TATA Group bidding for Air India – What’s the Catch?

TATA Group bidding for Air India – The story so far: The Tata Group is no stranger to Airplanes or to the business of Aviation, nor is Ratan Tata. At the age of 17 years, the octogenarian chairman of one of the biggest business conglomerate of India (TATA Sons), once landed a plane that had lost its sole engine mid-flight. To add to the tally of Ratan Tata’s credentials, he has also piloted the supersonic F-16 fighter Jet.

Now, with the chance of becoming the biggest full-service carrier in India, TATA sons are in a foray to bid for the ever ailing Air India. If Tata’s Air India bid gets through, it will the second full-service provider (Vistara is already a full-service provider) under the wing of TATA Group. In today’s article of Market Forensics by Trade Brains, we’ll cover the story so far on TATA Group bidding for Air India. Let’s get started.

TATAs Love for Aviation Industry

There is no hidden secret about the fascination of the TATA group with the Aviation Industry, more specifically with the business of Airlines. The following timeline will give a brief snippet of the TATA sons and its association with the business of aviation:

• The legendary industrialist and philanthropist J.R.D. Tata was India’s first licensed pilot. He stated TATA Airlines in 1932 as the nation’s first carrier (flying mail between Karachi in then-undivided, British-ruled India and Bombay)
• In 1953, the government nationalized TATA airlines and named it Air India.
• Later in the 1990s when the economy was liberalized, TATA’s interest grew again and in 1994 they came up with a plan to start airlines with 100 airplanes in collaboration with Singapore Airlines. But the government refused the entry of foreign entrants and the plan didn’t materialize.
• Later in the year 2014, a low-cost airline joint venture was entered with Malaysian business tycoon Tony Fernandes’ Air Asia.
• And in the year 2015, Vistara was launched as a full-service airline in collaboration with Singapore Airlines. It was started with the motto to redefine air travel in India with “Personalized flying experience”.
• In both the ventures mentioned above, TATA sons have a 51% stake.

TATA Group bidding for Air India – The Challenges

— Waving a Non-compete clause with Vistara Airlines

This will probably be the biggest challenge for TATA Sons. As TATA sons have already announced that they would want to consolidate the whole business of aviation into a single entity. And if they manage to win the bid and acquire Air India, it will come under the entity of Vistara. However, the conflict of Interest could arise as Vistara and Air India are both full-service providing carrier. TATA group is willing to go out alone to bid for Air India if Singapore Airlines don’t agree, even if it results in a fallout of the merger between TATA sons and Singapore Airlines. 

Essentially even if Vistara were to go ahead and bid for Air India, it would need consent from SIA and Temasek – which owns 55% of Singapore airlines. And earlier Temasek had voiced their opinion against the proposed bidding of TATA sons for Air India.

— Turning the fortunes of National Loss-making Airlines

This could be the second biggest challenge facing TATA sons. If history is to be believed then TATA Sons themselves don’t have a great history running the business of airlines. And owning Air India will come along with its own set of debts and baggage.

In the first quarter of 2020, Air India made losses of rupees 28 crores per day. Its losses widened to Rs 2,570 crore in the June quarter, from Rs 785 crore a year earlier. Moreover, Air India is also famous for its unions and bureaucratic structure, which could sometimes become a tuff nut to crack. 

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Why is the TATA group interested in Air India?

In February 2021, N Chandrasekaran will complete four years as group chairman at TATA sons. The revival of the group’s aviation fortune will be at the top of his priority list. And if the aviation industry experts are to be believed, “The TATA group needs Air India under its wings to salvage the group’s aviation business” 

From the time N Chandrasekaran took over the reins of group chairman, Vistara and Air Asia has increased their market share to 13.2% in October 2020 from a meager 7.2% in 2017. But industry leader IndiGo has performed even better. It is an undisputed leader of the aviation industry (51% in October 2020 from 39.5% in 2017)

However, if Air India (11% of domestic market share)  were to come under its wings, then the group will have a combined domestic market share of 24.2% (nearly a quarter of the aviation sector pie).

But the real meat of the deal lies in the access to international markets that comes along with Air India. IndiGo does not seem to be too interested in the long haul flights. But with Air India flights, time-slots, and other international offices, TATA will get a firm footing in the international markets. Air India, along with its low-cost unit Air India Express that flies majorly to the Middle-East destinations, has a fleet of nearly 90 aircraft. The airline flies to over 40 international destinations. Air India Express will also be sold along with its parent.

The Government Incentive to Airline Bidders

The Government has sweetened the deal whereby the buyer is supposed to absorb the Rs. 23.286.5 crores of debt and the remaining amount will have to be transferred to Air India Assets Holding Limited (AIAHL), a special purpose vehicle created after the failed sale attempt in 2018.  Air India had a total debt of Rs 60,074 crore as on March 2019, as per EoI. The debt would have grown substantially since then as the national carrier suffered due to the curtailed operations during a pandemic.

TATA Group bidding for Air India – What to Conclude?

Looking at the above discussion, it makes a lot of strategic sense for the TATA group to bid for Air India and begin its ascend in the domestic and global airlines market. However, it does come at a cost (buying cost, the debts of Air India, and the bureaucracy). But TATA group has experience in handling these sort of situations. In addition, the TATA group will also get a team of staff who is well trained and has been in the business of Aviation for a long time. 

Before we wrap up, here are a few facts about Vistra and Air Asia business of TATA group:

• Vistara has flown more than 5 million customers in the last one year, while the fleet size has also expanded significantly. 
• With 31 aircrafts today, Vistara flies to 27 destinations and operates 170 flights per day.
• AirAsia India has 23 aircraft, reaching 19 destinations with 165 flights. 
• Vistara is the only airline to offer the choice of Premium Economy class for travel between India, Dubai, and Bangkok, in addition to Economy and Business Class.

That’s all for today’s Market Forensics article on the story of TATA Group bidding for Air India. We hope it was useful for you. We’ll be back tomorrow with another interesting market news and analysis. Till then, Take care and Happy investing!