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Ushering in a new era in Indian aviation

India’s airline landscape forever changed by Air India sale.

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December 17th 2021

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Almost everyone in the country’s aviation industry is agreed the sale of Air India to Tata Sons, commonly known as Tata’s, has irrevocably changed India’s skies. Read More » The deal is the biggest and one of the most unexpected outcomes of India’s short aviation history. Almost nobody, including past ministers and secretaries of civil aviation, former chairmen and managing directors of the airline, the entire bureaucratic community that has been closely associated with the airline, operations, industry professionals, analysts and veterans, would have bet money on a successful sale. Yet it happened. So 2021 was a biggie, as big if not bigger than Margaret Thatcher’s privatization of British Airways in February 1987. India has finally reached a milestone the UK and then Australia achieved decades ago.

But 2022 is likely to be an even bigger game changer for the industry than 2021 as the effects of the sale begin to take effect. Post the buy-in, the heat is on Tata’s to get its act together and offer the new Air India as a credible player in the industry that will compete with its peers but also win back some of the Indian international traffic that has been swept up by airlines such as Emirates Airline, Etihad Airways, Qatar Airways and Singapore Airlines.

With an extremely nationalistic government in power in India, the imperative to make good and reclaim some of India’s traffic is paramount. The first step is to identify a CEO for the carrier group. The chosen one must have shape one airline group from four disparate carriers: Air India, Air India Express, Vistara and AirAsia India.

In the run up to the sale, Tata’s said it intended to bring all four airlines under one umbrella. But many pundits, of which there are scores in Indian aviation, argue Tata’s lacks the managerial talent and the expertise required to pull off such a coup in an extremely competitive airline space. For a start, the new entity that emerges from the shell of the flag carrier is likely to include elements of the existing Tata’s joint ventures – LCC AirAsia India and full service carrier, Vistara.

The conglomerate has a freer hand in AirAsia India since the exit of Malaysian partner, Tony Fernandes, but Vistara is a different challenge because of Singapore Airlines’s (SIA) 49% equity in the carrier. Will the negotiations result in Vistara remaining with Tata’s or will SIA exit the joint venture? Whatever the outcome, it won’t be a piece of cake getting there, by any yardstick.

Not only will Tata’s have to put its full heft behind the process of re-inventing Air India, it must do it quickly. Airport slots and frequencies it will soon control from acquiring Air India will not be available in perpetuity. Within six months of formal approval of ownership of the flag carrier, - which may be in January - the clock starts ticking on utilization of the 4,486 domestic and 2,738 international slots being utilized by Air India on November 1, 2019 (as per the January 27, 2021 EOI). Then there is the treasure trove of bilateral rights the airline enjoys of which many remained unused. How rapidly and efficiently the Tata’s act on these critical issues will determine, to a significant extent, the success of the airline group especially if it aims to be a global airline player.

This gigantic task to pull off requires nothing less than a Superman. The new leader of the new Air India must successfully merge four different corporate cultures into one or two entities. And even if this effort is successful, the combined market share of the new Air India, however it manages its joint partnerships at Vistara and AirAsia India, still is estimated at 27%, far behind IndiGo’s 56%-57%. The name doing the rounds is Fred Reid, a Delta veteran, a rumour denied by Tata’s.

Vistara’s short history has been plagued by steep losses that do not look likely to achieve healthy numbers anytime soon. Although it has managed to narrow its losses from Rs 1,814 crore in fiscal year 2020 to Rs 1,612 crore 12 months later, the improvement was mainly foreign currency gains. The airline also has increased its market share and moved ahead of SpiceJet’s figures for the first time. But the bigger market share and the reduced losses are little comfort for an airline judged yet to make clear its strategic trajectory.

But there is bad news for the group’s acquisition too. The Tata’s low- fare carrier, AirAsia India, recently reported its net losses rose 95%, from Rs 782.30 crore to Rs 1,533 crore in the reporting period that matched Vistara’s profit and loss report. AirAsia India’s auditor has flagged the possibility the LCC may not be able to continue as a going concern in view of the complete erosion of its net worth as a result of its latest results.

