Nerves of steel: Tata’s bid for Air India decoded

“I don’t believe in taking right decisions, I take decisions and make them right.” That’s one of the most-shared social media quotes of Ratan Tata, chairman emeritus of Tata Sons, the holding company of the over $105-billion in revenue Tata group. However, in an interview, when asked about this philosophy, Tata clarified, “I’m sorry… that statement was never made by me. It’s become a default statement, and you come to know of it when people read it back to you.”

That said, the Tata group, which touches the lives of Indian consumers in so many ways—from selling salt to jewellery to providing a direct-to-home linear television service—in a strange way echoes the philosophy of that “default statement”. And there is history to it.

J.N. Gupta, the founder and managing director of Stakeholders Empowerment Services (SES), a corporate governance research and advisory firm, says that “nobody believed that they could do it” when Tata Iron and Steel Company (now Tata Steel) was set up in 1907. “Everybody made fun of them, but they did it. And when you have that type of grit in you, you do not want to do one thing in life,” says Gupta, summarising the group’s diversification into sectors such as information technology, consumer and retail, automotive, financial services, tourism and travel, and aerospace and defence, to name some. There were 29 publicly-listed Tata companies with a combined market capitalisation of $123 billion as on March 31, 2020.

And not to forget: the group’s legendary chairman 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 passenger airline Tata Airlines. After Independence, the airline was nationalised and rechristened Air India (AI). Given this rich history, Sudhir Dash, founder and CEO of Unaprime, a financial investment advisory services firm, unequivocally says, “In India, if anybody can take over Air India and manage it, it’s only the Tatas.”

So, in December, when the Tata group submitted an expression of interest (EoI) in buying the country’s loss-making flag carrier Air India (it made a cash loss of ₹3,600 crore in FY20), many aviation analysts viewed it as a step in the right direction—for the airline and the sector. Reason: the Tata group has deep pockets and stands for long-term commitment.

But some disagree. “Rationally, they cannot afford to buy AI,” says Nirmalya Kumar, Lee Kong Chian Professor of Marketing at Singapore Management University and distinguished fellow, INSEAD Emerging Markets Institute. He alludes to the fact that AI wouldn’t be able to generate enough cash flows, yet would require large amounts of investment to keep it running. More so, given AI’s suitors will have to absorb a staggering debt of ₹23,286 crore.

AI is the country’s third-largest airline with a domestic market share of about 10%. On the international front, it is the largest Indian transporter of passengers to and from the country. Over the last six years, Tata Sons has stayed invested in two Indian airlines, AirAsia India and Vistara, both of which have been loss-making entities. Recently, Tata Sons increased its shareholding in AirAsia India to 84% from the 51% it held earlier by buying another 33% from partner AirAsia for $38 million.

According to aviation veterans, while Tata Sons is the majority shareholder in both AirAsia India and at Vistara, operationally the airlines were run by their respective junior partners, AirAsia and Singapore Airlines. Kumar, who previously headed strategy as a member of the nowdisbanded Group Executive Council of Tata Sons when Cyrus P. Mistry was chairman, says that the Tata group may not have the expertise to run airlines. “It is a cut-throat, highly cyclical business, with limited value-creating potential.”

AI, though, has a number of assets such as slots, bilateral rights, brand name, aircraft, airport and maintenance facilities, and a skilled workforce. But apart from the debt overhang, there is another big elephant in AI’s office: Culture. “All those people [at AI] have been primarily serving government- and quasi-government clients and, unfortunately, they have lost out on the service front,” says Dash of Unaprime. And that calls for “visible” and “inspirational” leadership, as opposed to “faceless” bureaucrats and “technocrats”, says Sanjiv Kapoor, former chief strategy and commercial officer, Vistara, and former COO, SpiceJet.

It isn’t very clear what the Tata group’s larger strategy is with regard to its aviation bets—AirAsia India is a budget airline, while Vistara is a premium one. Air India, despite its dismal service record, is a premium carrier. When Fortune India reached out to Tata Sons for this story, they offered “no comments”.

If the Tata group were to win the bid for AI, it is still anyone’s guess whether they would operate three separate airline entities or merge two or all of them. History, though, has shown that airline mergers in India have been disasters: be it Air India and Indian Airlines, Jet Airways and Air Sahara, or Kingfisher Airlines and Air Deccan.

But the Tata group isn’t a stranger to big-ticket acquisitions; it has a history of such buyouts beginning with Tata Tea’s acquisition of Tetley in 2000. Since then, Tata group companies have made several big acquisitions, including Corus by Tata Steel, Jaguar and Land Rover by Tata Motors, and Brunner Mond by Tata Chemicals. However, questions remain on whether the group has made good on some of them.

“Corus, JLR, Tata Chemicals, and even Tetley, took the focus away from India, and as a result, Tata lost leading positions/ market share as well as the opportunities to scale big in the domestic market,” argues Kumar. But Gupta of SES quips: “Everybody is intelligent in retrospect.”

Kumar says that the three companies that have performed the best for the Tata group over the past two decades, from a market capitalisation or wealth creation perspective, are Tata Consultancy Services (TCS), Titan Company, and Voltas. And he is quick to point out that none of them made large acquisitions or went global. “Remember, TCS’ revenues are global, but it is a purely India play.” The Tata group, he adds, now needs to focus on reducing the overall debt at the group level, and focus on the other businesses that need to be turned around, and the potential buyout of the Mistry family’s stake in Tata Sons.

Globally and in India, operating a profitable airline isn’t easy. There are only a handful of successful airline business models—IndiGo, India’s biggest airline being one— as many airlines survive on government support and subsidy. On the domestic front, competition is one-sided with IndiGo enjoying an over 55% market share.

“Now, in any consumer industry, any company having more than or close to 50% of the market is a bad signal,” argues Gupta. “One thing is certain: The Indian aviation industry needs a formidable competitor to the likes of IndiGo.” But is Tata group that competitor? “Once you remove generating profits or wealth creation as business objectives,” says Kumar, “pretty much all strategies are equally valid.” However, by all accounts, AI flying back into the Tata group would indeed be an emotional homecoming—even if it doesn’t turn out to be the right decision.

(This story appears in the February 2021 issue of Fortune India.)