Tata's mega aviation merger is poised for flight, but the skies are not clear yet

• Tata Group has interests in four airlines - Air India, Air India Express, AirAsia India and Vistara.
  
  
• It is merging low cost airlines Air India Express and AirAsia India; and Vistara with Air India.
  
  
• While Air India has been improving its operational performance, it’s in the middle of a turnaround and its CEO says they will have to hit singles with an occasional fours and sixes.
  
  
• Vistara and AirAsia India are yet to turn profitable.
  

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

Now, it’s bringing its interests together – by merging low-cost carriers AirAsia with Air India’s low-cost subsidiary Air India Express. It’s also moving towards merging its other two full-service airlines – Vistara with Air India.

Between Tata-owned airlines and the largest carrier, IndiGo – the Indian airline industry is set for a duopoly, experts say. “The industry is headed towards a duopolistic structure with Air India and IndiGo making up a dominant 80% of the market,” said an Edelweiss report.

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

This ‘structural command’ is good for both these groups, which will give them better pricing power – that’s much needed as the sector faces headwinds from hike in aviation turbine fuel prices.

“The anticipated duopoly would surely bring pricing discipline among large carriers and that should improve their financial performance,” Manvi Hooda, practice lead at CAPA India, said in an Edelweiss report.

Tata’s airline interests


Source: Press releases, reports


Air India on a ‘growth’ path

IndiGo’s direct competitor - Air India – has been competing with the airline in terms of a key metric – on-time performance (OTP).

OTP has always been IndiGo’s USP and since June, Air India – which has been an outlier – has raced ahead of it. As of September, 87% of Air India’s flights have been on time as compared to 84% of IndiGo’s flights, as per an Economic Times report.

Air India’s new CEO Campbell Wilson who has WAS brought in to turn around the formerly debt-ridden state-owned carrier said that its improved performance is an effect of investment in IT systems and strict monitoring of turnaround times.

It is also showing an improvement in its passenger load factors or PLFs. Air India was also one of two airlines that has shown a 2.5% improvement in PLF to 73.6% in August as compared to July. Its group airlines – Vistara and AirAsia too held on to their PLFs at 84.3% and 75%, respectively.

The sector is poised to take off

The Indian aviation sector, like most others, went through a dry phase during lockdowns and one of the rare such markets which has survived without an airline going under. Now, its recovery is one of the fastest in the world and is looking at a rapid growth in volumes.

“Industry volumes, although still slightly lower than pre-Covid peak, are recovering at a rapid pace. In FY23, we forecast domestic industry volume growth of over 50%. The demand environment for air travel in India is very strong with economic rebound post-Covid, resurgence in corporate travel and normalization of international tourist arrivals,” said a report by IIFL.

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

Apart from a wide and growing domestic market, India has a huge potential to grow international travellers – and its many international partnerships count. All the airlines under Tata have been ramping up from the opportunity. While Air India with its legacy in international travel, is all set to capture the growth in travel between India and North America, Vistara too has been ramping up flights across international destinations.

On the other end, LCC subsidiary of Air India, Air India Express too is adding new Boeings to its fleet to meet the growing demand. AirAsia too has been inching up its plans to go international.

The drag factors

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

Moreso, each of its airlines have their own issues. Vistara and AirAsia India are yet to turn profitable, and they started operations in 2015 and 2013, respectively. Added to that, Air India has a lot of baggage in terms of legacy routes that are unproductive, and in the midst of a turnaround that’s yet to complete – and looks like it would take time.

Wilson, who was formerly the CEO of Singapore’s Scoot, too had earlier said that turning around Air India is a matter of hitting many ‘singles’ and an occasional ‘sixes and fours’ in the journey.

In spite of healthy growth expectations, the sector could also turn competitive with the arrival of new players – Akasa Air and Jet Airways which are poised for a comeback. While Tata group airlines with their strong market share might be able to withstand pricing pressures better, aggressive challengers might wrest it away from them.

Yet, all in all the Tata group has one more trick up its sleeve – its extensive presence in the hospitality sector and its ongoing digital integration as a 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 bring in revenue upside as the app builds a loyalty programme.

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

If similar synergies kick in to the aviation business too, there is a value that the group’s umbrella can add to the airlines - both merged and individually.


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