It is fair to say Tata’s foray into aviation has been less than happy to date, but its new acquisition gives it another chance at the aviation big time. With the ability to command a greater market share from the Air India investment, senior Tata’s sources are hopeful of a turnaround.

If the Tata airline’s shape, structure and contours will determine how the aviation landscape for India and other airlines in the region will change, a lot will depend on the strategy of IndiGo, India’s largest airline group.

Has the LCC the appetite to take on more risk by foraying into foreign markets? It is not yet clear. IndiGo has not ordered wide-bodied aircraft and no commitment seems likely to eventuate in 2022. So the launch of IndiGo international long-haul flights, even in 2023, remains unlikely.

Many Ministry of Civil Aviation (MOCA) sources argue Indian carriers, including IndiGo, are not demonstrating an appetite for untested territory. Understandable in pandemic times.

IndiGo has captured an even bigger market share in domestic India in the last two years, edging close to 60% of the total passenger pie. Its increasing size has ensured the airline and its top management remain occupied with retaining control of this giant enterprise. At present, it is by far the preferred airline for anyone employed in the sector although the Tata airline is considered as a viable option going forward.

India also has a clutch of second tier smaller and weaker airlines hustling for business in a crowded space. For these airlines, 2022 promises to be even more crowded with the arrival Akasa, a new airline funded by market mover, Rakesh Jhunjhunwala, a Johnny-come-lately in Indian skies. The airline has ordered 72 737-8 MAXs and hopes to inaugurate flights mid next year, pending regulatory clearances. It will start small, bringing only one aircraft a month into its fleet.

Akasa has the distinct advantage of starting with a clean slate, untrammeled by the financial baggage of COVID-19 that burdens its potential rivals. How capable Akasa’s C-Suite, led by Vinay Dube, will be in negotiating aircraft purchase discounts, sale and lease back arrangements, route strategy, acquiring talent, positioning and product, has yet to be revealed.

In India, a nimble new airline could shake the ground competitors stand on and grab a higher percentage of passengers than would have been possible pre-pandemic. Its competitors and all other industry players are at their weakest at the moment creating space for a clear-headed and focused new entrant that could certainly emerge a winner.

A new airline also means more jobs in the sector, a welcome development for an industry that has been battered by closures of bankrupt airlines and the pandemic. Thousands of aviation sector professionals have exited the industry. Many are unemployed including pilots, particularly first officers, cabin crew, engineers and ground staff. Commanders and first officers who are flying are earning far less than in pre-pandemic times.

SpiceJet, which has shrunk to below 10% in market share during the pandemic, is attempting a big clean-up of its balance sheet and operations by hiving off its logistics and cargo business into an independently valued entity. This will provide SpiceJet with much needed funds. The value of this new subsidiary is reported to bring in annual revenue of US$350 million to the group.

The business, SpiceJet has said, is valued at four times its present revenue, bolsters the finances of the LCC and allows it to settle some of its dues with aircraft lessors by offering them equity in the new business.

How successful this plan, currently being shaped, will be revealed in the next 12 months. The airline has brought the MAX back into operation after renegotiating lessor terms, and managed to settle a long pending claim with Boeing from the grounding of the type in its fleet.

SpiceJet also has secured better terms for the remaining MAXs it has ordered, it said. With more efficient aircraft - the existing 737s are being replaced by fuel efficient MAXs in a phased and gradual manner- plus some easing of the heat from existing creditors and a limping back to normal schedule flying the airline hopes to weather the COVID storm, emerging smaller but fitter.

Keeping SpiceJet company, with a similar market share, is Mumbai-headquartered low-fare carrier, GoFirst, formerly GoAir. It also is hoping to raise money through the stock markets and emerge stronger despite the pandemic crisis.

All in all, the coming year will be decisive and a game changer for aviation in India. Having said this, readers must keep in mind a new and more deadly strain of the virus is in our midst and could be decisive in framing this analysis. The new global anthem, whether we like it or not, is que sera sera, be it aviation or any sector of the economy. The only certainty is uncertainty.

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