Tata group will make another attempt to acquire the company is growing stronger. The group has publicly stated that it is evaluating the proposal and will consider a bid “after due consideration”.

If the group does go ahead and eventually wins the bid, it will mark the culmination of its aborted attempt 19 years ago to buy the airline which it once owned before it was nationalised in 1953. In 2001, when the Atal Bihari Vajpayee government wanted to divest 40 per cent in the state-owned airline, Tata teamed up with Singapore Airlines (SIA) to bid. The Hinduja group was the other bidder. But strong opposition from domestic carriers led by Jet Airways stalled the sale, with the Hindujas, then SIA and eventually Tata pulling out of the race.

The big question is whether it makes sense for the Tata group to buy this loss-making, overstaffed airline with all the embedded weaknesses of a public sector company. More so because the group already runs two airlines, Vistara (with SIA) and Air Asia India (with Air Asia Berhad), and neither can be described as successes yet.  

 

 
This time, however, the equations are different from 2001. In 2001-02, the unmerged Indian Airlines-Air India (including the low-cost subsidiary Alliance Air) dominated the domestic skies with  over 50 per cent market share, with only Jet and Sahara as private sector competition. Today, Air India has a mere 9.1 per cent of the domestic air market (based on July 2020 figures) and is number three in the pecking order. IndiGo is the leader with an over 60 per cent market share, followed by SpiceJet.

In the international market, too, Air India was the sole domestic player with a 29 per cent share in 2001-02. Here again, the story has changed for the worse. Air India, which merged with domestic carrier Indian Airlines in 2007, and its low-cost subsidiary Air India Express, now has just an 18.8 per cent share. Here too, IndiGo has overtaken Air India (excluding Air India Express) for the top spot.

So why do some analysts think buying this declining airline makes good sense for the Tata group? One reason is that it may bulk up the Tata aviation business’s market share. Even after six years in the business, the group has grown painfully slowly. The two airlines have cobbled together a market share of only 10.2 per cent.

The group has also trimmed its expansion plans — last year then Air Asia India Chief Operating Officer Sanjay Kumar had announced that the airline would expand its fleet from 21 to 40 aircraft by April this year. Currently, it has only 30 planes and the Tata group is looking at buying out its Malaysian partner, which is struggling with financial challenges of its own in south-east Asia.

But the Tata airlines business is not in good financial shape either. Even before Covid-19 impacted air travel, AirAsia India made losses of ~334.6 crore in FY 20, more than double the previous year’s losses, on revenues of ~928 crore. Vistara, too, suffered a doubling of losses to ~831 crore in FY19 (FY20 results have not been declared).

By acquiring Air India, the Tata group could boost its domestic market share to a reasonable 24 per cent in no time, closing its gap with IndiGo and moving far ahead of SpiceJet. It will also be the only player in the full-service carrier market, now that Jet Airways has crashed. Plus, the three airlines will command a fleet that will expand from 72 aircraft to 244 in one stroke, within touching distance of IndiGo’s 276 aircraft.

This may still leave the group with some catching up to do with IndiGo’s dominance in the domestic market, but the bigger play for the Tata group will be the international skies, especially with scheduled international operations set to resume soon. Both Tata and SIA see this as their key area of growth, and an opportunity to fill the vacuum left by Jet Airways that had a reasonable market share in the key overseas routes of West Asia, the US and UK.  

It is also well-timed because Vistara started plying the international skies only last year in August. On Tuesday, it announced that it meant serious business by launching its first long-haul flight between Delhi and London Heathrow from August 28 to September 30 as part of the bilateral “transport bubble” on a Dreamliner 787. It also wants to use its second Boeing 787-9 for special flights to Paris and Frankfurt.

The acquisition of Air India would give the Tata group’s aviation business instant access to valuable flying slots, which usually take time to acquire, including lucrative markets such as New York and London and some West Asian markets where bilateral quotas have been exhausted. But most importantly, it will catapult the group into the largest domestic player in the international skies.

For SIA, the big challenge in its global battle against the well-financed West Asian carriers is that it does not have a share in the lucrative India-West Asian and African routes, which accounts for over 50 per cent of the total international passenger market. It is a key player on the India-Singapore route, but the route accounts just 8 per cent of international traffic. That is why its market share in December quarter 2019 was a mere 2.8 per cent of international traffic to and from India. A joint venture with Tata to buy Air India would give the island nation’s state-owned airline not only a share of this growing market but also that of Indians travelling to the US and Europe.

In many ways, therefore, August 31 will reveal the flight path of the Tata group’s aviation business.  


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