Can the Tatas turn Air India around?

It all started when the Tata group’s chairman emeritus Ratan Tata tweeted “Welcome back, Air India" last week. The tweet had two emojis, a landing flight and a house. Twitterati was quick to label it “ghar wapsi".

“Air India, under the leadership of J.R.D. Tata had, at one time, gained the reputation of being one of the most prestigious airlines in the world," Ratan Tata added in the tweet. “Tatas will have the opportunity to regain the image and reputation it enjoyed in the earlier years."

Right now, this appears to be a tall order.

Tata Sons Pvt. Ltd, through its wholly owned unit Talace Pvt. Ltd, submitted a winning bid of ₹18,000 crore as the enterprise value of Air India. The group will also assume ₹15,300 crore of Air India’s debt and pay ₹2,700 crore in cash to the government of India. The deal is expected to conclude by the year-end. However, the airline the Tata group will inherit is vastly different from the one it let go in 1953, when Air India was nationalized.

First, the carrier doesn’t command the same respect it used to in the past. Second, Air India has also found it challenging to compete with private sector airlines after the economy opened up in 1991. Third, over the last decade, the national carrier’s growth potential has also been pegged back by its huge debt pile. It hasn’t made an annual profit in more than a decade since its merger with Indian Airlines in 2007. To add to these challenges, a large part of the airline’s fleet is in dire need of maintenance checks, refurbishments and renovation.

Complexity is a curse in aviation and the Air India purchase is as complex as they come, Satyendra Pandey, managing partner at aviation advisory firm AT-TV, said. “Tata group will need access to capital to the tune of at least ₹10,000 crore to support the Air India acquisition," Pandey estimated, adding that it may take at least four to five years for the company’s operations to turnaround under the new owner. “The turnaround will hinge on the three pillars of costs, culture and communication. Attacking the cost base demands a hacksaw approach as opposed to a scalpel. That in turn has consequences," Pandey added.

By a hacksaw approach, Pandey implied a more aggressive stance towards cost rationalization (the scalpel approach being gentler). For now, there are limitations to a very aggressive approach. Tata group, for instance, will have to retain all 12,085 Air India employees for a minimum period of one year, and offer a voluntary retirement scheme after that.

Besides employee costs, Tata group will need to lower operational expenses by negotiating contracts with airports, fuelers, aircraft lessors and other vendors. It also has to negotiate with Boeing and Airbus for aircraft replacements. And importantly, the group needs to bring in top talent who can take the hard decisions while infusing a dose of corporate work culture in an organization that has diverted significantly from the path to profitability.

None of this is easy but aviation experts Mint spoke to said that Tata group would do everything to make the acquisition work—it is not just an emotional connection to Air India that made Tata group bid aggressively for the national carrier. There is a solid business rationale.

Coming soon: duopoly

Tata group, clearly, has plans to navigate away from the fringes of India’s aviation industry and stamp itself as a major player. The market, right now, has one winner—IndiGo. With the entry of the Tata group, it becomes a duopoly.

According to data from AT-TV, the acquisition of Air India helps Tata group leapfrog in the domestic aviation space ahead of most of its competitors with a market share of about 27%-35%. The estimate cobbles up the share of Vistara (a joint venture with Singapore Airlines) and AirAsia India (brand license agreement with AirAsia Berhad). IndiGo, nevertheless, is expected to remain the largest domestic airline with a market share of 52%-58%.

The Air India acquisition, meanwhile, is key for Tata group’s international aspirations. It is the government of India that decides the countries an airline can fly to under bilateral rights. It wouldn’t have been easy for Vistara to get too many international flying rights, said an aviation industry executive, requesting anonymity.

“Air India comes with a recognizable global brand, assets, hangars, bilateral rights to fly to various countries. It has slots and parking bases at key airports, trained pilots and staff. It provides a ready-made product to serve the international market, albeit one in which the Tata group has to invest further to make it viable," the executive said.

With Air India and Vistara in its fold, Tata group can now pose a threat to the international long-haul aspirations of IndiGo or the international cargo plans of SpiceJet, ICICI Securities said in a recent research report. “This is evident considering the network (7 of Vistara and 70 of Air India), wide body aircraft fleet (total of 49 —2 Vistara and 47 Air India) and international market share of the combination," the report added. Air India operates a lion’s share of international flights among Indian carriers. The acquisition of Air India also gives the Tatas ownership of Air India Express, a no-frills international airline that mostly operates flights between south India with the Middle East. Air India Express, unlike its parent Air India, has been a profitable airline before the pandemic.

