On October 8, Puhin Kent Pandey, Secretary of the Department of Investment and Public Asset Management (DIPAM) announced that Tata Sons had won the bid for debt-laden Air India. The news has taken the aviation industry by storm. The airline has returned to the Tata Group after 68 years! In this editorial, we dive into the details of the acquisition and what lies ahead for the airline.
Air India – A Brief Profile
India’s first civil aviation pilot, Jahangir Ratanji Dadabhoy (JRD) Tata, set up the first domestic airline— Tata Airlines in April 1930. In the pre-independence era, princes of different states enjoyed the new mode of transport and the hospitality it offered. Thus, the group redesigned the airline with the iconic ‘Maharaja’ style.
After India’s independence, the Tata Group proposed the launch of ‘Air India International’, a new overseas air service. This new entity became the first Asian airline that connected the east with the west. In 1953, with the heat of nationalisation spreading across the nation, Tata Airlines and nine other domestic carriers were merged and rebranded as Indian Airlines. Air India International was also taken over and merged with Air India. This move was opposed by JRD Tata and other players in the airline industry, but as a consolation, JRD was appointed as the Chairman of Air India and one of the directors of Indian Airlines. With his leadership, the new entity found its pace for the next 25 years.
With liberalization and the entry of private low-cost carriers, Air India started to lose its feet in the industry. Various governments tried versatile steps to make the airline profitable, including measures to privatize it. Due to various political circumstances, none of these measures was successful. In 2007-08, a decision was taken by the government for the merger of the domestic carrier Indian Airlines with Air India. The merged entity had a very stressed balance sheet, and the management was in deep trouble.
In March 2018, the government invited bids for acquiring a 76% stake in Air India. At that time, not even a single bid was received. Finally, the state again revised its invitation for a 100% stake in the airline. The Tata Group was declared the winning bidder for the national carrier on October 8th 2021.
Details of the Deal
Talace Pvt Ltd, a subsidiary of the Tata Sons, will be paying Rs 18,000 crore for a 100% stake in Air India and its low-cost arm Air India Express. They will also acquire a 50% stake in the ground handling company of Air India (AISATS).
Currently, Air India has an aggregated debt of Rs 61,562 crore. Out of this, Rs 46,262 crore will be handled by Air India Asset Holding Ltd (AIAHL), a special purpose vehicle (SPV) created to manage its debt. An amount of Rs 15,000 crore will be paid off by Talace. The government will be left with Rs 2,700 crore as cash equivalent after the deal.
It is interesting to note that Air India has generated a total debt of Rs 20,000 crore in the last two years. Additionally, the Centre has infused more than Rs 1 lakh crore into the airline since 2009 to make it operational.
Origin of Vistara & Air Asia India
The Tata Group always had the intention to get into the airline business. In 2013, the Government of India allowed Foreign Direct Investment (FDI) of up to 49% in the civil aviation sector. A joint venture (JV) by Tata Group and Singapore Airlines (which was rejected in the early 1990s) came into the limelight again, giving life to TATA-SIA Ltd or Vistara Airlines. Tata Sons have a 51% shareholding in the entity, and the remaining stake is held by Singapore Airlines.
Currently, Vistara has a fleet of 47 aircraft and a market share of 8.1% in the Indian civil aviation industry. However, the airline is not profitable. From a loss of Rs 400 crore in FY16, it has ended up in a loss of Rs 1,612 crore in FY21. The company has raised fresh capital of Rs 1,835 crore in FY21 as a result of the high capital requirements of the industry.
In 2013, Malaysian global low-cost airline, AirAsia, was also interested in starting its Indian subsidiary. They created a JV with Tata Sons in India. AirAsia India currently has a market share of 6.7%, with a fleet size of 33 aircraft. The Tata Group has an 83.6% stake in this airline. Similar to Vistara, Air Asia India is also a loss-making company. The company reported a loss of Rs 1,533 crore in FY21, almost double compared to the previous year.
The Airline Industry – An Analysis
Before the Covid-19 pandemic hit the airline industry, nearly 16 crore Indians utilized air travel as a major mode of transport. The United States tops the chart by carrying 92 crore travellers, followed by China with 65 crores. This report indicates the scope of penetration of airlines in India.
IndiGo Airlines tops the chart with a share of more than 58%. The combined market share of the 3 companies led by the Tata Group will be only 25%.
We can see the magnitude of the fleet size of IndiGo compared to Vistara and AirAsia. Even though Air India has witnessed a lot of selling pressure on its fleet to manage debt, the company still manages to have a fleet strength of 172.
The arrival of well-experienced management is positive news for the stressed airline. The expertise of the Tata Group in managing and collaborating with international air carriers will help the new entity find its path. In 2019, N Chandrasekaran (Chairman of Tata Sons) said that they are not interested in running a third airline unless all are merged. Thus, there are a lot of rumours surrounding the merger of the three entities. However, such a merger can be a double-edged sword. If not managed properly, we may see a similar situation of the Air India-Indian Airlines merger or a similar case of the recent unification of Vodafone-Idea.
It is important to note that none of the existing airlines is profitable. Increasing competition, high capital requirements, debt, and the Covid-19 pandemic are some of the major concerns for this business. In this scenario, it is an advantage for new airline players to start from scratch and keep their balance sheet strong. One such move has been made in the industry by the Stock Market Big Bull Rakesh Jhunjhunwala. He has announced a new airline venture, Akasa. The lack of penetration of air travel in India, as well as being a comparatively cheaper mode of transport for long distances, is the fuel that drives these airlines in the long term.