Tata-Air India: Too much to chew

To have an over $100-billion Indian conglomerate like the Tata group, that has a vast consumer connect (from jewellery to salt), play a bigger role in India’s aviation industry would certainly augur well for the sector, which has been plagued by loss-making airlines. Reason: Tata group has deep pockets and, quite rightly, stands for long-term commitment.

Consider the last six years. Tata Sons, the holding entity of the Tata group, has stayed invested into two Indian airlines, AirAsia India and Vistara, both of which have been loss making entities. While Vistara’s pre-tax loss widened to ₹1,814 crore in FY20, AirAsia India reported a loss of about ₹317 crore. Malaysia-based AirAsia, according to various reports, is now reviewing its interest in its India operations, in which it has a 49% stake.

So, earlier this week, when the Tata group reportedly submitted an Expression of Interest (EOI) in buying the country’s loss-making flag carrier Air India (AI), many analysts viewed it as a step in the right direction—for the airline and Indian aviation. AI is the country’s third largest airline with a domestic market share of about 9.5%. On the international front, it is the largest transporter of passengers to and from the country.

While sources in the Tata group confirmed the EOI bid to Fortune India, the group’s spokesperson declined to offer comment. There hasn’t also been any formal recognition of the names of the bidders, who have submitted an EOI for AI, from the central government.

The shortlisted bidders, though, are expected to be announced in the first week of the new year. However, the Tata group is being pegged as the front-runner to acquire AI. And if it does, there are now hushed voices within the industry that suggest that the Tata group may be biting off more than it can chew.

“I think the Tata’s are underestimating what it will take and overestimating their ability to turn around AI,” says an aviation industry insider on condition of anonymity. Both at AirAsia India and at Vistara—while Tata Sons is the majority shareholder—operationally both the airlines have been run by their respective junior aviation partners, AirAsia and Singapore Airlines, respectively. “There is no J.R.D. Tata anymore,” adds the insider. J.R.D. Tata pioneered aviation in India in the early 1930s with the launch of a freighter air service, which some years later morphed into a passenger airline (Tata Airlines). Post independence, the airline was nationalised and rechristened as Air India.

Seven decades later, on offer is a 100% stake in AI, including ownership of Air India Express Limited, a profitable international low-cost airline subsidiary, and 50% ownership of Air India SATS Airport Services Private Limited. The latter provides ground handling and cargo handling services at airports situated at New Delhi, Hyderabad, Bengaluru, Trivandrum, and Mangalore.

“Air India has a number of assets such as slots, bilateral rights, brand name, some good and relatively young aircraft, airport and maintenance facilities, and skilled workforce,” says Sanjiv Kapoor, former chief strategy and commercial officer, Vistara, and former COO, SpiceJet. However, more importantly, he adds, “it [AI] will need to be completely recaptilalised, will need a largely new fleet, and every aspect of the business and culture will have to undergo a transformational overhaul.”

Turning Air India around

Earlier this year, it was reported that potential bidders for AI would have to take on ₹23,286 crore worth of debt (much less than the airline’s overall debt overhang of over ₹62,000 crore). But, now, various reports suggest that the government is allowing bidders to determine themselves how much of the airline’s debt they would like to take on—by accepting bids on the basis of the airline’s enterprise value (equity + debt).

“Offer a zero debt AI to the highest bidder in an open auction instead of sealed cover,” argues Captain G.R.Gopinath, founder of erstwhile budget airline Air Deccan. “Because now debt is linked to asset value, and asset value and contracts are suspect.” Furthermore, he believes that the successful bidder must be given the right to retain employees whom they want. “For the rest, government has to give VRS (voluntary retirement scheme).” Despite all these challenges in acquiring AI, Gopinath labels it as being “a worthy” challenge.

Kapoor, who has first hand knowledge of how SpiceJet turned around from the brink of collapse in 2014, says the kind of transformational turnaround that is required for AI is not easy nor is it cheap. “They will need visible and inspirational leadership, as opposed to faceless bureaucrats and technocrats who are typically unable to inspire, motivate, and drive culture change,” adds Kapoor. He insists that AI cannot be turned around on “sentiment” and “good intentions” alone.

If the Tata group were to come up as the winners in the bid for AI, would the group then operate three separate airline entities or merger two or all of them? Gopinath says that they should merge all their aviation ventures under one entity, “and call it Air India.” He goes on to explain that all domestic operations of the merged entity should operate on the lines of a budget airline, while international operations could be run on a full-service model—offering business class seats, and other passenger comforts, and perks. “Domestic [operations] must be run like IndiGo or better, Air Deccan,” says Gopinath, “and International like Singapore Airlines.”

Easier said than done, especially when airline mergers in India have been a disaster. And the examples are plenty, be it Air India and Indian Airlines, Jet Airways and Air Sahara, or Kingfisher Airlines, and Gopinath’s own Air Deccan.