International operations, nevertheless, will also be challenging. For starters, this segment is expected to recover to pre-covid levels only by 2023-24, much later than the recovery expected in the domestic market. Tata group will also be competing against the deep pockets of state-owned carriers such as Emirates, Qatar Airways and Singapore Airlines. The conglomerate, as of now, isn’t offering any comments on the strategy ahead. When Mint contacted the group, a Tata Sons spokesperson said that it is looking forward to working with the government to complete the transaction process over the next few months. “We will be able to comment further only later," the spokesperson added.

The headwinds

Let’s take a closer look at Air India’s cost structure. The airline’s cost per available seat kilometre, a metric to determine cost performance, is 18-22% higher than IndiGo, and is similar to that of Vistara, data from AT-TV shows. IndiGo, however, follows a no-frills model while both Air India and Vistara are full-service carriers.

According to an executive in the know, Tata group may need to spend at least $2 million on each aircraft owned by the airline on refurbishments alone, apart from separately spending on pending maintenance checks. “Air India’s aircraft lease contracts are very high. The airline’s aircraft like Boeing 777 are also not very efficient, while Airbus A321 don’t offer the same range and capabilities as the new models. The airline should also have opted for the bigger Boeing 787-9 planes instead of Boeing 787-8 to fly on the international routes," the executive said, requesting anonymity. “Most of Air India’s fleet needs to be modified to be made competitive with other carriers," he held.

As of 2017, Air India had a fleet of 121 aircraft (excluding 4 B747-400 aircraft) mainly comprising Airbus and Boeing aircraft such as A319, A320, A321, B777 and B787. Apart from costs, a second concern for the Tata group would be cannibalization—Air India can cannibalize Vistara’s traffic, which operates on similar routes such as London, Frankfurt and Tokyo (from New Delhi). “There are plenty of question marks still on how you operate the group of carriers competitively without cannibalizing your own traffic," Lewis Burroughs, head of Indian Aviation at consultancy firm ICF, said. “For Air India, I think we’ll start to see routes rationalized with loss-making routes cut and a greater focus on serving the market economically rather from a public service perspective," he added.

Meanwhile, Tata group’s recent track record in aviation hasn’t been too rosy. Both Vistara and AirAsia India have been loss-making ventures. Both airlines haven’t reported an annual profit since they began operations in 2015 and 2014, respectively. Vistara’s net loss for 2020-21 stood at ₹1,1612 crore, down from ₹1,814 crore a year ago. Similarly, AirAsia India reported an annual loss of ₹1,532 crore for 2020-21 against ₹782 crore last year, as per its annual report filed with the corporate affairs ministry. Both these airlines, together, comprise about 13.5% of the domestic market share as of August 2021, according to the latest data from the Directorate General of Civil Aviation. During the month, Vistara’s market share stood at 8.3% and AirAsia India’s market share at 5.2%, respectively. In comparison, market leader IndiGo had 57% market share in August.

“Vistara has a cost problem while AirAsia India has a revenue issue," said an aviation expert who has worked with several top airlines and did not wish to be named. “Vistara’s cost problem stems from very expensive contracts it signed with suppliers, ground service, IT, and lessors during inception and later. Most of these contracts were executed by officials from Singapore Airlines, as Tatas didn’t have the expertise," the expert said.

Path ahead

So, how will the Tata group move ahead with the integration to begin with? The conglomerate’s track record of handling acquisitions successfully in the past, both in India and abroad, implies a certain confidence. The group can leverage its management expertise for carrying out a smooth transaction for Air India, said Nripendra Singh, global program lead (Aviation) and strategy consultant at Frost & Sullivan.

He added a long list of dos that can turnaround Air India. “They (Tata) will have to focus on flight schedules to synergize with Vistara and AirAsia India, negotiate with OEMs (original equipment manufacturers) for aircraft replacement, revamp inflight entertainment on Air India flights to Vistara standards, negotiate contracts post acquisition with airports and fuelers, define protocols for managing human resources, and make the best use of slots and international routes to enhance balance sheet positions," Singh suggested.

Meanwhile, Tata group is unlikely to renew a brand license agreement with AirAsia Berhad to continue operating its no-frill airline under the AirAsia brand—after the agreement expires in December 2022, a person familiar with the matter said while requesting anonymity. The Tatas, other experts hoped, will bring in airline experts from abroad who have experience in turning around loss-making carriers and are bold enough to take tough decisions such as dismantling the various unions. There were about 15 unions—both recognized and unrecognized —when Air India and Indian Airlines were merged in 2007. During its formative years, IndiGo had hired expats from top western carriers to set up their operations in India, they pointed out. “Tata group will need patience, capital and expertise to turn Air India into a profitable entity," the executive quoted above said. He couldn’t be more right.