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Tata’s mega-aviation merger is about to take off, but the sky isn’t clear yet

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  • Tata Group has interests in four airlines: Air India, Air India Express, AirAsia India and Vistara.
  • It merges low-cost carriers Air India Express and AirAsia India; and Vistara with Air India.
  • Although Air India is improving its operational performance, it is in the midst of a turnaround and the CEO says they will have to hit singles with the occasional four and six.
  • Vistara and AirAsia India have yet to become profitable.

It’s been less than a decade since the Tata’s entered the aviation industry – through joint ventures – growing both organically and inorganically. With the $2.4 billion acquisition of government-owned Air India, Tatas has earned the rare distinction of being part of four airline companies: Vistara, AirAsia India, Air India and Air India Express.

Now it is bringing its interests together – by merging low-cost carriers AirAsia with Air India’s low-cost subsidiary Air India Express. It is also on track to merge its other two full-service airlines: Vistara with Air India.

Between Tata airlines and the largest airline, IndiGo, India’s aviation industry is poised for a duopoly, experts say. “The industry is moving towards a duopolistic structure with Air India and IndiGo making up a dominant 80% of the market,” said an Edelweiss report.

IndiGo had a 57.7% domestic market share as of August 2022. The Tata group, on the other hand, carries a quarter of India’s airline passengers, with Air India and Vistara each having a 9.7% share and AirAsia a 5.8% share.

This ‘structural injunction’ will benefit both groups, giving them more pricing power – much needed as the industry faces headwinds from rising jet turbine fuel prices.

“The expected duopoly would certainly lead to price discipline among major airlines and that should improve their financial performance,” Manvi Hooda, practice leader at CAPA India, said in an Edelweiss report.

Tata’s aviation interests

airline Tata’s commitment Other owners
View 51% 49% owned by Singapore Airlines
Air Asia India 100%
Air India 100% commitment
Air India Express 100% stake (subsidiary of Air India)

Source: Press releases, reports

Air India on ‘growth’ path

IndiGo’s direct competitor – Air India – competes with the airline on one key metric: on-time performance (OTP).

OTP has always been IndiGo’s USP and since June Air India – which was an outlier – has raced for it. As of September, 87% of Air India’s flights were on time, compared to 84% of IndiGo’s flights, according to an economic time report.

Air India’s new CEO Campbell Wilson, who has brought on WAS to turn around the formerly debt-ridden state airline, said the improved performance is a result of investments in IT systems and strict monitoring of lead times.

It also shows an improvement in its passenger load factors, or PLFs. Air India was also one of two airlines to show a 2.5% improvement in PLF in August to 73.6% compared to July. The group’s airlines – Vistara and AirAsia also held on to their PLFs of 84.3% and 75% respectively.

The industry is about to take off

India’s aviation sector, like most others, went through a dry phase during lockdowns and one of the rare markets to have survived without an airline going under. Now the recovery is one of the fastest in the world and is facing rapid growth in volumes.

“Industry volumes, while still slightly below pre-Covid peak, are recovering at a rapid pace. In FY23, we forecast domestic industry volume growth of more than 50%. Air travel demand in India is very strong with a post-Covid economic recovery, a resurgence in business travel and normalization of international tourist arrivals,” said a report from IIFL.

This sentiment is also shared by Singapore Airlines, which owns 49% in Vistara. Singapore Airlines CEO Goh Choon Phong has said so an interview with Bloomberg that India is poised to become the world’s third largest aviation market by the middle of this decade, if not sooner.

Aside from a broad and growing domestic market, India has huge potential to grow international travelers – and its many international partnerships count. All airlines under Tata are using the option. While Air India with his legacy in international travel, is all set to accommodate the growth in travel between India and North America, Vistara has also ramped up flights about international destinations.

On the other hand, LCC subsidiary of Air India, Air India Express is also adding new Boeings to its fleet to meet growing demand. AirAsia has also stepped up its plans to go international.

The drag factors

However, all of these factors are half the chips in place – all bode well for a growing aviation conglomerate. Yet, analysts have them doubts when it comes to Tata’s ability to pull off these complicated mergers with several cross-shareholdings and integrate their strengths with partners.

Moreso, each of its airlines has its own problems. Vistara and AirAsia India have yet to become profitable and started operations in 2015 and 2013 respectively. In addition, Air India has a lot of baggage in terms of old routes that are unproductive, and in the middle of a turnaround that has yet to be completed – and it looks like it will take time.

Wilson, who was formerly the CEO of Scoot in Singapore, had also previously said turning Air India around is a matter of hitting a lot of ‘singles’ and the occasional ‘sixes and fours’ during the trip.

Despite healthy growth expectations, the sector could also become competitive with the arrival of new players – Akasa Air and Jet Airways, poised for a comeback. While the Tata Group’s airlines, with their strong market share, may be more resilient to pricing pressures, aggressive challengers may be able to take it away from them.

But all in all, the Tata group has another trick up its sleeve: its extensive presence in the hospitality sector and its continued digital integration as part of its super app, Tata Neu. The app brings all the services the group offers, from retail to hospitality to wallets, under one umbrella, and that could increase sales as the app builds a loyalty program.

Loyalty member revenues from the group’s Indian Hotels now contribute to 18% of total revenues from 12-13% by the end of the first quarter, according to an HSBC report in August. While IHCL itself had 2 million loyalty members, the Tata Neu app helped push that number to 3 million, the report said.

If similar synergies also emerge in the aviation business, there is value that the group umbrella can add to the airlines – both merged and individually.

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