Over the weekend, several news outlets claimed that the TATA Group had filed an official expression of interest in bidding for the troubled national air carrier Air India.
Is the TATA Group trying to bring Air India, erstwhile named Tata Airlines, under its wings? What does this acquisition mean for the TATA Group? How will this acquisition affect the aviation sector?
In the article that follows, we discuss the bidding for Air India by the TATA Group and its implications. Let's get started:
Tata group's old association with the aviation industry
The TATA group's expression of interest in the beleaguered airline Air India is driven by strategy as well as emotion. The TATAs are no strangers to the aviation industry.
To understand this association of the TATA group and the airline business, let us delve into a little bit of history:
- India's first licensed pilot, J.R.D. Tata established TATA Airlines in 1932 as the first national carrier. The airlines flew between Karachi and Bombay in the then-undivided, British-ruled India.
- In 1953, the government of India nationalized TATA Airlines and renamed it Air India.
- After the liberalization of the 1990s, the TATAs developed a new interest in the airline industry. They created a plan to start an airline with 100 planes in collaboration with Singapore Airlines. However, the plan could not materialize as the government did not allow foreign players to enter the domestic industry.
- There was little activity from the TATA group in the years that followed. But then, in late 2014, it entered into a joint venture with Malaysian businessman Tony Fernandez to start a low-cost airline AirAsia.
- In 2015, in collaboration with Singapore Airlines, the TATA group launched a full-service airline Vistara intending to redefine Indian air travel with a 'personalized flying experience.'
- The TATA Sons group has a 51% stake in both AirAsia and Vistara.
Therefore, it is evident that the TATA group knows that it is a master of the field of the airline business, and bidding for Air India is more of a prestige issue. The Air India acquisition would be a historically significant acquisition for the TATAs, but the acquisition comes with its fair share of risks.
What are the challenges before the TATA group?
The Air India acquisition is massively essential to the TATA group. If seen through, this acquisition will present some pertinent challenges, which are discussed below:
Conflict of interest with Vistara:
The TATA group has expressed their intention of bringing the airlines under a single business. If the Air India acquisition is seen, it will also come under the same wing as Vistara.
This will raise a conflict of interest because both Vistara and Air India are full-service airlines. The TATA group's adamancy to acquire Air India independently could strain their association with Singapore Airlines, which has not shown any interest in this bidding.
Running a loss-making Air India:
It is often said that privatization is the only saving grace for the ever-failing Air India, which has been running in losses for a while now. It was reported that Air India was making losses to the tune of a whopping Rs. 28 crores per day in the first quarter of 2020.
The first quarter of 2020 saw the total losses of Air India rise to Rs. 2,570 crores as compared to Rs.785 crores in the previous year. And let's not forget, the bureaucratic structure of Air India and its famous unions are sure going to hinder this financial overhaul.
Will the TATA group be able to turnaround the fortunes of Air India? Only time will tell!
Effect of the Ongoing COVID-19 Pandemic:
The Air India acquisition is already challenging, given the magnitude of its losses over the years. But add a global economic crisis brought on by the COVID-19 pandemic to the pot, and we have a whole new challenge to deal with.
The TATA group's two collaborative airlines Air Asia and Vistara, have seen turbulence in business because of travel restrictions brought as a result of the ongoing pandemic. Air India's acquisition will only add to their burden.
Due to higher operating costs, Vistara has reported a pre-tax loss of Rs. 1,814 crores in fiscal 2020, as compared to Rs. 831 crores in fiscal 2019. This is reportedly the highest loss booked by the joint venture since it started in 2015.
Air Asia also saw its losses widen to Rs. 332 crores during April-June 2020 because of travel restrictions brought as a result of the ongoing pandemic.
Why is the TATA group keen on this acquisition?
After looking at all the challenges that come with the Air India acquisition, one might wonder why the TATA group is so keen on it?
The TATA Sons chairman, N Chandrasekaran, has been quoted as saying, "Tata Sons is in a strong financial position with adequate cash flows to support the group companies and new growth initiatives. Tata Sons are not looking to monetize its investments to raise capital."
Industry experts believe that the Air India acquisition will help salvage and revive the TATA group's aviation business. The acquisition is vital to the group.
Now you must wonder why this acquisition is so critical to the TATA group? Well, let us take a look at the market share figures to try to understand this:
Market Share in 2020
Market Share in 2017
Vistara & Air Asia
It is seen from the above data that the TATA owned airlines hold a meagre share in the aviation market as compared to the undisputed market leader Indigo. Air India has a domestic market share of about 11%. If acquired by the TATAs, it will help bring their market share to about 24.2%, which is nearly a quarter of the aviation market sector pie.
The Air India acquisition is strategic from another perspective. It allows the TATAs to develop a strong foothold in the international market; an area where Indigo has shown no interest in entering.
And let's not forget! The Air India acquisition comes with its low-cost unit Air India Express which is a 90-planes fleet flying majorly on Mid-Eastern routes among 40 other international destinations.
Air India's Massive Debts: Another Deciding Factor
It is also worth noting that Air India had a total debt of Rs. 60,074 crores as of March 2019. This already massive debt figure would have substantially grown since then because of the operations' slowing down due to the ongoing COVID-19 crisis.
However, the Indian government has given an incentive to the buyers who are supposed to absorb only Rs. 23,286.5 crores of the total debt. The remainder of the debt will be transferred to Air India Assets Holding Limited (AIAHL), a special purpose vehicle created after the failed sale attempt of 2018.
TATAs quest to bring Air India home: Final thoughts
The Air India acquisition by the TATA group is significant not only to the TATAs but the aviation industry too. But it has its heavy baggage also. Not only the cost of acquisition is high, but the debts are also massive. And not to forget the inherent bureaucracy!
On the other hand, the TATA group is set to acquire well-trained and well-experienced staff and has shown effectiveness in handling these different situations. All in all, it will be an exciting time to watch this bidding and eventual acquisition unfold.